by Qamar Zaman*
*The author is a civil servant belonging to Commerce and Trade Group. Presently, he is posted as Joint Secretary (IRC), in Cabinet Division, Islamabad.
Abstract
In Pakistan, the government and people often talk of economic growth and development. However, once we look at ground realties, there are serious stumbling blocks that inhibit this yearned transformation. There is a pre-defined path to development, which has been followed by various countries. This process – which is supplemented by the service sector – entails a shift from agriculture to industrial to high-end technologies. There is no such country in the world that has not followed this route. Economies of smaller countries can grow through tourism, natural resources (oil income has been the driving force behind most of the middle eastern countries) and the services sector. Pakistan – the 5th most populated country the world – however, is likely to follow the route that other industrialized nations have followed. Pakistan cannot improve its economic condition by circumventing industrialization. – Author)
Agriculture – social status and economic growth
Pakistan is an agriculture-based economy. The bulk of its population earns subsistence from farming, and livestock. Generally, low income countries have agriculture-based economies and the same holds good for Pakistan.
Due to peculiar socio-economic reasons, Pakistanis take pride in agriculture. This is evident from the fact that a large majority of the parliamentarians of the country hail from agricultural backgrounds, and agriculturists/landowners also enjoy higher social prestige, especially in rural settings. This becomes quite a dominant trendsetter in a society where 45% of the population earns its livelihood from agriculture.1
In order to transform their industries and increase income levels, such countries need restructuring to expand their industrial base. Examples of some countries that were able to transform their socio-economic conditions over the past few decades are: Ethiopia – one of the most impoverished countries of the 20th century – has ventured into major reforms and through active public-private investments has transformed its agriculture-based economy into manufacturing. The growth rate of Ethiopia over the last two decades has been more than 7%. The major exports of Cambodia, once an agricultural country, are textiles (70%) and these are fuelling a GDP growth rate of 7%.2 Vietnam, has altered its economy from agriculture (rice and coffee) to basic industries (textiles, footwear) and is now also an exporter of electrical and electronic products. Thus, economic transformation is the key to economic growth and it can only be achieved through focused, intentional and sustained efforts coupled with supportive policy interventions.
Additionally, we can also categorize various countries on the basis of their resource pool of soft skills. Various researchers have identified Vietnam as the top most destination in terms of relocation of industries from China. These studies were published before an agreement was reached between the USA and China. Soft skills include an evaluation of commercial returns, human resource, regulatory regime, ease of doing business, visas, cost of living, tourism facilities and other benchmarks for international investors.
Private companies have the option of choosing from numerous countries. Therefore, in order to attract Foreign Direct Investment (FDI), countries need to make their investment regimes competitive by providing something extra or special.
Pakistan: the problem lies in low FDI and low savings rates
Normally two types of investments are made by international investors: short term in Treasury bills, the stock exchange and bonds and long term in the shape of FDIs. Over the past two years, Pakistan has attracted a larger sum of investment in its treasury market. The primary reason being high discount rates, which have been unprecedently high during this period. This type of investment is quick to come and even faster to go. The moment Pakistan reduced its discount rate the hot money started moving out (as per State Bank of Pakistan, out of a total $3.4bn investment in T-bills, about $1.74 bn were withdrawn in March 2020).
Pakistan has a Gross Savings Rate of 5.2 % (2019) while this is 45% in China, 32% in India and 27% in Bangladesh.3 The savings rate is further translated into investment. The other source of investment is private sector lending by banks. In Pakistan, due to a high policy rate, private sector lending is small. That too has been decreasing over the past few years.4 The Public Sector Development Programme (PSDP) spending has also been small, considering the size of the country, and remains lower than its allocations. A low savings rate does not leave much room for investment and with a high discount rate of 9% (which has recently been lowered from 13.25%, where it was fixed in July 2019) the bank option is also not that viable. FDIs seem to be the only logical option to follow. FDIs provide financial support as well as economic stimulus. The push factor of FDIs is always many times greater than its financial benefits as this translates into transfer of technology, HR training, positive externalities and, most importantly, it helps in completing the production cycle. The substantial role that US money and technology played in the economic development of Chins is a valid example of this process. As the dictum of ‘export led growth’ holds, there is need to attract investment in the export sectors of Pakistan.
