DISMAL BUSINESS CLIMATE
FOZIA ISHAQUE (Fozia.firstname.lastname@example.org)
Dec 01 - 07, 2008
Macro economic indicators in Pakistan are portraying a grim picture of the probable investment opportunities in the trade and industry. The serious weakness of Pak Rupee against US dollar which reduced value of Pak currency to over Rs 78 a US dollar and depleting foreign exchange reserves as low as below US dollars 6.0 billions are serious threats to our economy.
Pakistan economy is not export-oriented but import-oriented and our forex reserves may be sufficient for less than two months. Pakistan's security, political and law and order situation is negatively affecting performance of our economic and agriculture sectors. The manufacturing concerns, in particular, are under a lot of stress. Galloping inflation, frequent power cuts, cash flow crunch, dwindling confidence in the economy and growing wage demands mean that the only option for many enterprises is to shed jobs or close down. Light engineering industry textile, automobiles, garments manufacturing, fertilizers, cement etc are apparently major victims of the present difficult business environment. But the pain is also being felt strongly by the leather industry, sanitary ware makers, and SME sector exporters. It is just that different industrial sectors have different cramps of pain and capacity to absorb it.
There has been a 15% to 30% job loss in auto parts manufacturing industry due to reduction in demand. Besides, several units are closed down because of losses. Two-thirds of readymade garments units across the country have already gone out of business. It is hard to verify the exact number of closures in the garments industry or retrenchments by auto parts suppliers because most small units in any sector operate in the informal economy and others don't provide the exact data on their employees to the regulators. But the small to medium-sized industries, whether working for the domestic market or global buyers, are finding it real hard to cope with the rising cost of doing business when sales are falling.
A rough estimate reveals that the production cost has risen by 20% to 40% due to rising fuel prices, frequent power blackouts affecting production, skyrocketing raw material prices, wage demands, and so on. The small units working in informal sector of the economy with no access to finance are more prone to the economic slowdown and closures.
Following major factors are contributing towards deteriorating investment prone environment of the country:
1- LAWLESSNESS AND IMPAIRED CREDIT RATING
Persistent cracks by the international credit rating agencies have been made, consequently corroding the image of the economy with worsened credit ratings. Continuous cutback in financial standing has shattered investor confidence to a great extent. Standard & Poor's Ratings Services has lowered long-term foreign currency sovereign credit rating on the Islamic Republic of Pakistan to 'CCC' from 'CCC+' and its long-term local currency rating to 'CCC+' from 'B-'. The outlook on the long-term rating is developing.
Ruined law & order situation has further exacerbated the situation. At present at least 32 foreign companies are planning to wind up their businesses in Pakistan and 122 others may limit their future investment plans because of persisting law and order situation in the country. These issues combined with decline in meeting businesses' electricity requirements from 14.7% to 0.9% and the progressively deteriorating economic indicators have further piqued foreign investors' perception that Pakistan is a good place to invest.
2- INCREASED GAS TARIFF
Manufacturers claim that the first blow to their business viability was energy crisis, which resulted in a steep decrease in production to the level where it becomes unviable to continue manufacturing.
The devastating rise in gas tariff is termed as "last nail in the coffin" for the ailing industry; the recent spike in gas prices will have a spiraling effect of 15% to 20% on manufacturing sector cost of production. For instance most of the textile companies are operating their mills on captive power plants, for which gas is the major input. The estimates suggest that gas has a weightage of 65% to 70% in the total fuel and energy component of textile sector's cost of production. The profit margins of all manufacturing concerns, which are already dwindling, would be further squeezed, denting their profitability in the coming days.
No small or medium unit can afford alternate power generation arrangement because of its costs. Frequent power cuts for eight to 12 hours mean substantial drop in production, which few units could afford.
3- FINANCIAL ASSISTANCE
Pakistan at the moment is at the threshold of a default on external debt payments. This dilemma has become a nightmare for the business zone. Despite numerous attempts over the recent months, the government has only been able to secure minimal multilateral and bilateral aid, including from countries deem to have a strategic interest in Pakistan's economic and political stability. Without a formal macroeconomic stabilization program--likely within the framework of an International Monetary Fund loan program--it appears that no substantive material assistance from such sources will be forthcoming.
4- REGULATORY ENVIRONMENT
The leading constraints affecting firm's production are the unfavourable regulatory environment and the insufficient demand. Our wrong policies have cushioned our competitors in the world market. The political government should consider out of box options to deal with the challenges on the economic front.
Pakistan has the fifth highest inflation rate in the world after Venezuela, Russia, Egypt, and Sri Lanka according to Bloomberg data. This high rate of inflation is leading to dire consequences for all spheres of business community. Due to inflationary pressures and lower growth during fiscal year 2008-09 there is an increase in input prices, output prices, rate of interest on deposits, and the interest rate on advances and wages. The growth has slowed down and inflation has risen during July-December 2007. The firm's expectations of an increase in the input prices and the wage pressure are leading to the piling up of the inventories.
As a result, most of the enterprises are cutting jobs and reducing their manufacturing capacities, partially or wholly across a broad spectrum of the industry. The cost of doing business is spiking and the demand decelerating. While the economic growth has declined from the targeted 7.2% to close to under 5%, the unabated double-digit inflation continues to haunt the policy makers. Critics say that the tightening of the monetary policy may not tame inflation in the short-term but may retard economic growth. Nothing worth mentioning has changed for the services sector. The situation has become more challenging for the manufacturing amidst growing uncertainty and rising costs.
6- INSUFFICIENT DEMAND:
Shrunken production combined with increased cost of production has created a spill over effect on demand side also. There is a reduced demand in domestic and international markets for the manufacturing products. The business sentiments about investment prospects seem to be creating a negative effect in the economy. The high cost of doing business and depressed demand in export markets are not Pakistan-specific. However, Asian economies including those of China and India driven by better growth models have so far not shown signs of any major dent in their growth momentum.
In the near future, we do not see any improvement in the situation and all measures including short, medium and long terms would be required for providing real boost to industry.