RISING COSTS OF DOING BUSINESS IN PAKISTAN

SYED FAZL-E-HAIDER
Jan 18 - 24, 20
10

The cost of doing business in Pakistan has risen due to high interest rates, energy shortages, political turmoil and deterioration in law and order in the country's major commercial centers. The textile industry, which accounts for two-thirds of the country's exports is still struggling to revive growth amid rising interest rates. The country's overseas sales of textiles are threatened by growing terror attacks, power outages and poor market access. The exports of apparel from Pakistan in the last ten years had increased from $1.5 billion to only $3.5 billion, whereas in Bangladesh the exports increased from $1.5 billion to $12.5 billion, which showed that Pakistan's exports were much below as compared to other competitors in the region. The soaring power and gas tariffs are likely to put additional burden on the industry and squeeze the gross margins of the industry. The local manufacturers forecast more industrial closures and job losses over the next one year.

HIGH INTEREST RATE

Pakistan is the only country in the region where interest rate is still higher. The country lags behind its neighbors in economic growth and exports due to high interest rate and energy crisis. The other countries have already reduced the interest rate to the lowest level. As compared to12.5 percent interest rate in Pakistan, the neighboring India is currently managing 3 percent.

The business community, which has long been demanding a significant cut in the central bank's key policy rate, sees high interest rate in the country a major constraint to perk up economic activity and improve credit off-take by the private sector. The business community believes that the interest rate should be brought down to a single digit. The high interest rates are the main reason behind the fall in the country's industrial output. The downfall in auto, textile, electronic, petroleum and other key sectors adversely affected the performance of large scale manufacturing (LSM) in the country.

Local industry is facing power shortages and squeezing local and international demand, while banks are not risking their money to support the private sector. The analysts believe that the Gross Domestic Product (GDP) growth has declined due to economic slowdown following the tight monetary policy. They contend that significant reduction in discount rate bringing it down to single digit is essential to rescue the ailing industry.

Despite hiking interest rate and withdrawing subsidies on petroleum products, the government has so far failed to tame inflation, which is still at a higher side. The tight monetary policy has virtually failed to achieve its objective of combating inflation, which has pushed up the cost of living and made it the most important problem in Pakistan.

The middle-class income group is slipping fast into the poor class while vulnerability of the lower classes has further aggravated. Under the IMF programme, the country witnessed a significant economic slowdown, as macroeconomic stability took precedence over growth.

Analysts believe that cutting interest rates to single digit level will produce multiple benefits for the economy, as it will lower the cost of doing business, give a strong boost to business and industrial activities, provide easy credit and loaning facilities to trade and industry, promote better investment and exports, and generate more tax revenue for the government.

LAW & ORDER PROBLEM

The country is suffering $6 billion export losses annually due to the ongoing war against terrorism, according to one estimate. Some analysts believe that revival of growth would require an improvement in the country's security environment, as the army is attacking the northwestern strongholds of the militants, who have responded with suicide bombings in towns and cities. Mounting terrorism inside the country is causing massive losses to manufacturing and trading sectors.

December 28 bomb attack on Ashura procession in Karachi raised security concerns among investors, as terror hit the country's commercial capital, which was a hub of business activity. The attack that killed at least 43 people, has also affected trading activity in stock and other wholesale markets of the country's commercial capital. Thousands of shops are estimated to have burnt to ashes in the Boultan wholesales and adjacent markets on the day of bomb blast.

POLITICAL WRANGLING

Political wrangling in Islamabad is likely to further hit the country's economy and affect the business. The rising political tensions in the country are having negative fallout on the economy and stock business. President Asif Ali Zardari is under criticism from opposition parties after the Supreme Court struck down an amnesty that had protected the increasingly unpopular leader and several of his political allies from corruption charges. The uncertainty regarding corruption cases against some sitting ministers, advisors and members of parliament has created uncertainty among the businessmen.

National Reconciliation Ordinance (NRO) was promulgated by former president Pervez Musharraf as a result of a US-brokered deal that allowed former Prime Minister Benazir Bhutto to return home from self-exile and participate in politics without facing charges. Under the deal, corruption investigations involving up to 8,000 ministers, bureaucrats or politicians from across the spectrum, were stopped.

Pakistan witnessed perpetual instability since February 18 polls in 2008 on different issues including restoration of deposed Supreme Court judges and the frequent tussles between coalition government and former president Pervez Musharraf. After the Musharraf's exit in August 2008, the differences between People's Party (PPP) and Muslim League-Nawaz (PML-N), the two major political parties of ruling coalition ultimately widened the split of alliance.

On February 25, 2009, the disqualification of former prime minister Nawaz Sharif and his brother Shahbaz Sharif from contesting elections and holding public office, led to an open fight between the country's two major political forces- the ruling PPP and PML-N, as both parties scrambled for power in Punjab province where the federal government had imposed governor-rule for a period of two months. The protests and agitation against court's decision against Sharif brothers had a negative impact on the economy. Presently, the two political parties have differences on policy matters related to the war on terror and abolition of Musharraf's 17th amendment.

POWER SHORTAGES & OUTAGES

Another reason is the prolonged and unscheduled power outages, which have enhanced the cost of doing business and badly affected the industrial productions and trading activities in the country. The government still lacks a clear cut policy on power cuts or haphazard outages, which are causing huge loss to both trade and industry. The business community also complains huge machinery loss leading to bankruptcy of the whole industrial unit because of repeated unscheduled power cuts. The country's export-oriented industry is unable to ensure on-time delivery to their foreign buyers because of acute power shortage. The loss of export orders has now become a routine and a large number of importers from US and the EU countries have begun to place their orders to the other regional countries.

Under the IMF demands, the government decided to increase the power tariff by 18 per cent in two phases this year 12 per cent in January and six per cent in April. Local business community has strongly resented the government's decision of increasing the power tariff from January saying the move will bring the already ailing industries on the verge of total collapse. The hike in power tariffs would badly hit the industrial and business concerns, which are already in doldrums, due to highest-ever increase in the cost of manufacturing and doing business owing to the multiplicity of taxes and levies and excessive utility tariffs.

Fragile commercial activity due to lower productions has forced a number of businessmen to think of shifting their businesses to other countries. The government should announce its remedial strategy to ensure implementation of a proper power outage plan for the sake of industry.