Time for Bold Decisions

LAHORE: Pakistan is facing the worst economic crisis due to ever-increasing trade deficit and fast depleting foreign exchange reserves, said S M Naveed, chairman of the Special Economic Zones Authority (SEZA) and managing director of Din Textile Mills (Pvt) Limited.

“Yes, the global recession is a serious concern for all the countries but the situation is really tough for Pakistan, which is predominantly an import-based economy. We rely on imports to fulfil our energy needs. We even import agro-based products such as oilseeds, pulses and grams. We will need to import more wheat and raw cotton during the current year. But we don’t have enough foreign exchange reserves to fulfil our domestic energy and food needs and keep the wheel of the industry moving.”

“The industries, relying on imported raw materials, have been closed down due to the refusal to open the letters of credit. Businesses are bearing the brunt of high input costs, massive rupee depreciation and the rising interest rate. Unprecedented inflation and high cost of utility services have badly affected the lives of the common man. The situation is going from bad to worse due to political unrest. We first need to make our own house in order and early announcement of elections is the only way forward,” he said.

A stable government formed with a clear public mandate could take bold decisions to revive the ailing economy, he said and suggested taking short- and long-term measures to revive the economy and ensure sustainable growth, as more borrowings would only increase debt burden.

Referring to the ever-increasing circular debt, he said, it has now become an economic black hole of the energy sector, which would be difficult to fill.

“Increasing electricity and gas circular debt is the biggest issue and we cannot move forward without filling this black hole, which is widening by each passing day. The only option is to get rid of the circular debt and resource consuming state-owned enterprises,” Naveed said.

“Our textile sector flourished in the post-Covid-19 scenario due to diversion of import orders to Pakistan in the wake of worst situation of the pandemic in India, Bangladesh and Vietnam. Now, the global recession and our own domestic problems have caused closure of our half of the textile manufacturing units. The remaining industries have cut the production, which has rendered thousands of employees jobless.”

“At present, textile production has decreased to 40 to 50 per cent of the actual capacity. The major issue of the sector is a delay in the release of refunds by the Federal Board of Revenue. High interest rate has made it almost impossible for the industries to go for the option of borrowings,” he said, while suggesting early release of the FBR refunds for giving some breathing space to the cash-strapped industries.

Naveed is a graduate in Business Administration and Economics from Boston University, US, qualified ISO-9000 Auditor from the International Register of Certified Auditors (IRCA) and a Microsoft Certified Professional (MCP).

He has twice served as the president and once senior vice president of Pakistan-China Joint Chamber of Commerce and Industry (PCJCCI), president and treasurer of the board of directors of the Lahore American School, FPCCI Standing Committee on Textile and Allied Products chairman, First Punjab Modaraba director, Entrepreneur Organisation (EO) Pakistan Chapter president and the president of Boston University Alumni Association of Pakistan.

He has also served as the member of the Alternative Dispute Resolution Committee (ADRC), Federal Board of Revenue (FBR), Punjab Municipal Development Fund Company (Funded by the World Bank), Citizen Police Liaison Committee (CPLC), Environment Committee, government of Pakistan, National Productivity Council (NPC), Ministry of Industries and Production, Punjab Workers Welfare Board and Punjab Power Development Board.

Din Textile Mills manufactures and exports high quality cotton yarn brand ‘DIN’. The annual turnover of the company is more than $85 million. Naveed is also director of Din Leather (Pvt) Limited, leading manufacturers and exporters of finished leather products with an annual turnover of around $25 million.

The company achieved best performance awards from the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) in 1979, 1980, 1981, 1984, 1985, 1986, 1987, 1988, 1989 for the highest exports.

Following are excerpts of an exclusive talk with him:

Your take on the political chaos and frequent change of regimes in Pakistan?

The political unrest directly affects the economy and businesses. In such a scenario, the businesses avoid making short- and long-term investments for expansion. It also affects the foreign direct investment.

