Pakistan’s corridors: economic and transit hub

Hassnain Javed

March 20, 2019

In an era where geostrategic and geopolitical maneuvering of states are giving way to ‘geo-economics’ pursuits, Pakistan’s advantageous location offers promising future prospects for its economy. Apart from inheriting the fertile Indus Valley, Pakistan sits on territory which has had historical significance as a transit hub for trade caravans, marching armies and wandering saints. Parts of the Ancient Silk Route, which passed through its mountains in the North, have been modernized into the Karakoram Highway.

The various mountain passes on Pakistan’s insurmountable peaks allowed passage to conquerors and invaders from Afghanistan, Iran and beyond, ushering the establishment and intermingling of entire civilizations in the subcontinent. Sufi saints travelled such ancient routes and trails, eventually settling in areas that became hubs of cultural and commercial activity.

For hundreds of years, the region of present-day Pakistan enjoyed a “central position in relation to the rest of the world, a place where different societies mingled, sharing cultural ties and making economic transactions. Cities such as Lahore, Multan and Peshawar, and those in Upper Sind lay on trade routes connecting lands to their west ? Iran, Central Asia and China ? and those to the east ? India ? and as such became centres of trade, commerce and culture and brought prosperity to regions they commanded.”

In the present-day and age, with states’ borders fixed according to the modern international legal framework, it is not difficult to see that Pakistan’s strategic location is more beneficial than ever for economic trade. And in this context, the various trade corridors, routes and projects available to Pakistan can also offer significant economic returns for the regional and global economies.

Within Pakistan’s vicinity lie Iran to its West; Afghanistan to the North-West; India to the East and China to the North. Its Southern coast, which boasts the celebrated port of Gwadar, grants access to the Arabian Sea, Gulf of Oman, Persian Gulf and the Indian Ocean. The importance of this maritime access cannot be stressed enough, especially in light of the assertions of eminent scholars who argue that the 21st century world politics will revolve around the Indian Ocean.

Thus, it is clear that Pakistan is part of a region that is demonstrating immense economic vitality. China’s populous and emerging middle class offers a “huge consumer market for Pakistan’s products”; and with a high savings rate, could also serve as “a deep pool of investment for Pakistan”. India too has seen a consistent high growth trajectory. The Central Asian Republics are “engaged with the world to exchange their mineral wealth for goods and services that satisfy growing consumption and rising living standards of their citizens.” Iran’s fossil fuel reserves can be channelled to power the “energy poor South Asia in exchange for skilled manpower and consumption goods.”

Even as sub-regional units, Pakistan’s environs have shown promising economic activity and regeneration with booming economic growth rates. Among these engines of growth, the Central Asian Republics as a sub-region have shown around 5% growth rate over the past five years. For China, “GDP growth has averaged nearly 10 % a year – the fastest sustained expansion by a major economy in history – and has lifted more than 800 million people out of poverty”. South Asia has shown a growth rate of 6.5% over the past five years.

Thus, there is emerging consensus that the decades ahead will usher in an Asian century. Within this milieu of a Rising Asia, Pakistan with its central location can serve as an economic and transit hub, by utilizing both its North-South and East-West trade potential through trade routes and corridors. From a practical standpoint, the ancient trade routes would help link the energy-rich states of Central Asia with the emerging economies of South Asia, and promise much benefit to Pakistan which would play the role of a regional trade-hub.

International trade opens up “sustained welfare improvements for citizens” as the economy moves from being a transit hub, to a manufacturing economy – which is marked by high productivity and high wages for its populace. This transition requires a skilled labour, modern infrastructure, efficient governance policies and promotion of investment over short-term consumption.

Such reforms will only be holistically achieved for Pakistan if it is able to develop the land-based trade routes across a full spectrum, i.e. in multiple directions and sub-regions. Trade via transportation on land routes is a common feature of the imports and exports between neighbouring countries. Yet despite having a common border with both China and India, Pakistan’s trade potential via land with these two booming economies has not been tapped to a significant degree. With China this has primarily been due to an absence of well-developed land-based infrastructure in the past. “Until recently, there were no feasible low cost land routes for transportation of goods between the two countries.”

However, this is an area where the China-Pakistan Economic Corridor will offer considerable remedies. “Western China is closer to Pakistan than the coastal provinces and can be accessed if highways, railways, pipelines are built to link the two countries. But Pakistan has yet to fit itself into China’s huge supply chain as other Asian countries have done.”

The re utilization of the historic trade corridors would expand the population base which is searching for avenues to maritime trade in the Indian Ocean. Pakistan promises easy access to the Arabian Sea via its strategic coastline, and thus can become a major transit hub in the region. Trade via Pakistan’s land routes can act as a driver of growth which can lead to substantial growth rates that result in a persistently rising GDP and per capita income.

