ANALYSIS: Big business launch to boost economy —Muhammad Aftab - Monday, February 21, 2011

Source : http://www.dailytimes.com.pk/default.asp?page=2011\02\21\story_21-2-2011_pg3_6

The big businesses and the IMF are on the same page over Pakistan’s economic woes. The IMF, for years, has been urging the government to overcome the huge budgetary deficit and stop its massive borrowing from the State Bank of Pakistan

Pakistan’s big business and top corporates have jointly come out with an impressive agenda to boost business and industry, and counter the economic slowdown. The agenda was launched by the newly formed Pakistan Business Council (PBC). It plans to tackle Pakistan’s economic crisis and the need and opportunity for reforms. The PBC, a grouping of the largest corporations, multinationals, industries and businesses, is of the view that “the economic situation is getting out of hand and problems like inflation, poverty, unemployment and crime will rise further if concrete steps are not taken on an urgent basis”.

It says it is “deeply concerned at the prevailing economic situation of Pakistan”, but it has been “greatly encouraged by the initiatives taken by the government of Pakistan and the political parties in parliament to initiate a dialogue to develop a consensus for a national agenda. While the economic problems are perennial and complex, the PBC sincerely hopes the process will lead to urgent and effective measures”. In order to move forward on this track, the PBC recommends a three-point plan, which, it says, should “form the core of this national agenda”. The points are aimed at the following:

To address the severe energy crisis on a war footing by taking critical reform decisions to tackle pricing distortions, production and distribution inefficiencies, remove bottlenecks for urgently needed imports and develop indigenous energy resources.

To reduce the budget deficit by overhauling the tax and tariff structure and bringing all sectors into a uniform, documented tax net. There is a need to reform and restructure public sector enterprises, appoint professional top management and boards of directors empowered to take necessary actions, eliminate waste in government spending and phase out non-targeted subsidies that benefit the well off.

To significantly increase education, heath and income support spending for the most vulnerable segments of society.

The PBC highlighted the fact that the Pakistani economy is endowed with exceptional human and natural resources and, given the right policy environment, the country can turn itself into a dynamic economy, which meets the aspirations of all its citizens in the not too distant future. The state-owned enterprises are incurring a loss of Rs 300 billion annually, a huge drain on the national budget.

Speaking for the PBC, Asad Umar, President of Engro fertiliser and consumer products group, attributes the crisis to “ the economic fallout of higher inflation and a lower GDP growth”. Umar cited huge government borrowing from the banking system to fill the massive budgetary deficit as “the primary cause of rising inflation and dwindling economic activity”. “Heavy borrowing by the government has resulted in a classic crowding out effect, reducing private investment and credit demand,” he says.

The big businesses and the IMF are on the same page over Pakistan’s economic woes. The IMF, for years, has been urging the government to overcome the huge budgetary deficit and stop its massive borrowing from the State Bank of Pakistan (SBP), the central bank, and the commercial banks.

The government insists on several factors for the deficit. These include low tax collections, big spending on the war on terror and the energy crunch that has hit industrial output, businesses and households.

Private sector borrowing from commercial banks, for instance, declined to Rs 132 billion in the last two fiscals — 2009 and 2010 — from Rs 768 billion in fiscals 2006 and 2007. Government borrowing surged to Rs 1,169 billion in fiscal years (FY) 2008 and 2009, from Rs 207 billion in FY 2006 and 2007. It has starved the private sector of bank credit and made it increasingly costly. The banks’ lending rates rose from 14 to 18 percent.

The PBC has urged the government that, as part of a plan to overcome the energy crisis, it should speed up development of the huge coal resources in Thar, Sindh and gas exploration in Balochistan and Khyber Pakhtunkhwa. The existing power generation, distribution and transmission system has become obsolete and requires immediate up-gradation. Nearly 40 percent of all power generated in Pakistan is lost, chiefly because of outright theft. Of this, around 10 percent is described as ‘transmission losses’.

The PBC members also insist that poor governance is a key hindrance to growth. “Once good governance is in place, all issues will be resolved and funds will start pouring in,” said Mian Mohammad Mansha, Chairman of the Muslim Commercial Bank (MCB) and a large textile group.

Byram D Avari, Chairman of the Avari Group, which runs a chain of hotels in Pakistan and abroad, including Dubai, besides having stakes in the pharmaceutical industry and airlines travel, is less than hopeful for foreign direct investment (FDI) inflows to pick up soon because of what he describes as “a strong anti-West sentiment, inconsistent government policies and a poor law and order situation. But big businesses and investors will continue to come to Pakistan because they can operate in difficult and challenging environments. Big players make high-risk investment in sectors, including mining and oil and gas exploration, but the medium-sized businesses, which get the economy of a country going, will stay away.” However, Avari is upbeat over the investment potential itself. “Pakistan has huge potential to attract investment in secondary cities and towns in agro-based, value-added businesses, textiles and information technology,” says Avari.

One hopes that the government takes to the high-growth track highlighted by the PBC, plus succeeds in its ongoing dialogue with the PML-N. It is only then that the economy will start moving at a fairly good speed. It has the potential and the past is proof enough.

The writer is an Islamabad-based journalist and former Director General of APP