The regime change increases the likelihood of subsequent change. The people evaluate the policies of the next government before making any investment. A country like Pakistan cannot afford prolonged political unrest and frequent change in regimes. For me, early elections are the only way forward. The political governments should complete terms, as frequent regime changes are not in the interest of the country.

Impact of increase in the electricity tariff and fuel prices on businesses?

The increase in the electricity tariff and fuel prices have considerably enhanced the cost of doing business. Many industries have been shut down and more are heading towards closure due to tough economic conditions. There is a need to take immediate measures to reduce the input costs for the manufacturing sector.

As a long-term strategy, the government should construct dams to increase water storage capacity and generate low-cost and environment-friendly electricity.

How inflation and high freight charges have affected businesses?

Inflation has badly affected all the businesses across the world. The global recession will persist during the ongoing year. The situation is more difficult in Pakistan due to heavy reliance on imports to fulfil energy and food needs. We even import raw materials for our manufacturing sector.

Yes, inflation is much higher in Pakistan, compared with other countries. The inflation rate is hovering around 26 per cent for many months. Unprecedented inflation has affected the businesses and made the lives of the common man miserable.

Possible measures to reduce the trade deficit?

Trade deficit is a huge challenge due to heavy reliance on imports. The major portion of our imports are crude and edible oils. We will need to import wheat and half a million cotton bales to fulfil our domestic needs.

The government should take practical measures to enhance the yield of major crops such as wheat, identify areas and encourage sowing of palm oil, sunflower and other oilseeds to save the precious foreign exchange.

Import substitution through local production, diversification of products, value addition and exploring new destinations are necessary to enhance exports in the long run. There is a need to take long-term measures like building dams to generate cheap electricity and ensure availability of water for irrigation purposes.

Your take on the volatile exchange rate and unprecedented rupee depreciation?

It is hazardous for the economy and the businesses. Political stability is the key to normalise the economy. Early elections can help in it.

How high interest rate hike affected businesses?

An increase in the markup rate has enhanced the borrowing cost of the enterprises. Many industries have closed down and more are on the verge of closure due to the lack of capital.

The State Bank of Pakistan (SBP) should revise down the interest rates and bring it at par with the regional countries such as India, China, Sri Lanka and Bangladesh.

Your take on the future outlook of the overall business environment in Pakistan?

The global recession will persist this year, which will affect all sectors in the country. There is a need to take out opportunities from the prevailing crises. The industries should improve their efficiency during this recession to perform better on normalisation of the situation.

During this tough scenario, the government should take measures to reduce the input costs, control inflation, revise markup rates and ensure stability of the exchange rate.

How important are special economic zones? How can we benefit from China-Pakistan Economic Corridor and Chinese experience?

Pakistan is passing through the worst stagflation, needing drastic changes in the economic setup. The global experience suggests that the SEZs are an important source to diversify the economy, reduce regional disparities, and cluster economic activities for complementarity generation with the local industries, skill development of local labour force, transfer of technology and dissemination of know-how, attraction of local and foreign direct investment, especially towards under-privileged regions.

The SEZs under CPEC will be a lifetime opportunity for the Pakistani companies to work together with their Chinese counterparts for the development of export-oriented manufacturing industries. It will also enable the firms agglomerate and get benefits of external economies and will; thus, provide an opportunity to put domestic industries on a higher path of the learning curve.

Which industries should be prioritised in the SEZs?

Textile, leather, food processing, marble, automobile, dairy, agriculture and pharmaceutical industries are traditional economic segments, which need the inculcation of sophisticated technological upgradation and should be prioritised to exploit the maximum benefit by using its abundant labour and natural resources.

Challenges in promoting the SEZs in Pakistan?

Pakistan needs to create a supporting business climate for foreign and domestic firms and to invest in the specified zones. The country has a weak legal regime, which is also a major hurdle in attracting foreign investment. Thus, Pakistan needs to offer strong arbitration rules in case of contract disputes.

In this case, Pakistan could look at China’s experience, which has drawn the arbitration rules from the West. The SEZs cannot resolve the issue of unemployment unless the governments formulate better labour policies to be implemented at the zones.