Regional trade will enable Pakistan to establish modern special economic zones. Pakistan has a huge young labour force, as well as business-friendly policies which enhance competitiveness. Thus, regional integration would allow Pakistan to become a major manufacturing hub. Economic prosperity will eventually lead to social and political stability. One can find extensive work on trade corridors within the context of regional geographical divisions such as Asia, South Asia, etc. For instance, the Asian Development Bank has conducted extensive research on connectivity prospects between South and South-East-Asia. The effects of the regional connectivity will be far beyond the localized infrastructure; and it is through dialogue, engagement and investment that these projects will bear fruit for the regional and global economies.

Transforming the investment landscape of Pakistan

Hassnain Javed

March 12, 2019

After the last government’s poor financial performance, Pakistan is still recovering from growth which was fueled by short term debt and declining investments. The economy was in shambles and Pakistan was almost on the verge of bankruptcy by the end of the year 2018. In these circumstances, the Pakistan Tehreek-e-Insaf (PTI) government has chosen to control the supply side of policies with the aid of reduction in government spending to encapsulate austerity drives and increase taxes.

So what should be the government’s focus in order to boost investment in the country? A major highlight from Finance Minister Asad Umer’s speech on the new mini-budget was the relief and incentives being given to the investors to ensure ease of doing business. According to recent stats, Pakistan is ranked at the 136 in the Ease of Doing Business Index (EDBI), and 173 in terms of complicated tax systems. The investment-to-gross domestic product (GDP) ratio of Pakistan has been stagnant at approximately 15 percent, while countries like China, India and South Korea have been able to sustain the ratio to more than 30 percent. Therefore, the new government should aspire to raise the investment-to-GDP ratio to at least 20-25 percent during the government’s five-year tenure. Such a move will improve job creation, productivity, and exports.

Recently, the Finance Supplementary (Second Amendment) Bill, 2019 was passed by the National Assembly, which is termed as a business-friendly reform package. This is because a tax reform package would encourage investment, promote industrial growth as well as boost the country’s stagnant exports. Before this announcement, Abdul Razak Dawood, who is the Adviser to the Prime Minister on Commerce, Trade, Textile, and Investment has also said that the bill would allow investment opportunities and business activities will increase in the country. Regarding this, the Chairman Pakistan Afghanistan Joint Chamber of Commerce and Industry (PAJCCI) Zubair Motiwala acknowledged decisions of the government and speculated that it would help to boost exports and investment.

Following these encouraging policies, the State Bank of Pakistan reported that private sector borrowing has jumped by over 92 percent to Rs600.5 billion during the July-February 22 period, compared to Rs312 billion in the same period last year. These numbers are encouraging for the government as the private sector continues to borrow at a stronger pace despite a steep rise in interest rates, which shows increased confidence of investors in the economy of Pakistan.

Foreign investment in Pakistan is also showing positive trends with countries like the United Arab Emirates (UAE) and Turkey showing interest in investments. Turkey has further expressed interest in developing a legal framework for tourism infrastructure planning, allocation of public properties to the investors, determination, and classification of qualities of hospitality facilities based on international standards. The main focus would be the rendering of technical support to Pakistan in order to facilitate promotional marketing of tourism, advertising a positive image of the country and production of promotional material.

In early October last year, PM Imran Khan spoke at the Future Investment Initiative Conference (FIIC) in Riyadh, where he discussed Pakistan’s economic challenges and invited foreign investors to invest in the country. In this conference, the PM communicated the policy of his tenure that is to enable an environment for investment. He further added that the plan is not just to attract foreign and overseas investors, but also Pakistani investors as well.

The crown prince of Saudi Arabia visited Pakistan last month, showing staunch support and promising $20 billion in investment. Haroon Sharif, who chairs Pakistan’s Board of Investment claimed that the UAE has also nearly finalised plans to establish an oil refinery in Pakistan with an anticipated production capacity of about 300,000 barrels. This project would entail $8 billion in investments.

Recently, Foreign Minister Shah Mehmood Qureshi held a meeting with a delegation led by Luxembourg Foreign Minister Jean Asselborn. Both governments have exchanged views on bilateral relations, trade, and matters of mutual interests. Furthermore, agreement exchange of delegations for enhancing bilateral ties besides cooperation in science, technology and education sectors.

Conclusively, the investment landscape of Pakistan shows some promising trends but in order to fully upturn prevalent economic conditions, more effort from the government is required. Firstly, a multiplicity of taxes and redundant procedures hurt businesses. Pakistan is advised to transform its entrepreneurial environment by encouraging cottage industries to improve the domestic market. By easing the procedures to start a business, the investors could be encouraged by allowing construction permits as indicators through one-window or online operations. Moreover, reforms in contract enforcement, tax payments and protecting intellectual property rights among others are also needed.

