Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
The industrial sector is the backbone of economic progress. It works as a major source of employment and its growth paves way for sustainable development. For Pakistan, the growth of small-scale and large-scale sectors can help in bridging scarcity of revenue. However, it is a reciprocal arrangement where the efforts of government in the shape of laws and regulations, provision of infrastructure, and ensuring availability of cheap energy are pivotal to ensuring growth. The consolidated impact of large-scale manufacturing and other sectors together reflects in the shape of GDP growth and the correlation between industrial growth and growth of per capita income helps to scale up the overall level of economic activity.
According to Economic Survey of Pakistan 2020-21, the manufacturing sector contributes 12.79% to GDP and employs 16.1% of the country’s labor force. It consists of three sub-sectors: Large Scale Manufacturing (LSM), Small Scale Manufacturing (SSM), and Slaughtering. LSM is 9.73% of GDP and dominates the overall manufacturing sector, with a sectoral share of 76.1%, followed by SSM, which accounts for 2.12% of total GDP and 16.6% sectoral share. The third component, slaughtering, accounts for 0.94% of GDP with 7.4% share in entire manufacturing sector.
The LSM index is a measure of the changes in production and output of manufacturing over a particular period (normally one month) as well as on cumulative basis. The positivity and growth in the index are attributed to growth in economic activity. The production data of industries are sourced from Oil Companies Advisory Council, Ministry of Industries & Production, and Provincial Bureaus of Statistics. LSM hovered at an average of 5.3% before Pakistan Muslim League (Nawaz)—PMLN—left office in 2018. After assuming power by the coalition government of Pakistan Tehreek-i-Insaf (PTI) in August 2018, it nosedived to an average of 1.1% during its first three financial years. Though PTI government attributes this to the pandemic, the fact remains that even after its first year in power (2018-19) it witnessed a deceleration of -2.6%. This irrefutably confirms that the policies adopted by PTI were largely averse to business environment and manufacturing that used to contribute around 10.9% to GDP during the PMLN tenure. The same was reduced to around 9.7% in PTI’s tenure.
When PML-N came to power in 2013, the industries were facing multiple challenges like terrorism, energy crisis, inflation, and high cost of funds. The PMLN government successfully managed to avert the crises and within a short period, the energy deficit of more than 8,000 megawatts was turned into a surplus. In parallel, the policy rate was reduced to the lowest possible level and inflation was in control—all these factors contributed positively to the economic growth of all sectors.
The present PMLN-led coalition government, assumed power after no-confidence motion on April 9, 2022. Since then it has been facing economic challenges of shrinking fiscal space, non-funded/politically-motivated subsidies, coupled with unprecedented debt burden, amongst many others. It is, thus, left with very limited capacity to enhance developmental outlays. The real estate/construction sectors, presently thriving, due to controversial tax amnesties, have risked inclusive growth in future. The International Monetary Fund (IMF) is ardent critic of such perpetual tax amnesties. Further, inflation, constantly in double digits, has significantly increased the price of building materials.
With constantly increasing international prices, free fall of green pack and very high policy rates, growth in robust automobile sector is going to suffer. In fact, all the key sectors of growth are facing similar risks and challenges, owing to perpetual political instability, constitutional challenges, ever-increasing cost of inputs, and lack of direction exhibited by the incumbent united government. In order to overcome the present chaotic scenario, the government in power must come forward to support the public and private sectors to increase growth and ensure efficiency and productivity. Irrespective of political affiliations and individual manifestos, all political parties and stakeholders must strive towards a common goal—an economically independent and stable Pakistan.
In view of perilous outlook of the overall economy of Pakistan, a realistic fiscal policy can play a supportive role, especially in the current circumstances where the margin to ease monetary policy is limited. Thus, a simpler and fairer tax system, with the principal objective of dispersion of tax rates and narrowing down preferential treatments, alone can broaden the tax base and generate higher revenue with less pilferage [see details in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, 2016 and 2020)]. With higher revenues government can spend more to improve access to production infrastructure, ensure provision of economical inputs and establish special economic zones and growth poles that can positively add to the economic growth of the country.
On the external front, trade arrangements with developed countries are always an opportunity for under-developed nations to support diversification, attract new investments, create employment for skilled and unskilled labor, and most importantly helps to benefit from technology transfer. In the recent past, China Pakistan Economic Corridor (CPEC) created a landmark opportunity to connect our markets with global leaders like China and other key players collimating under the historic initiative of Belt and Road (BRI). In this way, potential foreign partners not only bring investments but also extend substantial expertise and technological advancement. These can work as a concrete base for sustainable and long-term growth. While making efforts for foreign investment, the government must ensure that the trade laws and regulations must complement the objective of generating new investment and expansions.
Unless ease of doing business is ensured to domestic and foreign investors, Pakistan will continue to face the challenge of pendular movements in the GDP growth index. We will keep witnessing a break in GDP growth after certain period. Moreover, new round of talks with the IMF team, started in Doha on May 18, 2022, is going to be tough as the lender of last resort is unhappy due to frequent violations by the previous government on various terms agreed to in IMF’s Country Report No. 22/27, released in February 2022. Though the current government is hesitant to raise energy prices, as they are not interested to put an extra burden on the people of Pakistan, yet in such a situation, it should assure the IMF of undertaking fundamental structural reforms.
Reforms must include initiation of privatisation of all loss-making state-owned entities, cutting of non-development expenditures, and improving the taxation system of Pakistan to generate tax revenue up to Rs. 12 trillion [complete roadmap is given in Tax Reforms in Pakistan: Historic & Critical Review, PIDE, Islamabad]. The easiest way of generating cash flow by raising petroleum prices to meet the fiscal gaps will not serve any purpose except adding more miseries to the people of Pakistan, who are already facing their worst economic challenges amid withering national unity due to political narrative of hate, mud-slinging and unwarranted attack on state institutions.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions