COST OF DOING BUSINESS
Research Analyst, PAGE
Nov 1 - 7, 2010
The investment scenario has drastically changed with Pakistan losing its attraction to foreign as well as domestic investors due to the rising costs of doing business for the last three years.
There are number of factors due to which investors hesitate to invest in Pakistan, global recession being one of them. The other main reasons consist of political instability, deteriorating law and order situation, high interest rates, and frequent power and gas outages. The recent increase in power and gas tariffs is likely to put an additional burden on the country's industrial sector and squeeze the gross margins of industries. The local manufacturers forecast more job losses over the next one year.
FDI IN PAKISTAN ($ MN )
YEARS FDI 2001-02 484.7 2002-03 798 2003-04 979.9 2004-05 1524 2005-06 3521 2006-07 5139.6 2007-08 5152.8 2008-09 3,721.8 2009-10 2,150.8 2010-11 (July-Sept) 387.4
In Pakistan, lack of capital is a major obstacle in the way of establishment of heavy industries. Pakistani society is mostly consumer oriented so the savings rate is very low. On the other hand, banks follow stern conditions and tiresome procedures while advancing loans to consumers. Mostly bank loans are granted to affluent persons while smaller businesspersons are rejected in a number of ways, for example, by charging higher interest rates. Pakistan is perhaps one of the few countries in the Asian region where the interest rates are very high. The country lags behind its neighbors in economic development and exports due to high interest rates and energy crisis. As compared to the 13.5 per cent interest rate in Pakistan, India's current interest rate is at 4.7 per cent, Japan 0.1 per cent, and China 5.31 per cent, thus one can clearly see the difference.
SBP's high policy rate has not only added to the rising business costs, but has also enlarged the size of non- performing loans. The effect of the high interest rates resulted in losses for a number of industrial units.
Terrorism is yet another reason causing huge losses to trade and industry. The rising political obstacles in the country are having a negative impact on the economy and stock business.
Cost of doing business in Pakistan has been increased further by poor infrastructure. Transport depends on CNG and oil; both prices have recently risen to a higher level. Pakistan is producing about 20 per cent of its oil requirement. But, due to failing efforts to find new reserves and its lavish consumption, this percentage seems to fall in the coming years.
The trivial viewpoint that a higher tax rate will generate more tax revenue holds not much logic in the age of diversified business environment. Prevailing business tax rate of 35 per cent is excessively high. A high tax rate essentially gives a way to tax evasion and contracts business activities in the country. Tax exemption provided to the elite section of the society is unfair and needs to be removed or scaled down.
In Pakistan, practices such as red tapism and the long awaited departmental procedures are big barriers in doing business. Licenses, NICs, gas, electricity, and water connections etc cannot be acquired easily. The investors have to face the insulting behavior of the bureaucrats. Corruption and malpractices have been successful in preventing easy entry of foreign investors, and those succeeding, their effective participation in economic activities. In fact, retaining investors has never been observed as an area deserving attention of the concerned departments' officials. Many hurdles have been linked with five broad groups ranging from purchasing of land and site development to financial and executive regulations, along with taxation related matters. Investors, who are able to start up their businesses in less than eighteen months time period are considered 'lucky' and termed as 'enterprising' or having the 'right' connections. But, in any case they also have to live up with administrative procedures taking up about fifteen per cent of their revenues.
Bankers with supreme authority govern Pakistan for the last 10 years and they take measures, which are only beneficial to the banking industry. The banking spread in the country (highest in the world) is 7.8 per cent and needs to be cut down by two per cent at least. This will save us from the control of financial institutions like IMF, the World Bank and the Asian Development Bank (ADB). The interest rate should be brought down to a single digit. The gross domestic product (GDP) growth has declined due to economic slowdown following the tight monetary policy. 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. The country has no competitive edge since exporters are facing many difficulties due to high cost of production.
Cost of doing business in Pakistan is alarmingly increasing. It is impossible for Pakistani investors to pay 21 to 22 per cent bank interest without insurance cost. If the same situation remains the same, the unemployment will increase to an alarming stage.
Cutting interest rates to a single digit can 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.