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Punjab’s Economic Woes

By: Editorial Team
Published: March 1, 2017
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Multiple factors come into play when assessing the business climate in Punjab. Given the complexity of problems affecting Pakistan’s economy, the effects are having a similarly negative impact on business and investment in the largest province in terms of population.

Terrorism alone is not the only contributing factor to Pakistan’s dismal economic picture. Government short-sightedness and lack of concern for setting the right priorities adds to the misery of the province’s industrial sector.

Terrorism and the very high cost of doing business in Punjab has left the business community wondering whether it is still feasible to continue investing in the province, or shift to other parts of the country, where policies are still relatively business-friendly.

The industrial sector in Punjab is unable to meet international demands, which is one of the major reasons Pakistan is losing a significant proportion of investment, now going to neighbouring countries.

The industrial sector in Punjab is unable to meet international demands, which is one of the major reasons Pakistan is losing a significant proportion of investment, now going to neighbouring countries.

Unannounced power outages, at times going up to 10 hours a day, coupled with a weak law and order situation and an unreasonably high interest rate are just a few of many factors playing their role in ensuring a grim outlook for Punjab’s businessmen and industrialists.

Punjab’s industrial sector and business community is looking for an effective mechanism to be put in place for businesses to get back on track, which will go a long way in not only providing more jobs to the people, but playing a crucial role in strengthening the country’s struggling economy.

Punjab’s leading investors discuss the problems with Narratives

Irfan Qaiser Shaikh

Former President, Lahore Chamber of Commerce and Industry (LCCI)

 

Industry in Punjab has undergone hard times over the past 16 years. Terrorism, coupled with the high cost of doing business, left businessmen unable to meet international demands and requirements.

The casual approach of the government towards meeting the requirements of gas and energy caused massive unemployment while export orders were being shifted to neighbouring countries.

There has been a massive flow of investments into the region during that span of time, but Pakistan has been unable to capture its share mainly because of internal conflicts and issues.

In addition to terrorism, gas and electricity shortages adversely affected all industries. Punjab faced the worst level of load-shedding from 2007 onwards, which rendered industry inefficient and unable to effectively compete in the international market.

The Lahore Chamber of Commerce and Industry (LCCI) had to go on protest against ten hours load shedding on daily basis.

Around 6-7 years ago, the mark-up rate in Pakistan was 16 per cent compared to India’s 9 per cent. The situation has still not improved in Pakistan as we are still lagging far behind compared to the interest rates being offered in other countries.

Official statistics from the Chinese government reveal that the volume of exports with Pakistan is around $16 billion while officials in Pakistan claim to have imported items from China worth $12 billion. There is a difference of $4 billion in the claims of both countries. The difference is due to under-invoicing

Though the law and order situation has significantly improved due to the ongoing Operation Zarb-e-Azab, the cost of doing business has not been reduced. RLNG and electricity is available for the industrial sector but on higher rates.

Prime Minister Nawaz Sharif’s relief package for the textile industry was being awaited for quite a long time. The textile industry, which has been surviving on relief and rebates until now, will have to take advantage of it going forward.

Rebates and refunds on exported items is serious issue being faced by business community and exporters have had to wait for their rebates for the last two years. The government still has to pay Rs 300 billion to the industrialists in the form of rebates.

Industrialists are thriving more on rebates and refunds instead of improving the quality of their products. Pakistan is still lacking further industrialisation which alone could alleviate the economy.

The Pakistan government must strength the revenue system which is plagued with corruption and inefficiency. A major step towards this would be the privatisation of the Federal Board of Revenue.

The government should pick someone from the private sector to manage FBR, improve collection and control leakages. Tax payers are being harassed through sending of notices without any effort to remove bottlenecks.

Furthermore, import and export data is not accurate.

The national economy is facing losses of billions of rupees due to under-invoicing. Official statistics from the Chinese government reveal that the volume of exports with Pakistan is around $16 billion while officials in Pakistan claim to have imported items from China worth $12 billion.

There is a difference of $4 billion in the claims of both countries. The difference is due to under-invoicing. Data from Pakistan Customs should be linked with the Chinese authorities to tackle the issue of under-invoicing.

The involvement of too many departments is a major obstacle in attracting foreign investment.

The government will have to initiate a One-Window operation comprising all relevant departments with the objective of facilitating new businessmen and foreign investors.

Issuance of notices to the business community by the Labour and Environment departments are creating problems for the business community in these very challenging times. Other provinces also have Labour and Environment departments but they are not doing any such practice.

Abdul Basit

President, Lahore Chamber of Commerce and Industry (LCCI)

Terrorism in Pakistan has adversely affected the industrial sector in Punjab. Incidents of terrorism and negativity created by the media caused panic within the business community resulting in flight of capital and brain drain.

According to some figures, Pakistani businessmen invested around $46 billion in the Dubai real estate market. Peace is being restored because of Operation Zarb-e-Azb, but the government is still not in a position to direct Pakistanis to bring back their foreign investments.

Due to travel advisories issued by foreign governments, international consultants are reluctant to visit Pakistan.

Most of the businessmen are facing a similar situation, where they have to face prolonged delays in getting machinery and equipment installed in factories because foreign consultants are not available.

