PAKISTAN'S INDUSTRIAL WOES
June 4 - 10, 2012
The prolonged power outages have adversely hit growth in the country's industrial sector. The poor industrial growth reflects the impact of energy shortage and too expensive electricity. Large Scale Manufacturing (LSM) sector witnessed hardly one per cent growth during the first nine months of the current fiscal year ended June 30, according to the Pakistan Bureau of Statistics (PBS). Growth in food, beverages, and tobacco stood at 1.33 per cent, pharmaceutical 0.8 per cent, non-metallic mineral products 0.29 per cent, paper and board 0.24 per cent, textiles 0.23 per cent, leather products 0.03 per cent and wood products by 0.07 per cent during the first nine months of the current fiscal year over same period last year.
Other factors, which held back growth in industrial sector, include economic slowdown, high interest rates and poor law and order situation. Lack of foreign investments due to lack of continuity in policies also affected the industry. Frequent electricity blackouts are suffocating the industry. The country is facing acute power crisis because of the inefficiency in the state-run segments of the power sector, an inability to collect bills, power sector subsidies and rising oil prices. The liabilities to the entire energy chain or circular debt continued to increase in the absence of any plan for power sector reforms.
The country generates 13,240 megawatts against a peak demand of 18,065MWs. The power shortfall has presently reached 8,000 MWs. The massive reduction in power generation has forced the Pakistan Electric Power Company (Pepco) to carry out 10 to 12 hours of load-shedding in urban and 12 to 18 hours in rural areas. The government has raised electricity tariff by 16 per cent and also indicated two more raises in the next two months in a move to reduce the circular debt and compensate independent power producers (IPPs) for full utilization of its installed capacity.
In the last fiscal year, the industrial sector, hampered by electricity and gas shortages, saw a decline in production by 0.1 per cent against the targeted growth of 4.9 per cent, while LSM grew a mere one per cent against the target of 4.9 per cent. The services sector managed to achieve a growth rate of 4.1 per cent but remained short of its 4.7 per cent target.
The country's largest industries are cotton textile production and apparel manufacturing, which account for 65 per cent of the merchandise exports and almost 40 per cent of the employed labor force. Cotton and cotton-based products account for 61 per cent of export earnings. It is actually the chronic energy shortage for the textile processing industry that has made Pakistan uncompetitive in the region.
The power and gas cuts for the textile industry, which account for over half of the country's exports, have taken a heavy toll on the country's textile exports. Pakistani exporters of value-added textile are unable to ship their orders on time, as the energy crisis has caused huge production losses to entire textile chain from spinning to finished goods particularly in Punjab. Local textile makers are concerned that suspension of gas supply and power outages would bring the textile industry to a grinding halt adversely hitting the textile exports. They warn that energy-deficient industry would only add to closures and subsequent unemployment pushing more people below the poverty line.
The long power outage has thrown the leather industry in deep crisis, which is facing great hardships in the execution of export orders and is unable to fulfill the commitment made with the valued foreign buyers. The industry suffers financially due to cancellation of export orders and while the country's economy loses precious foreign exchange.
The growing power crisis is the key reason behind frustration of industrialists, who are looking to other countries for setting up their units. Chronic energy crisis has forced many textile manufacturers in Faisalabad - the country's textile hub - to move their manufacturing units to Bangladesh, which has become a favorite destination for the country's textile sector.
Presently, Cosy International, a composite textile manufacturer, Masood Textile Mills, a knitwear exporting firm, and Tauseef Enterprises have reportedly set up textile factories in Bangladesh, while K&M Textile, a composite manufacturer, plans to move abroad.
In view of the comparatively 35 per cent cheaper and uninterrupted power supply and 30 per cent higher profit margins in Bangladesh, many industrialists have already moved their factories to Bangladesh and many have set up additional units in Bangladesh. The mass exodus of the country's textile units will render the millions of people jobless, as textile industry accounts for 38 per cent of workers in the manufacturing sector.
The cost of doing business is constantly going up not giving a sigh of relief to industrialists. 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.
Industrialists strongly oppose the central bank's tight monetary policy, which has led to the closure of many industrial units.
Tight monetary policy has disappointed the local industrialists, who contend that high interest rate has further increased the cost of production and destroy the industries, as it is already suffering from exorbitantly high business cost. Pakistan is on its way to become one of the most expensive countries of the world, as already cost of doing business is more than 35 per cent in the country as compared to other regional countries. Higher interest rate increases the cost of borrowing of the private sector, which discourages the demand for private sector credit. When the demand for private sector credit decreases, the level of private investment falls adversely affecting the prospects of economic growth.
High interest rates have marginalized the private sector. India's Reserve Bank kept problems of businesspersons in mind and maintained low interest rates to keep the stimulus it provided last year to boost growth. Inflation in both India and Pakistan is now almost the same. However, the policy rate was three times higher than India. The increased power tariffs and power outages have also crippled the industry, causing widespread discontentment in the business circles.
The country's economy lost significant growth momentum during the last four years as the economic growth averaged just 2.6 per cent as against 5.3 per cent in the preceding eight years. The country failed to meet its growth target as the economy grew by 2.4 per cent in the last fiscal year 2010-11, against the target of 4.5 per cent.