Rashakai Economic Zone: a way forward!

Hassnain Javed

March 07, 2019

 

 

Currently, 33 Special Economic Zones (SEZs) are being planned under the China Pakistan Economic Corridor, with an approximate total cost of US$62 Billion. The construction of the Special Economic Zones, is a proposal by the provincial government, and all locations are selected at the provincial level. Private investments alone consist of 90 percent of this budget under CPEC’s Long Term Vision-2030. The manufacturing industry in Pakistan as a percentage of GDP has been stagnant at (19.5pc now, 20.5pc a decade ago), and Investment to GDP has decreased (from 20pc to 15pc). The China Pakistan Economic Corridor can aid Pakistan in reversing this trend. According to the Executive Director, Centre of Excellence, China Pakistan Economic Corridor (CPEC) Dr Shahid Rashid, in the second phase of the corridor, nine special economic zones would be built in all the four provinces including Gilgit Baltistan, FATA, and Azad Jammu and Kashmir. The feasibility studies on the three out of nine prioritized locations are complete including, Dhabeji (in Sindh), Faisalabad (in Punjab) and Rashakai (in KP). Also construction work on these three economic zones is soon to be started after the breakthrough from Prime Minister, Imran Khan’s visit to China.

Rashakai Economic Zone (REZ), is a flagship project of Khyber Pakhtunkhwa Economic Zones Development and Management Company (KPEZDMC), which spans over a 1000 acre land. The REZ is important for Khyber Pakhtunkhwa (KP), because of its imminent trade position. The location is connected both through air and land routes via Airport in 50 KM, dry port in 65 KM, railway Station in 25 KM, highway in 5 KM and the city center in 15 KM. Moreover, it is strategically, located on the M1 Motorway at the bridge between CPEC and Burhan interchange. On top of that, REZ also serves as connecting grounds for the Northern areas of Khyber Pakhtunkhwa and it shares a border with Afghanistan. Since KPEZDMC has been involved with the construction of Rashakai Economic Zone from the start, the infrastructure boasts of international standards with an additional one window operation to assists the industrialists. The enterprises in this zone will have access to all the basic amenities including, water treatment plants, vocational training facilities, state of the art IT systems, security, uninterrupted water and energy supply.

Keeping in mind the special features of the areas near it like, connected districts and resource pool, REZ is ideal for food items, industries in fruit & food packaging, textile, and auto manufacturing. Also proximity to natural resources Gemstones, Metal Ores, Soapstone, Magnesium and Phosphate at Abbottabad allows the setup of industries like marble processing, furniture, electrical products, pharmaceuticals, Matchbox manufacturing, sugar mills, tobacco, and juices.

Another incentive for the industrialists in the zone, would be the proximity to expo center in the residential area. This 50 acres plan is initiated by the Federal Government in order to promote exports of Khyber Pakhtunkhwa in areas all over the country and internationally. Construction of SEZ’s would simultaneously boast the economy as well as the country’s export, creating shared knowledge between related industries and thousands of employment opportunities.
In Pakistan, a major setback in initiating industrial growth is the lack of infrastructure, which is essential for sustainable economic development. The creation of Special Economic Zones in Pakistan will facilitate the alleviation of this concern. This could only be possible, if Pakistan follows a consistent government policy plan and regulation. Only then will Pakistan attract a sustainable investment and fully reap the benefits of CPEC.

The potential projects at the Rashakai Economic Zone could be of intermediate goods production for – auto, electronic parts and components etc., which contributes a major chunk in the import bill of Pakistan. With the devaluation of Pakistani Rupee, the trade deficit for Pakistan increase in imports and stagnant exports has wedged a huge gap. Therefore, manufacturing of intermediate parts would be imperative to boast the final good production, as well as decrease Pakistan’s reliance on expensive imported parts. A large number of Chinese companies can thus offer strategic alliances and ample opportunities for joint ventures to achieve economic development in the region.

The setup of vocational and technical training with the Chinese support is also imperative for the efficient human development of the labor working in SEZs. Along with the organized training institutes in Pakistan, it is proposed Chinese universities should also provide research and development department at the site location, for business development strategies. Finally, I am of view Pakistan can capitalize on China’s expertise in Artificial Intelligence (AI) and robotics to bring down operational costs. Such a measure would allow Pakistan to create a low cost advantage in comparison to traditionally manufactured goods. Therefore, the assistance from Chinese companies would be pivotal for the integration of innovative manufacturing machinery at the SEZs.

As mentioned earlier, the economic effect of such a venture would be the sizable decrease in Pakistan’s trade deficit as well as the creation of new skilled labor, which would in turn lower down the unemployment rates in Pakistan. Shazad Dada, Chief Executive Officer of the Standard Chartered Bank, said that the Chinese president’s strategic Belt and Road Initiative has promised 85 million new jobs and $2.5 trillion in additional international trade. This initiative has gained support from a total of 100 countries and international organizations along its route, and 80 of them have already signed an agreement with China. Currently, the total trade between China and other countries along the Belt and Road and Initiative exceeded $3 trillion between 2014 and 2016, and the trend is expected to continue in future. In order to maintain its growth momentum, around 8 trillion of investment in infrastructure is required. The careful execution of this initiative can ensure that the investment target is met and the future of Pakistan transformed in the decades to come.

