Do we discourage industrialisation?

  • Don’t we?

Recently I watched a TV talk show on which Mr Razak Dawood, the advisor to PM on commerce, was a guest. In this program he said that over the past ten or fifteen years there had been gradual de-industrialisation in our country.

By this he presumably meant that some industries were shutting down while not enough new industries were being set up to replace them. While the specific reasons for this industrial decline were not discussed in this program Mr Dawood did point out that our exports were steadily declining because our industry had become uncompetitive in global markets. No specific reasons were given for why our industry had lost its competitive edge.

Amongst other reasons the main causes of industry becoming uncompetitive are the following:-

  1. Higher input costs (rising faster than in other countries).
  2. Lack of sufficient capital for growth (not allowing economies of scale).
  3. Regressive government involvement resulting in inefficiencies.

Steady devaluation of our currency over the last so many years has been largely responsible for the permanent increase in our industrial inputs. Electricity, gas and fuel (transport) are primary inputs for all our production. Since these are directly or indirectly imported, devaluation permanently increases these costs.

While the primary reason for devaluation is current account deficit and low (or declining) foreign exchange reserves, the industries involved in exports have been encouraging devaluation because of a mistaken belief that devaluation boosts exports by making them cheaper (or more competitive). Devaluation does provide a price advantage for exports but this advantage is temporary lasting, perhaps, just a few months, until the higher price of imported inputs gets built in into the industry’s cost structure.

Some new regulations are humiliating to entrepreneurs, such as the FBR requirement that shareholders/CEO’s must appear in person when applying for an NTN for a new company

Another very important factor in higher input costs is taxation. The government, unable to control its expenditures and under pressure to increase revenue has resorted to taxing nearly all of industry’s primary inputs. The best example of this is electricity on which the following seven taxes are levied in total 40pc.

  1. Income Tax
  2. Excise Duty.
  • TV Fee.
  1. GST
  2. FC Surcharge.
  3. TR Surcharge.

To explain point b above (lack of sufficient capital), I need to refer first to another statement of Mr Dawood. He said correctly that Small and Medium Enterprises (SME’s) had not been encouraged in the past. He is aware, I am sure, that access to capital is essential for industrial growth.

SME’s are considered, all over the world, to be the backbone of the industrial economy. It may come as a surprise to the reader but SME’s constitute over 90pc of all enterprises in Pakistan and employ 80pc of the non-agricultural labour force. SME’s contribute over 40pc of our annual GDP. For perspective agriculture contributes 21pc of our GDP.

In spite of the clear importance of SME’s to our national economy, the State Bank of Pakistan has taken steps to deny SME’s access to capital. SBP’s revised rules of 2016 define an SME as an enterprise which has an annual turnover of not more than Rs150 million and employs not more than 50 persons. All banks are instructed by SBP not to lend more than Rs25 million to any SME. There are also stricter requirements of collateral and security for SME’s. The result is that SME’s share of all banks loans in the country is a mere 12pc. Without fair access to capital how can we expect 90pc of our enterprises to grow?

Coming to my last point of how regressive government involvement increases costs through inefficiencies, it is worth noting that over thirty forms need to be submitted to the three corporate regulatory bodies, namely, the FBR, the SBP and the SECP every year. These reporting forms are lengthy, cumbersome and repetitive. Management consultants estimate that, on average every SME has to spend at least Rs500,000 in terms of man hour costs every year on compliance with documentary requirements of different government agencies. Failure to comply, even in terms of neglecting to file a form, carries prohibitive fines (up to Rs10 million per director) and a threat of imprisonment.

Some new regulations are humiliating to entrepreneurs, such as the FBR requirement that shareholders/CEO’s must appear in person when applying for an NTN for a new company.

Such intimidating and threatening behaviour can hardly be expected to encourage industrialisation.