Manufacturing is considered as backbone of economy for Pakistan which provides employment opportunities to a bulk of population. It is second largest sector of the economy with a share of 10 percent to GDP. The sector is mainly divided into three sub-sectors namely Large-Scale Manufacturing (LSM) Small Scale Manufacturing (SSM) and Slaughtering. The growth of manufacturing sector is dependent on better availability of utility services, enabling environment, credit to private sector and capital market gains etc. The growth of this sector suffered in past due to non-availability of the desired inputs and poor law and order situation. The major hurdle in the growth of the manufacturing sector was power shortage, which could be managed by the government through providing separate electricity transmission lines that give uninterrupted electricity to industrial estates.
Up till FY18, the outlook for manufacturing seems promising on the back of continued growth performance in LSM, expansion in credit to private sector, low interest rate, contained inflation and increase in economic activities due to the China-Pakistan Economic Corridor (CPEC). However, in FY19, rising trends in inflation, the unfolding global developments, whether in terms of oil-price shocks, protectionist trade policies and falling flows to the emerging markets pose challenges to macroeconomic management in Pakistan, which leads to a slowdown in manufacturing sector.
Unlike East Asia, Pakistan has historically followed a policy of import substitution rather than export promotion. Consequently, there has been little emphasis on broadening the export base that has remained over-reliant on textiles as the principal export. Even now, exports of cotton yarn, cloth and value-added textiles constitute almost 60 percent of our total exports. Unfortunately, exports from agriculture and SME sectors have been neglected through over taxation of inputs, lack of access to infrastructure, especially electricity and gas, and restricted availability of credit from commercial banks. Extraordinary skills of Pakistani craftsmen, therefore, have remained largely unrealized. Export of precious gem stones and jewellery alone could enable Pakistan to earn more than half of the present total export earnings of Pakistan.
Explaining the rapid growth in imports it is normally stated that this is largely due to the upsurge in machinery imports, especially for projects related to the China-Pakistan Economic Corridor (CPEC). This is only partially true as up to FY17, the rise in the CPEC linked imports accounted for 38 percent of the total increase in imports. Other major contributors to the increase are food, petroleum, automobiles and other intermediate goods. In the case of imports, imposition of regulatory duties could lead to under-invoicing. A more effective policy to cut imports could be to introduce a regime of minimum import price on a number of items, as has been done in the case of sugar. Also, import tariff could be doubled if a particular commodity is imported by more than a pre-specified level. This will also help in avoiding speculation by importers.
Pakistan must also more actively exploit the openings created by the GSP plus status granted by the European Union as well as the opportunities offered by China-Pakistan Free Trade Agreement and the South Asia Free Trade Area (SAFTA) agreement. New markets need to be developed especially in Central Asia, Iran and Turkey. There is a risk of growing protectionism and a rising wave of anti-globalization. Exports could become even more difficult to increase within this looming scenario. It is essential that the trade gap be brought down over the next three years by almost 10 billion US dollars through establishment of Special Economic Zones.
Special economic zones development
The federal government will set up two SEZs, including the development of an industrial park at Port Qasim, near Karachi (with 1,500 acres of land). The second SEZ will be in the Islamabad Capital Territory; FATA, AJK, GB and the provinces will have one SEZ each, as well. Punjab aspires to set up an Economic Zone along the M-2 motorway in Sheikhupura district (5,000 acres). Sindh will establish its Special Economic Zone at Dhabeji, 80 km from the Karachi airport (1,000 acres). Khyber Pakhtunkhwa will set up Rashakai Economic Zone at Nowshera (1,000 acres) for fruit, food packaging, textile, stitching and knitting industries. Balochistan will set up an SEZ in Bostan, 23 km from Quetta airport (1,000 acres with 200 acres being developed already) for industries of fruit processing, agriculture machinery, pharmaceuticals, motorbikes assembly, cooking oil, ceramics, cold storage and electrical appliances. Gilgit-Baltistan will establish an SEZ at Moqpondass (250 acres) while AJK will establish a SEZ at Bhimber. In FATA, a boundary wall has been constructed around the Mohmand Marble City with 60 percent of the site having been developed and the remaining expected to be completed soon.
In the initial phase, Pakistan should ideally focus on inherent industries where it has latent comparative advantage and where its abundant human skills are optimally capitalized such as leather, textile, food processing and marble. It would also be essential to develop the skills of labor in order to maximize on technology transfer opportunities presented by our economic collaboration with China. Pakistan’s SEZs should be designed to amplify the productivity and trade flow of its existing industrial clusters in Sialkot, Gujranwala, and Faisalabad etc. with a focus on export and value addition. Private investment (joint ventures/independent) should be encouraged through incentives to develop SEZs. Pakistan should prioritize putting Pakistani goods and produce on the CPEC. Also, considering the contribution of service sectors in Pakistan’s economic productivity, services specific economic zones should also be established with a focus on financial, accounting, legal and construction.