BUDGET AND MANUFACTURING SECTOR

AROOJ ASGHAR (Arooj.asghar@hotmail.com)
June 16 - 22, 2008

Like other countries, role of manufacturing sector in Pakistan's economy is of paramount significance. Enhanced exports are believed to benefit the country. Pakistan needs to strengthen this sector in order to enhance its exports which are concentrated largely in textile and semi-manufactures. Exports are dominated in foreign currency thus any change in the currency parities change the foreign exchange export earnings. Keeping this in view and in order to increase the export proceeds, Pakistan needs to enhance its exports of manufactured goods. Pakistan can enhance its external cost competitiveness in any sub-sector, including manufacturing sector, by reducing its unit cost of production relative to those of other countries. This can be achieved either by having lower input prices or higher productivity or a more depreciated domestic currency.

According to the Economic Survey of Pakistan, country's manufacturing sector recorded the weakest growth in a decade during the outgoing fiscal year 2007-08. Overall manufacturing posted a growth of 5.4 percent during the first nine months of the current fiscal year against the target of 10.9 percent and 8.1 percent of last year. Large scale manufacturing, accounting for 70 percent of overall manufacturing, registered a growth of 4.8 percent in the current fiscal year 2007-08 against the target of 12.5 percent and last year's achievement of 8.6 percent. Heightened political tension, deteriorating law and order situation, growing power shortages, the cumulative impact of monetary tightening and rising cost of doing business are the reasons responsible for the poor showing of manufacturing in 2007-08.

Keeping in view the above, present government has tried to provide support to the manufacturing sector to boost the exports. Business community has proposed various suggestions to minimize the emerging threats to the industry. Since May 2007, economy is under continuous stress therefore it is time for the new government to enable it to play its role in the growth of economy.

Engineering Development Board of Ministry of Industries has undertaken an exercise in consultation with the stakeholders to incentivise the domestic manufacturing industry. It is recommended that the rate of duty for various components be reduced to zero or minimized. It is also proposed that the rate of duty on raw materials & components at zero to ten percent. This measure will boost the growth of respective local industries and will also provide for additional employment opportunities.

Presently, seeds whether for oil extraction or for sowing purposes are exempted from customs duty but rice seeds are still liable to duty at the rate of 10 percent. Agriculturists demanded that In order to ensure healthy and quality production of rice, import duty on rice seeds is recommended to be withdrawn. This will enhance the export proceeds later.

Presently, Pakistan is facing sever electricity shortage. In order to conserve the energy consumption, currently use of energy saving lamps is being encouraged. Last year, custom duty on this item was reduced from 15 percent to 10 percent whereas its inputs were totally exempted from duty to encourage its local production. Now it is proposed that custom duty on energy saving lamps be reduced to 0 percent for next one year. Whereas WAPDA may be advised to procure the whole domestic production of energy saving lamps at a price inclusive of 10 percent duty impact for free distribution under the PM's 100 day Program. This will obviously increase the supply of electricity to the manufacturing concerns which will onward produce the export quality goods.

In last finance bill, government reduced the custom duties on import of raw materials, parts and components. This step was taken to incentivise the investment in domestic manufacturing industry. Now, the government has proposed to entirely remove the duty. With this change, it is estimated that local manufacturing industry will flourish.

Presently custom duty at the rate of 5 percent is being levied on an industrial undertaking to import plant and machinery provided that is not manufactured locally. Under the existing system, items being manufactured locally have been determined by the EDB and subsequently notified by the FBR. The list so notified is neither exhaustive nor free of disputes. Complete plants obviously consist of numerous machines, components, accessories etc. which are mostly not imported in one go. Partial shipments of plants and machinery therefore remain vulnerable to administrative and classification hiccups with reference to their local manufacture or otherwise. It is observed that such procedures have discouraged the investments. Now it is being proposed that any plant, machinery, equipment and capital goods which is worth US $50 million or more and being imported for setting up of new industrial project may be de-linked from the local manufacturing clause. It is expected that this de-linkage will curtail the discretionary powers of the administrative authorities and will provide hassle free investment environment.

Since long, various special incentive schemes have been introduced to encourage the industrial development in rural, under-developed and/or industrial zones either for social reasons of promoting economic activity or generating employment activities. Moreover, it also helps to spread industries across the country. It is observed that time bound tax holiday couldn't provide desired results. Therefore in current finance bill it is proposed that instead of providing tax holiday, First Year Allowance at an accelerated rate be allowed to the industrial undertakings established in the specified areas.

Pakistan made considerable progress in addressing its macroeconomic problems during the last few years but later couldn't sustain the pace. Significant economic and governance reforms need to be implemented, the fiscal deficit has increased, inflation is at historically high levels, exchange rates are not under control and foreign exchange reserves are decreasing. However, to maintain the progress and to put Pakistan firmly back on the path of sustainable, high economic growth, the Government must continue to vigorously address the key policy issues confronting the economy.

The primary economic policy issue for Pakistan is reduction of its debt burden, which constrains economic growth, and the Government's capacity to fund poverty reduction and social sector expenditures. This in turn requires that the fiscal deficit be reduced to a sustainable level. The Government has been able to increase tax revenues, but as a proportion of GDP they are well below the average ratio for the 1990s. Given Pakistan's high and rising levels of poverty and its low level of human development, there is a need to increase development spending. Therefore, the Government needs to focus more on reforms to improve revenue collection by broadening the tax base and strengthening tax administration.

Another important economic policy issue is restructuring the economy to enhance the efficiency and outward orientation of the manufacturing sectors. This is necessary for Pakistan to improve its external balance, service its huge external debt, and meet the challenges of globalization.