In a nutshell, Pakistan neither has indigenous resources to expand its production curve, nor is it using the international windows available to expand its manufacturing base. Analysis of South East Asian countries show that while investment numbers may appear small, but the spinoff effect of FDIs has been phenomenal. It is this cumulative impact that compels countries to always be on the lookout for FDIs.
What ought to be done
Visa Regime – tourism is the front-desk of businesses
Pakistan was ranked 121 out of 140 countries on the Travel and Tourism Competitive Index 2019 released by World Economic Forum. In some countries like china even local travellers contribute substantially towards the tourism sector. There are various reasons for this, but they mostly relate to security, image, infrastructure and facilitates. Therefore, in Pakistan, earnings from tourism are insignificant in comparison to the potential.
Putting aside tourism for its intrinsic and monetary value, a hassle-free process to acquire visas is the first step towards an ease to do business environment. Traditionally, Pakistan has not been a visa friendly country 5, though the government has started introducing some procedural interventions to facilitate visa issuance like the introduction of e-visa in 2019. However, the government needs to simplify issuance of business visas as well. Despite having a policy of 5 years business visa, it will require a detailed study to ascertain how many business visas of 5 years duration are issued, in reality. Generally, our missions issue business visas of shorter duration ranging from 6 months to 1 year and these are valid for only a couple of entries.
Pakistan needs to relax its visa rules for all types of visas, specially business and investment visas and the necessary authority for issuing visas should be delegated to the missions, instead of following a long chain of Board of Investment and Interior Division approvals. Initially, these exemptions should, at least, be available to nationals of friendly countries.
Taxation
Seventy per cent of our tax income is generated from the industries/manufacturing sector, whereas, this sector constitutes only 22% of the GDP.6 The services sector, which is largest contributor to GDP, only contributes 20% of overall tax collections. The share of the agriculture sector is even smaller. One of the reasons behind this industrial bias is the lack of documentation of the economy. In order to fill the gap, the tax collection at the import stage is a preferred mode – 47% of taxes are collected at ports. This raises the cost of inputs, raw materials and machinery, thus increasing the cost of production, which affects export competitiveness.
In a country with a youth bulge like Pakistan (65% under the age of 30) job creation is a necessity, otherwise this asset can easily become a liability. The government, therefore, needs to base its policies with the purpose of attracting more investment in this sector, thereby, creating more much-needed jobs.
Spinoff of the manufacturing sector
Manufacturing is the engine of growth. The natural progression of this sector is based around value addition and a shift towards the information and technology sector. The hindrance is skilled labour with the necessary expertise.
If we analyse trade data of China – out of $ 2.5 trillion imports around $ 2 trillion are basic or intermediary goods. In the USA, however, out of its total imports of more or less similar values, it imports $ 2 trillion finished products. This, at the end of the day, translates into a higher GDP growth rate in China vis-à-vis USA. That’s why, the GDP growth rate of countries like Bangladesh, Vietnam and Cambodia – being involved in labour-intensive industries – is higher, as export proceeds are widely circulated in the economic system.
Regulatory glut
In 2018, Pakistan was declared a champion reformist country by World Bank as it jumped 28 levels in Ease of Doing Business.7 This was a great achievement. Broadly, Pakistan showed remarkable improvement in areas which included electricity connection, registration of property and automation in revenue departments.
Ease of doing business needs to be analysed with the Competitive Index of Pakistan. Pakistan’s ranking on the ‘Global Competitiveness Report 2019′ dropped to 110 in 2019 from 107 from a list of 141 economies as released by the World Economic Forum (WEF) contained in the Global Competitiveness Report 2019.8 In the South Asian region, Pakistan is ranked fifth – behind India, Sri Lanka, Bangladesh and Nepal. This, along with the Transparency International reports, needs to be factored in. These few reportshttps://www.brecorder.com/2019/10/10/529011/global-competitiveness-report-2019-pakistans-ranking-drops/ provide a glimpse, to potential international investors, of the business/investment environment in the country. Sustained efforts are required by all government departments to improve the country’s rankings in the future.
