INFLATIONARY PRESSURE HITTING MANUFACTURING SECTOR
SADAF AURANGZAIB, Senior Correspondent
Jan 29 - Feb 04, 2007
The recent surge in inflation is badly affecting the performance of manufacturing sector as the industrial base is not expanding and the industrialists are rather not happy with the State Bank's instance of taking corrective measures to curb inflation at the cost of industrial output. In order to have an insight of the industries' concerns on the recent upsurge, we met Mr. Imran Shaukat, Chairman of SITE Association of Industry. Following are the excerpts of his interview:
PAGE: What is your opinion about the stability of CPI (Consumer Price Index) in view of the current inflationary pressures?
IS: As far as we can see, there is no stability in the CPI for the last couple of years. It's been fluctuating and is going constantly upwards. Actually, the cost of manufacturing is rising and there is excessive credit available to consumers as well, implying that there is excessive demand for all kinds of products that is resulting in high inflation.
PAGE: The gap between demand and supply is increasing further, how do you think this gap can be bridged?
IS: There are many ways to manage inflation, however, since we are a new economy in consumer credit and consumer credit has only been introduced to us in the recent past, I must say that it takes a while to get used to easy availability of credit and right now people are just excited with this credit and the spending spree. Definitely, there is a gap between supply and demand as the demand has shot up for a lot of things, particularly for luxury and household goods. You have to see that to increase the supply by any producer, a long-term trend has to be seen. Industrialists can't just go on and invest on a short-term trend basis, because for industrial investment, capital goods have to be there for a long term to be able to get any pay backs on that. Basically a squeeze on the easy credit card and money supply can result in controlling these factors.
PAGE: How do you see the role of State Bank in tightening the monetary and fiscal policies where the major influence is on rising interest rates? What impact does it cast on our industries and its capabilities in terms of domestic production?
IS: State Bank is doing the right thing by tightening the monetary policy but I am not in favor of rising interest rates at all. We all industrialists are against this. There are two ways of controlling this - one is to keep raising the interest rates and discouraging people from borrowing and the other is to control your credit. They are controlling credit by increasing rates but that is hurting the industrialists the most. The consumer credit had to be tightened whereas what we see is that the industrialists are getting squeezed and they are in real pressure. When the massive investment came in, when industrialists invest on importing new machinery to expand their industries a couple of years back then the interest rate was about 3% and now you are talking about 12% to 14% of interest rate and when we discussed that with State Bank, they brought up the issue of sensitivity analysis and we have been told that we should have done the sensitivity analysis. I am surprised by that opinion as nobody can imagine a sensitivity analysis for 200% rise. You do a sensitivity analysis on certain margins. Who could be expected when the interest rates would go up from 3% to 12% i.e. almost four times and even if somebody does that kind of sensitivity analysis keeping in mind that the interest rate would go up by 400%, the conclusion would be not to invest in industries any more. The State Bank has to tighten consumer credit and not the industrial credit and it has to look into accommodating the industries which have already been established on the basis of 3% or 4% credit because their feasibility has totally gone out right now.
PAGE: At the moment, the banking sector is booming manifold, do you think that it has got the backing of State Bank, however, this support is not that strong for the manufacturing sector. How would you increase your industrial base in view of such a situation?
IS: In the present circumstances, I don't see any expansion in the industrial base because the industrialists are already trying to find out where they stand. The support towards the banking sector by State Bank is much strong than the support towards the manufacturing sector. I think State Bank is trying to attract more foreign investment with the banking sector of Pakistan by giving very lucrative returns. Pakistani banking sector's profit ratio or borrowing and lending gap on the interest rate is right now among the most profitable in the world. We are pretty high up there in the banking profitability. What State Bank has to see is that if it does not have any plans for long-term industrial base expansion, the banking sector will also hit in the long run due to this trend. If the industrialists will not be in the condition of paying back they will not be making payment on schedule and continuously losing money. How do you think the banks can survive in such condition? So the Central Bank has to take a long-term view rather than just managing the direct foreign investment.
PAGE: What is the major industrial thrust in fighting the inflationary pressure among the rising interest rate scenario?
