HIGH COST OF DOING BUSINESS

SHAMSUL GHANI (shams_ghani@hotmail.com)
Jan 18 - 24, 20
10

Cost of doing business during the last two years has been on a constant rise. A number of factors contributing to the trend include effects of terrorism, high interest rate, private sector slow credit off-take, energy supply and price constraints, high corporate tax regime, and inefficient and corrupt government departments etc.

Terrorism has enveloped our social as well as economic spheres of life. Destruction of infrastructure, high transportation and security costs, and mostly uninsured business and commercial facilities immensely increase cost of doing business.

The recent act of terrorism in Karachi followed by large scale looting and arsons gave the metropolis a big jolt. The business resources of countless were turned to ashes within no time. The destroyed business property was generally uninsured, and that placed the entire economic burden on hapless individuals.

The ongoing wave of target killing is also an offshoot of the long drawn war on terrorism. This all adds to the cost of doing business of which no Kerry Lugar Bill promises any write-down.

High interest rate is yet another culprit that has not only stifled the economy but has also added significantly to the CoDB. Its role in containing inflation is debatable.

Incredibly high in the entire region, the SBP policy rate has not only added to the CoDB, but has also generated high scale defaults thereby raising the size of non performing loans on one hand and forcing closure of a number of industrial units on the other, the resultant job cuts notwithstanding. How far the high rate policy has stabilized the economy may not be easy to assess but the quantum of economic loss in the shape of closures and job losses has already been measured.

While the State Bank never fails to highlight in its reports the 250 basis point cuts in the highest mark of 15 percent, it never attempts to make a regional comparison and offer some logic for our policy rate being so out of this world.

The price and energy supply constraints are perhaps the most formidable factors that have throttled real sector growth and pushed the CoDB beyond reasonable limits in Pakistan. The consistently rising demand for energy and policy lag to match it with stepped-up supply have combined together to create a huge gap that is filled either through a restricted supply to the business and industry or through frequent price hikes.

Pakistan Economic Survey 2008-09 has described this scenario in the following words.

"Pakistan has experienced a slowdown in all economic activities as a result of international financial crises and demand contraction policies of the government. The major impact has been experienced in the industrial sector. Energy consumption being an integral part of all the economic activities has also declined as a result of the economic slowdown. Energy in its all form has declined or at least remained somewhat stagnant during the fiscal year 2008-09."

The Survey appears to have twisted it a bit. It was more the ever-increasing energy prices and lack of investment on exploration and enhanced capacity building measures that led to a forced reduced energy demand rather than the impact of international financial crises. The high interest rate and restrained energy supply subdued industrial energy demand and unabated gas and power outages tamed domestic energy demand.

The unilateral price increases offset the drop in the government revenue resulting from low supply levels. The industry and the common man were suffered very badly.

Oil plays a major role in determining the cost of doing business. It is the main input for producing power. Transport too depends substantially on petroleum products as CNG and LPG prices have almost lost the cost-effective edge after the recent thoughtless price increases.

Pakistan produces about 20 per cent of its oil requirement. In the back drop of failing efforts to find new reserves and a lavish style of consumption, this percentage is likely to fall during the coming years resulting in quantitative pressures. The oil prices after touching the $35 per barrel have again bounced back to $80 plus. The unstable oil prices will subject the country to external account and domestic inflationary pressures. This vicious combination can put the economy in disarray.

Domestic inflation together with the imported inflation might derail the process of recent economic recovery. The SBP first quarterly report has sounded a note of warning to this effect.

"The adjustment in administered prices of key fuels amid rising international oil prices and cut in electricity subsidies, are important factors behind the expected strengthening of inflationary pressures."

Natural gas reserves are also untapped due mainly to the lack of investment on explorations. Pakistan has recoverable known reserves for another 12 to 15 years.

The swiftly changing geo political scenario especially the law and order situation in the war struck regions has made the import of gas a doubtful proposition. The cost-push inflation caused by the oil price hike stems from reliance on oil as major source of energy.

Pakistan produces 64% of its energy from oil, gas and coal based operations. Besides increasing domestic oil output, the country will have to gradually do away with the use of oil for power generation. Use of oil by the transport sector should also be minimized by adapting to CNG based transport system and by immediately cutting back on CNG prices to offer an incentive to the transport sector as well as the individual vehicle owners.

To bring the high CoDB down, there is a need to cut back the policy rate further to ensure cheap credit flow to the cash starved private sector, and streamline energy policy to maintain an unrestricted and reasonably-priced energy supply to the real sector. The antidote to the unsteady and wildly fluctuating oil prices is a concerted effort to achieve major breakthrough in the areas of gas exploration, enhanced hydro power generation, and coal-based energy production.