The economic outcome of political uncertainty has hit Pakistani businesses at the worst possible time. Businesses are facing a global recession; their supply chains have been hit hard by container shortages and the highest freight costs on record. World commodity prices remain high.
On the home front, the economy is in total disarray. The rupee is down, inflation is at an all-time high. Banking margins broke all previous records. Electricity tariffs are very high and electricity supply irregular. Global natural gas prices have skyrocketed and the government lacks the resources to finance imports.
Foreign exchange reserves are low. International lenders and friendly countries are reluctant to lend because there is no certainty about the life of the current regime.
Political instability always creates difficulties for an economy but in an unstable world the difficulties multiply. Never before has the threat of a possible default by Pakistan been greater than today. In a sluggish global economy, every country needs a stable government that can wield its power and can make tough decisions. A well-governed economy manages the crisis better than an unstable government that is afraid to make the right decisions. The current regime and its predecessors have focused on survival rather than reforming the economy.
Companies in Pakistan have never faced such a situation in the past. Many do not know how to deal with it. Take, for example, the turmoil in the foreign exchange market. The rupee recently traded at 240 to the dollar in the interbank market. Only three months ago, the parity was 200:1. The cost of all imported products and raw materials has increased by 20% in three months.
Automakers have raised prices by an average of 18-20% over the past 90 days. They have even stopped taking orders as they are unsure what value the rupee will trade at over the next three months when deliveries come due.
If the IMF approves its staff-level deal in two weeks. The decline in the value of the rupee would stop. In fact, it is hoped that it will start to rise in value as withheld aid from the World Bank, Asian Development Bank and some friendly countries also start to flow. If entries hold, the Rupee could gain 20-30 points against the Dollar.
Raw materials or components of cars and other industries released at current rates will be used in three months. Consumers will demand lower prices. However, if IMF approval is delayed or denied, there will be another run for the rupee. Many businessmen are unprepared to operate in such delicate situations. They will probably choose to wait and see.
Exports fell 25% in July. Cement production fell by 44%. Some automakers have announced plant closures for up to two weeks in August. Imports fell by more than 33%. Given the precariousness of foreign exchange reserves, the State Bank of Pakistan has created technical obstacles to the opening of new letters of credit. The shortage of raw materials began to pinch the production lines. This further intensified the pressure on the rupee. Most companies seek to protect themselves. Political uncertainty intensified the rot.
The shortage of raw materials began to pinch the production lines. This further intensified the pressure on the rupee. Most companies seek protection.
All major business associations have sent SOS messages to politicians asking for negotiations for consensus on economic issues. If it is reached, it will remove some of the uncertainty. The Lahore Chamber of Commerce and Industry, Karachi Chamber of Commerce and Industry and most recently the All-Pakistan Textile Mills Association have called on rival political parties to sign an economy charter to ensure continuity politics.
Investors will be able to plan long-term industrial projects if they have the guarantee that sectoral or general industrial policies will not change for 10 to 15 years. Currently, the maximum duration of a sectoral policy is five years. However, policies are changed even by the governments that approved them. Few policies survive a change of government.
In an unstable political environment, the government in power tends to let go; hoarders, manipulators, speculators and smugglers have a field day. The exploitation of the poor increases. Prices continue to rise even when there is plenty of supply and spiral out of control when there is a shortage. Real businessmen suffer and crooks dominate the markets. After prolonged suffering, even initially honest companies are forced to adopt unethical practices to survive. This is currently happening in Pakistan. Tax compliant industries and businesses are in trouble, and those who engage in tax evasion and unethical practices are in the driver’s seat.
It is time to show solidarity at the political level and to support the decisions that are essential for sustained growth. If politicians unite to take a stand against smuggling and support the government in power, smuggling will decrease fairly quickly. Strict government action can prevent smugglers from getting rid of their stocks. For this, raids on outlets selling contraband goods must be supported by all political forces. Only the elimination of smuggling can give the economy at least a 20% increase in income and a 10% increase in local production. This can only be achieved through political stability.
In testing periods like these, there must be strict control over under-billing. This threat eats away at millions of domestic jobs. Under-invoiced goods are cleared at a very low import price. Import policy in all countries places duties on imported goods to protect domestic industries. However, the general sales tax percentage is the same. If an item worth Rs 100 is imported at an undercharged value of Rs 10 (it usually ranges from 10-25%), the duty payment is reduced to Re 1 (from actual Rs 10). Sales tax is levied on the cleared value which, in case of an under-invoiced item, would only be Rs 11 instead of Rs 110 (actual value of Rs 100 and customs duty of Rs 10).
The unethical importer will then pay the standard 17% sales tax. The actual sales tax should be Rs 18.7. Domestic manufacturers producing the same product at a globally competitive price of Rs 100 for that item would pay Rs 17 as sales tax. The real manufacturers will slowly disappear and only those whose production is declared will survive. Millions of jobs have left Pakistan and hundreds of billions of rupees are lost in income each year. The unstable governments in Pakistan lack the strength to act against the crooks who also have political influence.
The writer is a senior economic journalist