Intervention in free market
In Pakistan, governments have been meddling with market dynamics, thus creating inefficiencies and distortions. This practise squeezes room for free market growth. In the wheat market, for instance, this year the government has announced a support price of Rs 1,400 per ton and also set a target of 8.25 million tons of procurement by federal and provincial authorities.9 This is approximately 30% of the total wheat production of Pakistan and is big enough to thwart free market operations. This may be done for the benefit of the common man, but continuous intervention has created an atmosphere of perpetual rent seeking in Pakistan. On the other hand, Pakistan has shown remarkable progress in cement and steel sectors after privatization and deregulation.
Across the world, countries only provide support to the agriculture sector because farming is extremely vulnerable to seasonal changes. But even in these countries, the insurance industry provides additional padding against any unforeseen calamities. With other options available, providing support to vulnerable segments of society/economy must be separated from broad-based and persistent market intervention. The government needs to protect and assist sectors like education, health and water facilities, rather than commodities like wheat, sugar and their likes.10
Industrial regulations in Punjab – scattered across the departmental boundaries
At times, an activity is not illegal, rather policy gaps render it illegal. The case of Lahore industries is quite astonishing. In early 1990’s, all the industries located outside the municipal limits of Lahore city were formalized. Later, as the city expanded, so did its municipal limits. As a result, these industries became illegal. Lahore Development Authority (LDA) has initiated a regularization exercise and consequently has declared a couple of roads as industrial corridors. The basic reason of this conundrum is that government tiers (provincial and district) are slow and are not able to keep up with the pace of the growing needs of society. With the population growing at 2.9%, the people have needs and the economy has to grow accordingly. The government rules and regulations, therefore, need to change at the same pace.
Local Government order 2009 is a document worth reading. This essentially advises district governments to divide lands into commercial, industrial and agricultural. All the land, out of the periphery of the cities has been categorized as agriculture land, and only basic setups (which are not even part of cottage industries) can be established on these lands. Any industry, not included in the lists, needs to obtain approval of the district government, which is somewhat discretionary in nature and whimsical from a bureaucratic standpoint. This will imply that any industry not included in the list is illegal. The case in hand is the cement factories established in Chakwal, which have been made to run from pillar to post since their establishment on one pretext or another by government machineries.11 12
There is another piece of legislation in Punjab titled: Punjab Industries (Control on Establishment and Enlargement) Ordinance 1963. This piece of legislation categorizes an establishment where ten or more workers are working as an industry and it provides somewhat discretionary powers to Director (industries), while according permission to establish any industry. Quoting this piece of legislation, the Supreme Court of Pakistan declared the transfer of three sugar mills linked to a former Prime Minister illegal in 2018.13
Society has changed a lot since 1963, but unfortunately legislation and rules, enforced in Pakistan are of the period when industrialization had still not started affecting Asia. China began reforms from 1978. Most of the other Asian countries also changed their processes and procedures. While the world was opening up, we were closing down. Arguably, this led to the preservation of the powerful agriculturist lobbies and maintained status quo in Pakistan.
A Case study of the export cluster of Sialkot, Gujranwala and Gujrat
There is a need to carry out a survey of the industries in Sialkot, Gujranwala and Gujrat. In the absence of clear rules, it is highly likely that most of the industries of these export hubs would not be able to pass the requirements of the plethora of laws, regulations and rules of federal, provincial and district governments. Once these factories are established, state functionaries deem them as fait accompli. It is also likely that, due to mega policy gaps, these industrial units may be a source of routine income for state functionaries. There is a need to bring these units into the fold of law. Any post facto regularization of these industrial units is likely to invite criticism from the media, National Accountability Bureau (NAB) and other law enforcement agencies. In a country where decision-making by state functionaries is already at its lowest ebb, the government would have to muster great resolve and courage to take this action.