It takes two to Tango: The rising Indo-Pak tension

Hassnain Javed

March 07, 2019

 

 

Peace between India and Pakistan, which is tangible and true in every aspect and strong enough to crush the mood of bellicose jingoism in South-Asia seems like a cry far from reality. Prime Minister (PM) Narendra Modi who is contesting for re-election in India, has built a Hindu nationalist base with India’s violent response to a suicide attack in the Indian controlled part of Kashmir. The attack killed 49 Indian soldiers, in response to which India bombed Pakistan, claiming to have been targeting a Jaish-e-Mohammad camp. The air strike in the Muslim-majority area had initially improved PM Modi’s image amongst the extremist groups in India. However, after Pakistan’s counterblast and downing of two Indian aircraft and brief imprisonment of the Indian pilot by Pakistan, the tables turned.

It has been 30 years since the insurgency in Indian Occupied Kashmir (IOK) began. Indian military operations have led to the creation of a new generation of young activists that are fighting Indian forces for independence. The bombers who have claimed responsibility for the February 14 attack on the Indian troops was a local Kashmiri, which shows the level of agitation in the youth.

The situation has taken an interesting turn after the confrontation between the two nuclear-armed arch enemies took place five decades down the line. An article by the New York Times revealed that the challenges faced by the Indian army are quite visible as the country lost two of its planes to a country which is half in terms of the number of army and quarter in terms of the military budget. The article further explained that according to government estimates “if intense warfare broke out tomorrow, India could supply its troops with only 10 days of ammunition. And 68 percent of the army’s equipment is so old, it is officially considered vintage”.

Furthermore, Gaurav Gogoi, who is a lawmaker and member of the Parliamentary Standing Committee on Defense, said that: “Our troops lack modern equipment, but they have to conduct 21st-century military operations,”

Often characterised as an emerging superpower with a strategic position in South Asia, high quality of engineering technology and talent management, there is a rather gloomy story to India’s image of optimism. Reports reveal that India has one of the highest rates of illiteracy and unemployment in the world. Other Human Development Indexes like infant mortality, anaemia and morbidity are also showing poor performances. The social and economic disparities amongst the masses have reached an acute level. This can be seen from the fact that half of India’s 1.2 billion-strong population do not have the facility of private toilets in their home. According to the consensus report, about 77 percent of houses in Jharkhand, 76.6 percent of houses in Orissa and 75.8 percent of houses in Bihar do not have a toilet facility. All three of these states also report the highest poverty rates with more than half of their population living under the poverty line. Registrar General and Census Commissioner C Chandramouli said while releasing the report said that: “Open defecation continues to be a big concern for the country as almost half of the population does it,”

According to Express Tribune, even after the surgical strike on Pakistan, India has lost 785 points on Tuesday over rising tension between New Delhi and Islamabad; the KSE-100 of the Karachi Stock Exchange also shed 275 points on Wednesday as tensions continue to escalate between the two neighbours. Considering the economic consequences of having a nuclear war in the entire region, PM Imran Khan proposed to give peace a chance and released the Indian Air Force (IAF) Wing Commander Abhinandan – who was captured by Pakistan after his MiG 21 Bison aircraft was shot down by a Pakistan Air Force (PAF) jet. The DG ISPR Asif Ghafoor in a statement to the media said that, “Pakistan wants peace; India needs to understand war is a failure of policy”.

Despite these public statements and PM Modi’s reminder to Imran Khan to talk about poverty and illiteracy control, there still has been an air force incursion which is worrisome not only for both the countries but also the entire region. War is not an option, even if it’s started with the intent of being a brief political move to prove supremacy over counterparts in the region. As PM Imran Khan said in his speech, war has a tendency to escalate beyond control. Especially, when the two states are nuclear powers. There has been no direct engagement of war between nuclear countries, but only proxy wars in third states that were a result of failed policies and misplaced ideologies. It would be a move of utter insanity for Pakistan and India to engage in war in such a situation. Nuclear war becomes could annihilate both countries and neither India nor Pakistan’s weak economic conditions would sustain that level of damage.

Conclusively, the only viable option for India is to carry out peace talks with Pakistan as suggested by P Chidambaram, the Congress party leader and former finance minister. Nascent economies that are present all over the world face similar problems of poverty and economic disparity. Therefore, India and Pakistan should join forces to eliminate the crisis that has hit the region and work on public policies which work best for both the countries.

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.

Blue economy: an unexplored heaven!

Hassnain Javed

January 31, 2019

 

 

Blue economy is the efficient use of sustainable ocean resources for economic growth, improved livelihood, jobs and ocean ecosystem. The concept is relatively new, it talks about the stewardship of the world’s blue resources and oceans. The idea goes beyond just utilizing marketing opportunities alone. In fact, the blue economy is a mechanism for securing and providing more intangible blue resources by carbon sequestration, and coastal resilience to facilitate and educate developing nations or ‘Big Ocean States,’as the Small Island Developing States (SIDS) sometimes call themselves. These SIDs are mostly dependant on marine life and diesel economy to survive and thus are the worst-hit by climate change and sea-level rise.

