Monday, July 19, 2010

Industrialization in Pakistan by Shan Saeed

Industrialization in Pakistan

By Shan Saeed--Economist/Banker

FOR developing nations like Pakistan, industry occupies a key position in the development of a country.

Its development raises national income, creates employment opportunities and improves the balance of payments position both by producing exportable goods and by substituting imports, but also supports and stimulates development in other sectors of the economy.

In Pakistan, during the past few years, indeed industry has contributed the largest segment to the economy. Self-reliance has been the principal aim of the industrial policy in the five-year programmes. In addition to the public, private sector has been encouraged all along to play a supreme role in the industrialization of the country. It has also been recognized that investment of foreign capital, coupled with technical skill can play an important part in the quick execution of the industrial programme. By virtue of such pragmatic approach, the industrial development in Pakistan has been self-asserting.

As the country possesses the requisite natural and human resources for industrial growth, the industrial policy would continue to be directed towards increasing the share of the manufacturing sector in the total economy.

Emphasis would, however, increasingly be a shift towards deepening the industrial structure through an increase in the weight of high value-added, more sophisticated engineering, chemicals and other basic industries.

It is also imperative to ensure optimum utilization of existing industrial capacities and bring about revival of sick and closed industrial units wherever it is justified by their economic viability and managerial competence.

Over a period of time, a large class of potential entrepreneurs has developed, though with relatively modest resources earned from other economic activities within the country or mobilized by way of savings from employment abroad.

These potential entrepreneurs have the capacity and are keen to take up sizable responsibility in the industrial field. given suitable framework of policies, particularly relative freedom from unnecessary controls and regulation, there appears to be a promising climate for rapid expansion in private investment in Pakistan.

At the same time the public sector has established it management and entrepreneurial foundation. It is in a position to carter its future course in a manner, which would create a mutually supportive relationship between the public and private sector.

Public sector has come to stay in industries like steel, fertilizer, cement, petroleum refining and petrochemical, automotive equipment etc. wherein it would continue to remain active, though mainly concentrating upon rationalization, balancing, modernizing and selective expansion.

These industries are, however, by no means the exclusive presence of the public sector.

As in the past, the government would be willing to admit private sector participation even in these fields and would become concrete proposal in this behalf bolstered by proper feasibility studies and financing plans. Where, however, in the case of an industry considered essential from the overall national point of view, the pirate sector is not forthcoming for reasons either of the requirements of large amount of capital or acquisition of sophisticated technology, or where situation of pirate monopoly is apprehended, the public sector may step in the fill the vacuum.

The public sector has also continued to play its socio-economic role in industrial development of less-developed regions. Most of the investments required by public sector for its programme are, in line with the existing policy; have to be generated by public sector enterprises through their own resources such as retained earnings and provision for depreciation.

With a view to fostering healthy competition in all industrial activities between the public and private sectors, the government would continue to maintain the existing policy of equalizing the conditions and environments and access to financing for both these sectors. The “cost plus” pricing (formula) on which some of the existing industries are based will be avoided as far as possible in setting up new industries.

The government would continue to focus its efforts towards improving the technical and financial performance of public sector enterprises through suitable administrative and institutional measures.

A number of such measures to improve their skills and efficiencies have been introduced.An expert advisory cell has been created to monitor, coordinate and evaluate performance of each enterprise. This has been accompanied by delegation of powers to holding corporations and divestiture of un-profitable units.

The problem of sick units has confronted industrial activities for quite some years. The sick units were inimical to development of financial institutions. the total sick units whose default cases have been taken for adjudication by the creditor banks and DFI’s over the last few years are 868 units with total unpaid loans of Rs 107 billion.

The government has established the Corporate Industrial and Restructuring Corporation (CIRC) to tackle the long-standing problem of sick units to over financial difficulties of NCBs and DFI’s. The corporation has identified the first lot of 90 sick units initially for sale / transfer of ownership.

The CIRC has approved the transfer of ownership with management control of these units. The initiative has been successful in wiping off non-performing loans of worth Rs 12.2 billion from the balance sheet of the financial sector. The revival of sick units would add to the productive capacity of the country and revive the industrial activity in the country.