IS: Industries' major inputs are gas, water and power and we know that what kind of condition we are in. The cost of these essentials are getting high, the natural gas in the last one year has gone up by 66%, the electricity tariff has not gone up that high but it its again costing industrialists a lot because of load-shedding as the industrialists have to rely on their stand-byes and in turn have to rely on alternative fuels that is either diesel or furnace oil, which is twice the cost which you are getting as electricity from the utility companies so industrialists are beaten up from every direction. They are affected by interest rates, gas prices, power shortages - all these elements are killing the industrialists as the cost of production has gone up so high that the industrialists are standing nowhere. They are just trying to conserve everything to economize. In a competitive environment, these elements will not help them survive in the global market because of the competitors. The expansion that has come in has not been fully utilized to its full capacity. The textile exports have gone up by 4.3% but that is not realistic as the kind of money the billion of dollars that you have invested in your industry and you are just happy that it has gone up by 4.3% so in real terms there is no increase in the exports.
PAGE: How do you think that the productive capability and demand can go together?
IS: We have two kinds of industries: one which is export-oriented and the other that is catering to the domestic market. On export side, all the expansion that you did in the last there years have not been used to its utmost as we have not seen any improvement in the exports, however, the domestic demand has always been met through one way or another. Today this demand is stronger due to easy availability of credit but no one would be willing to expand his industry on the base of this demand. An industrialist has to think that if the policies got reversed and consumers were also taken into that net, then where will the industrialist be. The industrialists are very cautious right now. The investor is consolidating, cutting down the expenses, so to survive and to keep the cost of production as minimum as can be.
PAGE: How do you see the graph of trade deficit in view of fewer exports and more imports?
IS: Pakistan is not new to trade deficit, it has never been a trade surplus country. However, when you are just encouraging consumerism, you are more likely to have a higher trade deficit unless you bring out policies that are really export friendly. We have to see what our major export industries such as textiles are; it is the most competitive industry globally. Other countries are giving incentives to let them win the global market share and market share is something that if it is once lost, it is lost forever as it is very difficult to win a customer back. Unless you enhance your exports, trade deficit is likely to grow. As consumerism is based on imports and one of the main reasons for that is the lack of skilled labor. You look at India today, just because they got an educated labor and they have a good command of language. Banglore is a twin city to Los Angeles when it comes to the IT industry so India just don't have to rely on the export of traditional items, they have a fast growing IT industry. Why not we train our labor here, so that ten years down the road we will be able to take on Banglore in the IT industry. Today you just can't go with an inexperienced labor in any industry.
PAGE: What are the other inflationary fears that our industries have for the upcoming years and in the long run?
IS: We are keeping our fingers crossed that the inflationary pressure will be reversed now. OGRA has already notified for the downward revision of the gas prices which these utilities have not yet implemented so we are putting pressure to get that implemented so that there will be a little relief on that side. We are also hoping that the oil prices will keep coming down and we also pray that the government will also reciprocate that by reducing the prices as they have already delayed in revising the prices downward for the last one year. As the cost of moving goods and cost of logistics in Pakistan is as high as in any developed country but we are hopeful about the downward trend in oil pricing internationally which is quite encouraging. We also hope that the utility sector will improve its structure. We are hopeful that this inflationary pressure will subside soon.
PAGE: What is your hope for Pakistan and its industrial base?
IS: Pakistan has gone through many volatile periods in the history. Volatility is always there but the industrialists are the ones who have the confidence in Pakistan, who invest in Pakistan. Putting up an industry means you commit your next generation to it. Industrialists must not be looked down as opportunists but as a force and as a defense of the country. Pakistan has a pretty fair chance of becoming a strong economy provided we all work sincerely for one cause that is for the progress of Pakistan. I must also say that the politicians, the businessmen, and the government must always sit on one table as a team and not as rivals. We all have to work as Pakistanis as only then we can win the battle of survival.
SPI ITEM-WISE PRICE MOVEMENTS
PERCENTAGE CHANGE OVER
PRICE DEC –06
Rice basmti. Broken
Egg hen (farm)
Gas chrg. All clb. Comb
L.p.g. (cylinder 11kg.)
SOURCES:STATE BANK OF PAKISTAN