Industrial dynamics: evolution to revolution

Hassnain Javed

February 13, 2019

 

 

Pakistan’s economy remains unstable and underdeveloped in comparison to other South Asian countries despite the fact that CPEC is bringing in huge opportunities for investment in the country.

The major reasons behind this lag are the issues of climate change, energy crisis and poor law and order situation. All of these factors have disrupted a steady flow of foreign direct investment in Pakistan. Slow economic growth has further depressed the financial stability of the industries, leading to a cut down of formal jobs in the country. One out of three Pakistanis are still living below $3.1 per day. However, according to a report issued by United Nations Development Program (UNDP) in 2018, the working poor class has substantially reduced and the working class increased, over the past decade. This discrepancy may arise because these statistics do not include workers from the informal sector of the economy, which is a huge lot of people. The development of the human resource of a country is especially important for economic growth and improved productivity.

As of now, Pakistan has been neglecting its human development, with no improvements in vocational jobs and skill training as well as poor creative and cognitive skills which has resulted in an overall loss of productivity. Hence the outflow of exports has led to slow improvement in living standards. As there is a positive correlation between capital investment and skills, the human resource capital is also directly related with technological dynamism. With the advent of technology, the demand for technical labour has increased considerably around the globe. It should also be noted that the acquisition of new skills is a continuous process of learning, therefore, technological training is important for both the current and new labour pool.

In 2012, the Industrial Relations Act (IRA) of labour issues and trade unionism was approved. The aim of these constitutional amendments was to give more autonomy to the provincial governments regarding the control of the small and medium sized enterprises contributing to the increasing share of the informal sector in the economy. Despite these efforts, Pakistan faces a major backlash while trading across the borders where the business environment is ranked poorly due to the structural deficiencies in the labour market. Another major issue which is often frowned upon by international traders is the lack of skilled labour and women participation in workplaces. The total population of Pakistan was 193 million in 2016, increasing at a rate of 2.0 percent yearly, amongst which 70 Million are employed. In the Pakistan Bureau of Statistic report of 2017, the total unemployment rate was estimated to be 4.0 percent, whereas the youth unemployment was at 7.7 percent. The ratio of employment-to-population is stagnant at 51 percent, and only about 21 percent of women in the population are employed. According to the World Economic Forum, Global Competitiveness Report 2017-2018, Pakistan is ranked at 106 in Reliance on professional management and 132 in women participation. The stats prove that employees in country rank Pakistan low on all key indicators for global competitiveness.

According to the sectoral employment the agriculture is the largest sector for with 42 percent of all jobs in this sector. The service sector has widened two percentage points that represents 38 percent of the working class in Pakistan. However as compared to other growing economies in the region this percentage is relatively low, which shows a lack of knowledge and skilled workers in the country. Currently, there is a gap in the demand and supply of skilled labour and all the major sectors including textile, agriculture-based industry, oil and gas, steel fixing operations, leather, services, livestock, dairies, nursing, and general technicians. The Bureau of Statistics reveals that almost 92 percent of all the unemployed people are regarded as unskilled, whereas the rest of the 8 percent have the basic minimum education but lack the specific skill.

In order to fill the gap between demand and supply of skilled labour, re-establishing the link between the technical institutes and industry will be imperative. Such a move would increase the employability and aid in the human development of Pakistan. However, strengthening these ties requires curriculum reforms, funding of technical and vocational training and the promotion of approximately, 3.2 Million SMEs all over the country.

In this regard, the development of small and medium sized enterprises (SMEs) can play a pivotal role in relevance to job creation in Pakistan. Pakistan is no exception, where SMEs comprise nearly 90 percent of all enterprises and employ around 80 percent of the non-agricultural labour force. The SMEs share approximately 40 percent in the annual gross domestic product (GDP) and contribute almost 25 percent to total export earnings. Characteristically, SMEs would encourage the development of new innovative technologies that would further give rise to productivity and efficiency. The platform acts as a catalyst to transform economies and implement new solutions for increased profits. Instead of finding new jobs elsewhere, entrepreneurship would facilitate the people to become self-sufficient and develop the skills of critical thinking, decision-making, leadership, teamwork and innovation, which would benefit them in all walks of life. The extension of SMEs in Pakistan will help achieve the 6 percent growth target to facilitate the 1.3 million jobs for the youth.

Concluding the above discussion, it can be inferred that small and medium sized enterprises are more labour intensive and less capital intensive as compared to large industries. This is a major advantage for the economic development of Pakistan considering its low unemployment rates in the past decade. Up till now, SMEs are considered the informal sector in Pakistan therefore, the sector was largely unregulated. However, in order to fully utilize the scope of these small cottage industries, the evolution of the industrial dynamics is necessary.

Mini budget or reform package?

Hassnain Javed

February 06, 2019

 

 

The recent government’s new mini budget has left the critics in dismay. The reaction was not surprising since just after the PTI government came into power in September, a ‘mini-budget’, that was in the form of a bill was presented. The bill increased income tax rates, levied additional indirect taxes by imposing higher custom duties and reduced development expenditures. Now with just about 4 months later, a new ‘mini budget’ has been introduced that has raised the taxes to approximately Rs.200 billion. This has created an uproar amongst the opposition who claim that the government has already failed to deliver in its 100 day promise and that the increased tax burden would only pressurize the common man.

Survey statistics reveal that the nominal growth of revenue this year shows only two percent increases since last fiscal year. However, the figure should have increased to at least thirteen percent to support the fiscal year with a 4.5 percent economic growth and 8.5 percent inflation, which implies that the tax revenue has declined by 11 percent. Although the Pakistani rupee has depreciated about thirty percent, the customs duty and other taxes collected at the port has not increased where it should have quadrupled. Therefore, the main problem stems from the fact that the Pakistan economy has slowed down considerably and more taxes would further slowdown the economy and not generate enough revenue. What the economy of Pakistan needs right now is a tax reform policy that is focused on not only increasing taxes but also some tax exemptions to add incentives and stimulate economic growth that was the agenda of the new and improved mini budget of 2019.

After the last government’s poor financial performance, Pakistan is still recovering from a growth which was fueled by short term debt and declining investments. The economy was in a bad shape, and by the end of year 2018 Pakistan was almost on the verge of bankruptcy. Since the term for the last IMF of 2016 was expiring and oil prices hiked, the later seemed inevitable. The previous government’s poor implementation of both its fiscal and monetary policy was the reason for this catastrophe. The Rs. 1300 Billion of the government spending was being funded by printing money and monetization of public debt which implies the usage of money that the country did not hold. Of Course going to the IMF is inevitable for the government at this point which means that the government must reduce its fiscal deficit either by increasing revenue or cutting its expenses. And the current PTI government has chosen to control the supply side of the policy by cutting on government spending by wide range austerity drives and an increase in taxes.

So what is the government trying to achieve by its new ‘mini budget’. A major focus of Finance Minister Asad Umer’s speech was the relief and incentives being given to the investors to ensure the ease of doing business. According to recent stats, Pakistan is ranked at the 136th position in the ‘ease of doing business’ index, and 173rd in terms of complicated tax systems. Hence the new policies announced that the withholding tax on trading in the stock exchange will also be removed and all machinery in special economic zones exempted from all taxes. Furthermore, new industries will be exempted from income taxes for five years. The government has put forward a proposal for a 20 percent on income tax from loans to Small and Medium Enterprises and agriculture sector. Similarly, the government has increased taxes on small marriage halls to just Rs. 5000 from Rs. 20,000. Lastly, the minister also announced to eliminate withholding tax on banking transactions for filers to encourage the tax-paying culture. Such policy transformations would reduce costs of doing business in Pakistan, and encourage businesses and SME’s to operate freely. The power of government departments are proposed to be redistributed in order to reduce redundant and precarious steps that businesses need to get through in order to get government approvals.

With the beginning of 2019, Pakistan is entering into the second phase of China Pakistan Economic Corridor. This means that government would focus on trade policies and industry development, moving on from infrastructure. Large multinational companies are already interested in setting up industries in the automobiles, telecommunications, energy and electronics industry, in order to tap the undiscovered potential of the people of Pakistan.

Senator Imamuddin Shokeen of PPP, accused the government of having an under the table agreement with the business bless and banks hence, the reduction in the tax rate for the banks on their income from agricultural financing. He argued that the growers would not get any benefit from the step. However, they fail to recognise that the policy is only to jump start the stagnant economy of Pakistan and the reforms that are announced contains pretty straightforward short-term stabilizing measure. This can be seen from the fact that stock market has reacted favorably to the announcements and even international rating agencies like Moody’s called the budget good for the economy and predicted that the finance bill will assist in bringing expenditures and deficits down. Also more policies to incentivize the farmers have been introduced like the value of Produce Index Unit has been increased from Rs. 4000 to Rs.6000. Farmers can now attain subsidies of up to Rs 7 billion on fertilizer purchases and a reduction of GIDC by 50 percent for industries.

Another argument that critics have is that the budget is too pro non-filers because under the new finance bill, non-filers will now be able to purchase vehicles of up to 1300cc engine capacity after paying higher taxes. Also non-filers will only be allowed to buy vehicles that have been locally assembled/manufactured. However, the move was essential because overseas investment registered a decline of almost 50 percent after the imposition of the ban in the last budget. Therefore, withdrawing ban on non-filers was imperative to kick start activity in the real estate and auto sector by allowing non-filers to purchase these items as well.

Conclusively, prompt and adequate measures taken by the new government have impeded the immediate crisis of the balance of payment however, much more effort is needed to bring the proposed plan to life. Macroeconomic indicators have to be stabilized in order to encourage steady foreign direct investment in Pakistan. Until now the government has been successful in creating a fiscal space to encourage new investments by delaying the bailout support from IMF. However, immediate favorable results from new policies are not possible as economic development will take years to pick up its pace.