Private sector: the engine of growth

By M. Osman Ghani
The liberal economic and investment policies introduced since early 1990’s, put great emphasis on the private sector, making it the engine of growth. To facilitate increasing participation of the private sector and domestic and foreign investors, Pakistan introduced a long list of incentives and attractive packages to ensure accelerated GDP growth, income and employment generation.
Pakistan’s manufacturing sector recorded high growth rate during 2001-07 (average 9.6 per cent). Fiscal year 2003-04 and 2004-05 recorded highest ever manufacturing growth rates in the last three decades at 14.0 and 15.5 per cent respectively. Private investment as share of GDP which was 7.5 per cent in the 1990’s compared to 16.6 per cent of the public investment, increased to 15.7 per cent of GDP in 2005-06. However, since 2006-07 overall private sector’s share in the total investment has been declining, which stood at 14.2 per cent of GDP in 2007-08. Due to a number of adverse factors both domestic and international, Pakistan’s manufacturing sector recorded one of the weakest growths in a decade in 2007-08.
In the first eight months of the current fiscal, year large scale manufacturing has, in fact, contracted by 5.7 per cent as compared to a positive growth of 5.3 per cent during the same period last year.
Major sectors recording negative growth in the current fiscal year are; textile (-0.4 per cent), food and beverage (-06.7), petroleum products (-08.4), and automobile (-38.2). The main contributors to the negative growth among others are: global slump, domestic slowdown in demands and productions, growing power shortages, high interest rate, high inflation and rising cost of doing business etc. In view of the toughest ever time facing the business community in Pakistan they are now demanding for a better investment environment including reduction of cost in doing business.
High interest rates as a result of high discount rate (14 per cent at present) are eroding competitiveness and capability of the business community. Pakistani businessmen are rapidly loosing ground to many regional countries like India and Bangladesh in international trade. To revive their competitiveness and regain their lost grounds in international and domestic markets the business community demand drastic cut in the interest rates. The farmers are also demanding drastic cut in the lending rates to enable the agriculture sector to achieve more productive capacity and become dynamic. (See Table)
Terming the recent cut in discount rate from 15 to 14 per cent by the State Bank of Pakistan (SBP) as inadequate, various chambers of commerce and industry in Pakistan have demanded of the government to bring the rate to the minimum possible level for revival of the country’s economy. Business community was expecting the discount rate to be brought down to single digit level.
However, just one-per cent reduction in it has dashed all hopes of the business community for good times to come. This was also the unanimous opinion of local business community of the federal capital area.
The Multan Chamber of Commerce and Industry (MCCI) welcomed the State Bank of Pakistan’s decision to cut interest rates from 15 to 14 per cent but demanded further reduction in this regard. Representatives of trade and industry have generally appreciated the policy measures announced by Governor, SBP. Chairman, ruling business group, while appreciating positive steps of SBP with regard to 100 per cent Export Refinance Schemes, they term high discount rate as detrimental to the promotion of investment and business activities.
The representative of the Geneva based International Labour Organisation (ILO) for Policy Integration, has warned that reduction in annual GDP growth rate from six per cent to three per cent and higher bank interest rates would cause more unemployment and discourage investment in industry and agriculture sectors in Pakistan.
The ongoing electricity and gas load shedding has seriously affected the local industries and export, forcing lay off of millions of workers and closure of thousands of industrial units in the country. He called upon the government to take immediate measures for overcoming the energy crisis and for uninterrupted running of the industrial units. If the government does not overcome the load shedding of electricity and gas, and does not adopt policies to control unemployment, then there could be devastating social unrest in the country.
Due to global recession, almost all developed and emerging countries are slashing interest rates to revive their sagging economies and are offering many stimulation packages. SBP still maintains high interest rate which put a crippling effect on industry.
The interest rates, all over the world, are showing a declining trend. For example, in the United Kingdom, the interest rate has recently been reduced by 0.5 per cent. In India, discount rate has been reduced to 4.75 per cent, in Bangladesh it is 5 per cent, in Thailand it is 4.25 per cent and in Malaysia it is 3.5 per cent (Table). In Pakistan, the discount rate at 14 per cent is the highest in the region. Banks in Pakistan are charging a little less than 20 per cent that is perhaps the highest mark-up rate in Asia. A weak private sector cannot remain competitive and dynamic with such high interest rate burden. Better growth of trade and industry would not only provide strong cushion to the economy, but would also create plenty of job opportunities contributing significantly in reducing the unemployment and poverty levels in the country. Therefore, the business community wants SBP to bring down interest rate to single-digit level so that accelerated economic activities could be promoted to give a big boost to GDP growth, income and employment generation by availing easy credit.
Computer industry in Pakistan in particular, is reportedly on the verge of collapse as the growth of the industry has alarmingly declined. The industry is still at nascent stage and the imposition of high general sales tax has resulted in sharp increase in the prices of PC and other equipment’s common users. The high interest rate is also affecting their business. The computer Industry therefore, wants reduction in both sales tax and high interest rate to reduce its hardship.
High lending rates and business slump have caused record slowdown in the flow of credit to the private sector in the current fiscal year.
During July – 18th April FY 09 bank credit to the private sector has increased by only Rs.55.4 billion compared to Rs.359.7 billion in the same period last year. Reduction in interest rate, inflation and other costs of doing business along with improvement in law and order situation could help to bailout a depressed private sector in Pakistan.
INTEREST RATES IN THE REGIONAL COUNTRIES
Country Period Discount rate Deposit rate Lending rate
Bangladesh Sept. 2008 5.00 10.21 16.32
Pakistan Feb. 2009 14.00 6.96* 14.82*
India April, 2009 4.75 - 13.25
Malaysia Sept. 2008 3.50 4.14 05.96
Thailand Oct. 2008 4.25 2.75 07.25

* Weighted average rates.
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Sectors Amount Percentage
Infrastructure development Rs166 billion 45
Social sector Rs188 billion 51
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Again, the social sector suffered a major cut as out of Rs100 billion cut in development spending Rs79.5 billion was slashed from social sector projects, while the education sector Rs20 billion and health Rs39.7 billion would be decreased for next year. Recently, Pakistan occupies the 136th position among 177 countries listed in the human development index and lags behind even Bhutan and the Maldives in South Asia.

Remedial approach
(a) The government should launch a massive effort for job creation and employment generation in order to reduce the high levels of poverty.
(b) Infrastructure development would be an effective tool to curb the rising ratios of poverty. It should be a country-wide strategy, on the other hand, small and mega projects of infrastructure development should be initiated at the earliest.
(c) Housing is another sector which needs to be promoted and encouraged through a well planned incentives package. Huge housing will not only give a boost to all related industries but will go a long way to meet the acute housing shortage in the country.
(d) The transportation sector should also be reactivated. Different public welfare schemes should be started at gross-rout levels.
(e) Small and extensive vendor units in the textile, engineering and other export-oriented industries should be settled.
(f) Easy and smooth loaning facility.
(g) Effective use of micro-credit institutions to reduce the high levels of poverty.
(h) Delivery of essential services and basic necessities of life would lessen the burden of poverty on the general masses.
(i) The restoration in the investor’s confidence is a must because investment would automatically create more jobs, reduce poverty levels and promote economic growth.
(j) Better law and order situation would be helpful in the restoration of business activities and to reduce rising poverty.
Concluding remarks
Poverty discourages human talent and dignity. It decreases the level of patience and tolerance, and promotes corruption and terrorism and it also gives ways to disintegration and social alienation in the society. Therefore, sincere and coordinated efforts should be started to reduce the high ratios of poverty.

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