Such industrial units keep growing without approvals or permissions, while the government keeps its eyes closed. Such business establishments can only be managed and run by locals as it is not possible for any foreigner to invest in these sectors/areas. That’s why we hardly see any foreign company running any industrial unit in the industrial triangle of Pakistan, on their own. Collaboration is either through joint ventures, subsidiaries or shareholdings. These are the preferred modes of operation for foreigners in the Pakistani market.
Land ownership to foreigners
A country that desperately needs Foreign Direct Investment (FDI) needs to allow land ownership for foreigners. Land ownership is a basic requirement for foreign investors.
The Ministry of Interior, Government of Pakistan through Order No. 18/153/04/Poll (II) issued on 9th September 1984 had stated: –
“No foreigner directly or indirectly acquire land or any interest in land or landed property in Pakistan except with the previous permission in writing of the federal government and in accordance with the conditions to which permission is granted…”
The federal government in Pakistan is defined as the Prime Minister and the Cabinet. Since this new definition of Federal Cabinet was adopted in August 2016, not a single case of land sale has been approved by the Cabinet, nor was any such case presented to the government by the Interior Division; meaning, thereby, that any such sale of land has not materialized. In the absence of this, inbound FDI will be limited. Some SEZs, however, have leased land to foreign owned companies. One such example is granting status of Free Trade Zone to Gwadar and allocating the area to China Port Holding Company.
There is clear policy void, which necessitates policy formulation by the Board of Investment (BoI) and Ministry of Interior. The policy may have certain terms and condition, such as abiding by local rules and regulations and transferring money only by banking channels, etc. Issuing long-term visas that may lead to granting Pakistani nationality to individuals after the completion of a certain period and meeting certain requirements could be linked to this opportunity. Somehow, these aspects have been ignored in our policy making circles. Thousands of Pakistani expatriates are playing critical roles in the enhancement of economies of other countries. Brain drain is a topic that has been discussed for decades in Pakistan. On the flipside, there are certain benefits that investing and living in Pakistan may have that could attract foreigners, but the administration has closed its doors to this potential.
Presently, more than 120 countries allow land ownership to foreigners and some even have liberal visa and passport offerings linked to investment in land. The present government is eying to build five million houses during their tenure and have also announced amnesty for investments made in the construction sector, but without changing the land policy. The present set of policies need revision in order to attract necessary levels of foreign investment in property, construction and real estate sector.
Conclusion
The contribution of manufacturing at 12.1% in 2018 is down from a high of 17.5% in 2005.14 In Pakistan, we have a Ministry of Industries and Production at the Federal level and Industries departments at provincial levels. One of the primary responsibilities of the Ministry of Industries and Production is to prepare an Industrial Policy. Unfortunately, Pakistan never had any such policy document. The provincial industries departments are more focused on controlling industries, rather than promoting them. At the provincial level, the department of Environment is the sole contact with most industries. In Punjab, the role of Industries Department is confined to a few industrial Zones established by the Punjab Industrial Estate Management Company and it controls most of the industries through the office of the Director General Industries, which also has a presence at the district level. In addition, the Industries Department runs a few training programs through TVET and PSCI.15
The bulk of the regulations pertaining to industries are confined to the district government. The process starts from purchase of land, its mutation, status conversion from agriculture to industrial, approval of architectural designs by various tiers of the municipal corporations and planning department (in Punjab a District Design Planning Committee headed by Deputy Commissioners approves the designs), etc. At the provincial level, various departments are legal custodians of various regulations, while at the district level the office of the Deputy Commissioner (DC) is the front end, at the implementation stage. The office of the DC acts on behalf of these departments only for implementation purposes, as all the policy decisions are taken at the provincial level. These responsibilities are in addition to a plethora of other responsibilities entrusted to this office, leaving little time and energy for the officer to attend to these functions.
