According to data released by the Pakistan Bureau of Statistics, Large Scale Manufacturing (LSM) sector contracted by a further 7.06 percent in August 2019 – a decline that compares unfavourably with the July 2019 contraction of 3.28 percent and 2018-19 contraction of 6.04 percent. LSM has a 78 percent share in total manufacturing, 10.2 percent in Gross Domestic Product and is a major contributor to exports. This dismal data no doubt prompted Prime Minister Imran Khan and the Chief of Army Staff General Bajwa (an important member of the National Development Council that was established on 18 June 2019) to engage with around 30 major businessmen of the country during the first week of October and exhort them to continue to remain engaged with the government to resolve all issues.
The focus of the meeting was on concerns of the business community with respect to: (i) National Accountability Bureau’s ‘harassment’ of a number of major businessmen, with NAB subsequently establishing a six-member committee consisting of representatives from the private sector to deal with all cases of genuine harassment; (ii) clearance of pending refunds and prompt repayment of refunds in the current fiscal year though the implementation of pending refunds has been slow while repayment of refunds of this year has yet to begin; (iii) ending the condition of use of CNIC was not accepted by the government given Chairman Federal Board of Revenue’s salutary objective to bring the parallel illegal economy into the legal framework; (iv) rupee depreciation which has impacted negatively on LSM industries reliant heavily on imports of raw materials/semi-finished products; and (v) axle load condition applicable on national highways, which has raised the cost of transport as well as is destroying provincial and local roads as truckers are taking those roads to bypass laws was to be dealt with. Sadly, while these four issues are major impediments to LSM yet the fact remains that the economic policies, monetary and fiscal, are also major contributors to the decline in LSM.
Businessmen argue that even if refunds are current yet the fact that the LSM sector in particular relies heavily on borrowing, the cost of capital is regarded as an input cost globally, implies that the discount rate is a major factor in any decision with respect to actual output. The discount rate today is 13.25 percent no doubt due to State Bank of Pakistan’s over-arching objective to meet the Fund’s agreed condition of (a) linking the rate to the CPI rather than core index and already the differential has declined from 3.14 percent in May 2019 to July’s 2.95 percent; and (b) attract hot money and so far 300 million dollars has entered the Pakistani market; however, this amount is too little and at a very heavy cost to the national economy. Besides other input costs, particularly electricity, gas and utilities, are much higher than the regional average accounting for higher cost of production with a consequent negative impact on our exports.
The pressure on Chairman FBR with respect to the unrealistic target for the current year compels him to implement measures to deal with the illegal economy upfront, an approach that is causing serious resistance amongst several sectors/subsectors. A more phased approach may have more success. However, the International Monetary Fund (IMF) cites the sustained failure of previous Pakistani governments to implement the range and breadth of agreed reforms and is unwilling to abandon its insistence on upfront policy implementation.
The members of the NDC by insisting that the belt tightening is for the short-term only are relying on an upswing of the economy subsequent to the end of the IMF programme. However, the programme is for 39 months and so far only three and half months have passed (with prior conditions applicable since May 2019 when the staff-level agreement was reached) and 30 months are remaining – a lifetime for the general public already struggling to make ends meet.