The job of the CIRC is to liquidate those units, which are unprofitable and are in bad shape. It has been quietly successful in implementing its plan so far and has generated positive results.

The government will continue to encourage close collaboration between public and private sectors in setting up some of the large industrial ventures with management in suitable cases placed in private hands. Area, where collaboration can be possible will include enterprises requiring speedy response in a highly competitive market.

Role of financial institutions: Banks and financial institutions have played a major part in the industrial development of the country. The major objective of these financial institutions was to strengthen the industry and assist the country in industrialization. The development financial institutions (DFIs) have helped the industry to grow despite tough competition in the international market. For this purpose, the government set up different banks and financial institutions to cater specifically to the needs and demands of the industry. These included former NDFC, the IDBP, the PICIC, the ADBP, former the BEL, the SBFC, and the RDFC, etc.

The following chart illustrates the financing done by the DFI’s over the years for the industry:

Role of small industries: The development of small-scale industries has a strong socio-economic imperative for the country. They need smaller amount of capital, generate larger employment opportunities, disseminate the benefit of growth to a larger number, have short gestation period and carry the fruit of industrialization to rural area. Small industries have shown a remarkable resilience even in adversity. It is envisaged that the small industry route will accelerate the export-led growth of the economy.

The small industry is defined as a unit involving fixed capital investment of upto Rs 10 million. The key element in developing small industries is given below:

i) provision of adequate and timely credit at concessional rate;

ii) existing training-cum-service centre for small industry will be strengthened and more will be opened to provide training and common facilities; iii) large-scale industries units, particularly in the engineering sector, will be encouraged to make use of small units sub-contractors. The government will assist them to prepare programme of technical assistance, credit for new investment, provision of designs and moulds with long-term contracts for purchase of the products of small units;

iv) the Small Business Finance Corporation will expand its activities to cover the various small-scale industrial estates and will provide them with technical advice in addition to funds.

Role of SMEs: The small and medium enterprises constitute 90 per cent of businesses in Pakistan the SMEs comprise heterogeneous activities but their active presence in services and manufacturing is felt prominently because of large scale manufacturing and corporate sector’s limitations in catering all national demand for goods and services. The SMEs represent a significant component of Pakistan’s economy in terms of value addition and employment generation. SMEs play critical role in the manufacturing sector by providing 80 per cent of industrial employment, contributing 30 per cent to GDP and generating one-fourth of the sector’s export earning.

Its contribution to value added in the manufacturing sector has risen from 27 per cent in 1980-81 to 35 per cent in 1997-98 but its share in employment in the manufacturing sector declined from 85 per cent in 1980-81 to 83 per cent in 1997-98. This implies productivity improvements in the last two decades. It provides employment at lesser cost and its capital requirement it also low.

There is growing recognition of the importance of the SMEs in economic development but the policy framework remained biased against the sector. The growth of small-scale industry in mainly hampered by the non-availability of credit facility in the past. Realizing this constraint the government has opened a micro credit bank, named the Khushali Bank which plans to disburse Rs 500 million loans to poor people during the current year, first year of its operation. The government has reinvigorated and re-organized the Small and Medium Enterprises Development Authority (SMEDA) to provide technical assistance to potential small investors. SMEs still face difficulties in coping with skilled workers requirement, regulation and business environment issues, infrastructure problems like poor electricity, supply, poor technology, poor access to raw material, especially imported, Rowa and inadequate marketing. Following organizations are involved in promotion of small and medium industries in the provinces:

1. The Punjab Small Industries Corporation 2. The Sindh Small Industries Corporation

3. The NWFP Small Industries Development Board

4. The Directorate of Small Industries Balochistan

These organizations have infrastructure like industrial estates, vocational training institutes and funds. But, unfortunately these provincial organizations have not made any mark in promotion of small industries.

The reduction in the costs of communication and transportation, the emergence of the internet or economy, the frictionless flow of global capital and the widespread acceptance of market liberalism have brought about greater economic interdependence and connectivity. globalization is just a succinct way of announcing this reality and pointing to some of its implications.

A country of Pakistan’s demographic size, with people generally enjoying basic freedom of expression, can never be conveniently insulated from evolving idea, technology and changes in the rest of the world. At present, Pakistan can hardly think of options other than economic integration with rest of the world, even though there can be quite different views on the speed with which such integration can and should take place. For these elite consumers, the traders will bring Christian Dior, Rolex and Bally.

In such a scenarios jobs don’t grow enough to match the demand for them. There will be plenty and poverty side by side. For a chosen few, the country will spread the red carpet while most Pakistanis will see no change very soon.

In this context, it is particularly important to have efficient banks and non-banking financial institutions. Keeping the healthy and free from scam and corruption is essential if the millions of thrifty people were to trust the institutions and hand over their savings for investment purposes. Only then will golbalization for Pakistan be more than just a word. In addition, the future industrialization should focus attention on the following areas:

* defence-related industries should be given priority and special encouragement. Arrangement need to be made to combine both civil and defence demand for various components to enlarge the size of this market that has got lot of potential in the Gulf states;

* industries based on highly sophisticated technology and involving high risk and fast obsolescence and for which no capacity exists at present should, as pioneering industries, be provided with special incentives;

* the private sector will continue to be encouraged through fiscal incentives to set up industrial estates to provide not only land and infrastructure but also standard factory buildings, housing, schools, hospitals, and welfare and recreational facilities. The ministry of industries with the provincial governments and other concerned agencies including the SMEDA and the Export Processing Zone Authority will coordinate the selection of sites for industrial estates and provision for gas, telephones and electricity. These estates will be run by the private sector on self-financing basis.

Another major goal of industrial policy would be to strengthen the linkages of the industrial sector within the economy. this is sought to be achieved by developing on the one hand, agro and mineral based industries, and on the other hand creating domestic capacity to manufacture machinery, equipment and intermediate products required by other sectors of the economy.

Such linkages would be used, in combination with various fiscal and other policy instruments, to purposefully achieve dispersal of industry throughout the country in an economically viable manner. The supplies of scarce infrastructure will have to be converged in future into a limited number of growth though establishment of industrial estates of other such measures.

Given the size of Pakistan’s own domestic market, its industrial future lies not only in terms of an inward-looking domestic market approach, but also in boldly facing the competition and aggressively seeking higher share of the world market. The next phase of industrialization must, therefore, include greater emphasis upon strengthening the basic competitive position of the industries through a process of tariff rationalization, modernization, quality control and standardization rather than providing them excessive protection to survive with their own weaknesses and inefficiencies.

The flow of foreign investment in Pakistan has been quite in tandem, which shows the cautious nature of investors and deep thinking for the policy makers to do. In a world deluge with capital out-flow and in-flow countries have to manage the risk factor and laws and structural reforms and government position is very important.

In Pakistan number of factor contributed to the decline in foreign investment recently including tax documentation drive, lack of working capital, political instability, law and order problem, insecurity of foreigners, power failure, reduction in loans, slowdown of urban transport scheme, mechanical problem, lack of infrastructure, poor communication systems are in list to name a few.

Thus, while emphasizing foreign direct investment, let us not forget that we must create bulk of investment from within the country. The challenges are not just attracting FDI; but it is to create an overall positive environment for growth of investment in general. With the economy currently in a sluggish mood, it is time to take effective steps to promote private investment, both domestic and foreign.

In line with the present government’s economic revival programme (ERP), the Board of Investment (BOI) initiative to industrialization has opened doors of a splendid sector to foreign and local investors. The large-scale manufacturing has recorded growth rate of 7.8 per cent while formal manufacturing and others registered a growth of 7.1 per cent and 3.5 per cent respectively.

The above calculations are nearer to the SBP’s third quarterly report in which the country’s growth rate was depicted as less than 3 per cent of the GDP against projected target of 4.5 per cent for the current fiscal year. When viewed in the perspective of a less than 3 per cent population growth rate per annum, one feels nothing but to admit that our development strategy needs to be given one more thought to show improvement in this sector, which has always played a linchpin role in the country’s progress, and now its share to the national economy is conspicuous.

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