These are critical steps, however, most industrial units operating outside the industrial zones in Punjab are operating without proper legal cover. The case in hand can be, of the famous industrial triangle of Pakistan located in Sialkot, Gujranwala and Gujrat – the hub of 2 million SMEs. Most of the industries in the area are located inside the municipal limits. There is no demarcation between agricultural, industrial and residential zones, rather, everything is cluttered. This area earns more than $ 2 billion in foreign exchange but cannot meet the regulatory litmus test.
We have front loaded regulations and have jeopardized our industry. One amendment in the regulation in importing countries, will have our industries running for import orders. The other aspect is that the region has not been able to attract international investment, despite displaying promise and potential. In Bangladesh, for instance, more than 10% FDI is made in the textile sectors.16
There is a need to synergise federal, provincial and district departments in order to facilitate industrial growth. Industrial development is a federal subject and provincial and district governments need to toe the line and assist industries. It will be interesting to evaluate how many companies in Pakistan are fully owned by foreigners or have foreign stakeholders. There are some multinational stakeholders in sectors such as tobacco, telecom, automobiles and ICT. In mass manufacturing and export sectors like textiles, leather and rice (the core export sectors of Pakistan), there are hardly any investment by foreigners. Other sectors like sports good, surgical equipment and light engineering products are also fully owned by locals. The bulk of the products of our light engineering sector are purchased locally, therefore, Pakistan remains in the periphery of the Global Value Chain (GVCs). Recent World Bank reports observe that GVCs are playing a critical role in the economic development of countries. There is a need to expand these sectors to attract FDIs, which would, at a later stage, shift into other sectors.
Some functions like electricity connections have been simplified. Likewise, taxation has been digitized, Customs have introduced various schemes – Duty and Tax Remission for Exports, Export Oriented Unit (EoU) Scheme, and digitization of imports like Web based one Customs clearance (Weboc) – the sales tax registration process has improved and the availability of services for Income Tax filing are some of the star interventions that have facilitated business operations of companies.
However, there remain a mismatch of policies and misalignment of the various tiers of government. Each department is a custodian of its rules and regulations. There is a need to ease out regulations relating to land zoning, building controls, various NoCs, etc. The relevant departments need to assist private ventures to grow by playing the role of a ‘facilitator’ and not of a regulator. However, in the current milieu, putting up a manufacturing unit is an unattractive and cumbersome option. Investment in real estate and property development is a much simpler and more profitable venture.
Accordingly, there is need to let loose the competitive zeal of Pakistanis by encouraging them to make money and get into trade, businesses and manufacturing. The state must collect taxes, have limited bureaucratic interaction with the industries, and facilitate their operations.
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- Mr. Nabved Iftikhar, is of the view that Pakistan must deregulate all these industries, as there is no specific reason for controlling these, due to ample availability of supplies.
- Iqbal N. Serious illegalities detected in setting up of cement factories in Chakwal: report – Pakistan – DAWN.COM [Internet]. [cited 2020 Mar 29]. Available from: https://www.dawn.com/news/1439269/serious-illegalities-detected-in-setting-up-of-cement-factories-in-chakwal-report
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- Relocated sugar mills: Sharif family prevented from operating, doing business after two months – Business Recorder [Internet]. [cited 2020 Mar 27]. Available from: https://fp.brecorder.com/2018/09/20180914407588/
- Contours of a New Industrial Policy | Pakistan Business Council [Internet]. [cited 2020 Mar 23]. Available from: https://www.pbc.org.pk/research/contours-of-a-new-industrial-policy/
- Industries Department [Internet]. [cited 2020 Mar 23]. Available from: https://icid.punjab.gov.pk/
- UN: FDI inflow into Bangladesh rises 4.38% in 2016 | Dhaka Tribune [Internet]. [cited 2020 Mar 27]. Available from: https://www.dhakatribune.com/business/2017/06/09/un-fdi-inflow-bangladesh-rises-4-38-2016/
