In the recent past, businesses in Pakistan have been marred by exorbitantly high costs of doing business. The macro-economic adversity that was triggered by historic twin deficits has trickled down to every facet of business operation. The massive erosion in rupee value and hike in interest rate have further escalated the costs of doing business. The businesses in the current environment are facing server downturn as margins have squeezed and operational costs have skyrocketed, added to these is subdued demand for various products, due to shrinking purchasing power of people. The recent upsurge in the rail freight that cumulatively amounts to approximately 70% of some of the goods seems to be implausible by all standards.
Logistics industry, as a whole has faced the brunt of the severe economic conditions coupled with crucial policy decisions that have led to an escalation of costs for the businesses. The FY19 Budget introduced axle load regime in a nationwide attempt to counter safety repercussions of road transportation which has been welcomed by every stakeholder as a critical decision for the industry. However, the decision-makers were unable to think through this blanket move as the abrupt nature of the regulation led to a disruption in supply dynamics. Consequently, it led to an imbalance in demand and supply of road transportation industry. The move was bound to inflate road freights and hence, there was an approximately 60% escalation in general freights through road transportation across the country. Situation was worse for agriculture commodities as peak season of several crops led to delayed distribution at high costs.
During this period, rail freights recorded a series of increases which outpaces the effect of inflation rate, oil prices and rupee depreciation, all put together. The rail freights were increase by 10% and 20% in July and August respectively. In addition, Pakistan railways has increased rates by another 30% in October by altering commodity classes which consequently led to crucial Agri commodities witnessing a compounded rail transportation cost increase of more than 70% in 2019.
In a country where road transportation forms approximately 90% of the total goods logistics, the Government should have instead taken the opportunity to augment the demand for rail as an alternative mode of freight cargo in the county. Besides this, the additional demand could then be utilized to improve the ailing infrastructure of rail transportation in the country and develop a viable substitute to road freight. In the aftermath of axle load regime implementation, there was a definite shift towards rail cargo, but the transition could not sustain for long. With road transport taking the burden of country’s logistics, it is imperative to develop rail sector to promote a competitive structure within the logistics industry.
This hefty rise has been widely deemed as unreasonable as unlike road transportation segment, rail freights have risen without any major business environment change. It is pertinent to note that historically the growth in rail freights has remained under 5% every year which reflects the normalized inflation rate in Pakistan. The latest adjustment is unprecedented and weighs down heavily upon an already distressed environment for businesses. In times when the Government is exploring avenues to improve ease of doing business and uplifting the investor confidence in the country, the latest move is in stark contrast to its mainstream narrative. The brazen contradiction in government’s actions is proving to be the main reason behind falling business confidence in the country.
The agricultural sector of Pakistan which has been the most affected by such cost increases is expected to witness further escalation in selling prices. Needless to point out that the sector forms the backbone of Pakistan’s economy and provides livelihood to 38% of work force of the country. This move by Pakistan railway will only compound crippling pressures on the farmers’ community especially small and subsistence farmers.
Moreover, the resultant food inflation is bound to affect the masses, which remain paralyzed due to soaring inflation in the country. On the macro-economic front, any move that further propels’ inflation will be a problematic for the government as it is aiming to normalize headline inflation in the coming months and drive macro-economic easing which the government direly needs to do in order to deliver on its ambitious campaign promises.