The government will have to give incentives to foreign businessmen for investing in the Stock Exchange by providing them relaxation in the flow of their capital. They can be brought into the documentation ambit afterwards on easy terms.

The recent decision of deregulating the regulatory authorities is also detrimental to the interests of the business community. In the absence of any regulatory authority, the prices of gas will vary from region to region and have a negative impact on the economy

The energy crisis has gradually improved and electricity is available to the businessmen. Nevertheless, the prevailing rates of electricity are beyond their reach. The incumbent government has initiated a number of energy projects, but most of them are thermal or coal-based producing electricity at expensive rates.

Prevailing prices of petroleum products are currently very low, but prices will ultimately increase in the international market, resultantly in increasing electricity rates in Pakistan as well. The government should focus on initiating hydel projects for providing cheap electricity to the business community.

Construction of the Kalabagh Dam is inevitable and the government must take the initiative to build it in the larger national interest.

The recent decision of deregulating the regulatory authorities is also detrimental to the interests of the business community. In the absence of any regulatory authority, the prices of gas will vary from region to region and have a negative impact on the economy.

Punjab Chief Minister Shahbaz Sharif is considered ‘business friendly’ but the policies of his government are not being properly translated and implemented. The investors are facing too many checks from various departments.

There is a need to revise and simplify the prevailing taxation system. The system of dual taxation should be immediately abolished. Businessmen have to pay taxes at every step, starting from their net profit to trickling down its dividends to all the shareholders.

The tax audit policy should be simplified and post-audited returns should not be re-examined. People are afraid of the government’s taxation policies. An estimated 800,000 return filers out of a total 3.8 million NTN holders is the true reflection of its failure. The government should also adopt measures to develop and assist entrepreneurs.

Another important factor, which can have a positive impact on Pakistani exports, is reducing the tariff on the import of raw material for local manufacturing. The government should reduce the tariff on such raw material to zero per cent. The export of finished products will ultimately shore up the national exchequer.

Amer Fayyaz Shaikh

Chairman, All Pakistan Textile Mills Association (APTMA)

The Pakistan textile industry, which contributes 8.5 per cent to the total Gross Domestic Product (GDP), has been under pressure for the past three years because of the rising cost of doing business.

Massive load-shedding, increase in petroleum prices and unavailability of gas made the largest manufacturing industry in Pakistan inefficient and unable to compete in the international markets.

Consequently, 70 per cent of the textile mills in Punjab including spinning, weaving and processing, had to shut down their operations.

The situation has improved over the past two years but the price of electricity is still not cost effective. Electricity is available to the manufacturing units but at a higher rate. The prices of electricity have increased by 57 per cent during the past three years.

Petroleum prices have come down, but the government has not passed on this relief to the industrial units. Electricity is available to the textile industry at the rate of Rs 10.30 per unit which is not sustainable. Its price should be decreased to Rs 7.30 per unit for making it viable to the industry.

The suspension of gas supplies to textile manufacturers, including the processing industry, in Punjab has also put them at a disadvantage vis-à-vis their counterparts in Karachi. The textile business is shifting to Karachi from Punjab.

Excluding Pakistan, electricity prices in the region range between Rs7.3 and Rs9.2 a unit; interest rates are between 5-8 per cent and wages between $68 and $98 per month (except in China, where labour costs have gone up to $300).

Similarly, the rate of RLNG being used to generate energy for the mills is also out of the range of industrialists. The commercial rates of RNLG should be unanimous throughout Pakistan.

The suspension of gas supplies to textile manufacturers, including the processing industry, in Punjab has also put them at a disadvantage vis-à-vis their counterparts in Karachi. The textile business is shifting to Karachi from Punjab.

If the situation is not rectified and Punjab’s closed processing capacity not revived, the possibility of hundreds of thousands of jobs shifting from here to Karachi cannot be ruled out.

Another major problem being faced by the textile industry is the taxation system. The cost of doing business in the textile sector has gone up and the burden of incidental taxes, provincial cess system inefficiencies and the punitive withholding tax regime, have added fuel to the fire.

The government will have to go a step further through releasing all taxes and duty refunds to ease the liquidity crunch, if it wants exports to grow and take advantage of trade concessions allowed by the European Union under its GSP+ system.

The lack of fresh investment in new technology and capacity expansion since 2006-07 is fast eating into the country’s share in the global T&C trade. The World Trade Organisation’s regional T&C trade growth numbers for 2006-13 show that Pakistan may already have missed the opportunity offered to major textile producing nations from the elimination of the quota system.

Almost 70 per cent of sugar mills are located in the core cotton zone of the country, especially in Punjab. The establishment of mills in the top cotton growing areas, and increasing the crushing capacity of the existing mills, have led to 26 per cent shrinkage in cotton areas, especially in south Punjab, including Rahim Yar Khan and Muzaffargarh.

The cotton growing area has also been squeezed by popularisation of maize and potato crops in the districts of Sahiwal, Faisalabad and Khanewal.

The relief package of Rs 180 billion announced by the prime minister for textile industry is a good step towards increasing exports. But it should be made free of hurdles and payments should be made through the State Bank of Pakistan under an export proceeds realisation policy. Moreover, the government should facilitate indirect exports.

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Editorial Team
The Editorial team of Bol Narratives