According to the 2018, report of the Commonwealth, the worldwide ocean economy is valued at a total of US$1.5 trillion per year. It is estimated, that by 2025, thirty-four percent of the total crude oil production in the world would come from offshore field. Currently, the World Bank estimates that eighty percent of the global trade is carried via sea routes and aquaculture is the fastest growing food sector. Moreover, approximately 350 million jobs world-wide are linked to fisheries. The concept of ‘Blue economy’ is very similar to the green economy, as it aids in the wellbeing of humans, social equity as well as concern for environmental degradation and scarcity of natural resources.

The downturn in Pakistan’s economy is steepening with the trade deficit rising to approximately 371.6 Billion in November 2018 from 246 Billion in the corresponding month last year. Although the exports have improved to 18.7 percent but the effect is marred by a jump in imports to 23.2 percent from the last fiscal year. Many debates have surfaced, regarding the worsening condition of the economy, since the Pakistani rupee has devalued against the US dollar. According to World Bank the inflation in Pakistan is expected to remain high till the fiscal year 2020. In such times of instability in the economy, adopting blue economy can reap unsurmountable benefits to Pakistan. A major opportunity lies in the forward plans of China to built oceans-based passages as a part of its Belt and Road Initiative. As a major recipient of this initiative under the China Pakistan Economic Corridor, Pakistan can capitalise on the maritime cooperation and mutually promote beneficial “blue partnerships” and forge a “blue engine” for the growth of this region. According to the Belt and Road Forum for International Cooperation held in May, three blue economic passages are already under way, including ‘China-Indian Ocean-Africa-Mediterranean Sea blue economic passage, will run westward via the South China Sea to the Indian Ocean, and link with the China-Indochina Peninsula Economic Corridor, and connect with the China-Pakistan, and Bangladesh-China-India-Myanmar economic corridors.

Makhdoom Khusro Bakhtiar- Minister for Planning, Development and Reform, said that CPEC project will facilitate socioeconomic development and poverty alleviation programs in the Gwadar region. Therefore, the subject was the topic of major discussions in Prime Minister, Imran khan’s recent visit to China. The creation of Gwadar would help Pakistan capitalize on its potential in building a blue economy. The government has planned new infrastructure projects like the New Gwadar International Airport, a vocational center, China-Pakistan Friendship Hospital and a host of socio economic uplift projects. Additionally, a smart city program by the name Gwadar Smart Port City is ready to set its course for transforming Gwadar, in a well-planned urban city. However, in order to fully transform Gwadar, into a sustainable blue economy more effort is needed in activities like fisheries, maritime transport, renewable energy and waste management.

One such opportunity underlying the concepts of Blue Economy sector is the sustainable harvesting of the living food resources, marine biotechnology and generation of fresh water beds, all of which requires a heavy amounts of investment. Along with fish farming techniques, an efficient shipping industry is essential for the safe, cheap and quick transport of goods. The International Maritime Organization (IMO), has launched a concept of Sustainable Maritime Transports which provides the building blocks of efficient and environmentally friendly techniques to develop the necessary infrastructure.

As stated earlier a concept of energy transition for SIDs can be revolutionary for Pakistan since they can play a vital role in reducing carbon emissions and pollution. Also considering the energy shortages in Pakistan, the fishing units would require large amounts of freezing units to store and transport the items. Therefore, green economy concepts would allow a development framework that would allow biodiversity and other ecosystem services. Some of the major blue energy resources are from the wind, wave, tidal, ocean thermal energy conversion (OTEC) and salinity gradients and biomass sources. However, offshore wind could be a major resource, generating approximately 6GW in 2012, with a possible rise to 175 GW by 2035.

As far as the solid waste is concerned the Waste to Energy (WTE) seems to be the most popular option for recycling, applied in 93.2 percent of the cases and biological treatment 6.8 percent. Composting, which is although the most cheapest organic method, is not feasible at a large scale. The reason why this method is particularly cheap is because composting produces an organic by product of a fertilizer that can be sold or used for residential or commercial purposes. Highly chemical or toxic solid mass like the wastes from hospitals has to be treated in an incineration plant before it can be dumped in landfills. However, the process is very costly with a price tag on average of $125/ton. Studies around the world prove that 95 percent of all solid waste could be recycled one or another way as mentioned above. Moreover, as compared to burning wastes, innovations which shape blue economy would provide thousands of jobs in Pakistan and revenue along the process, without compromising the environment.

Another golden opportunity for Pakistan lies in the concept of branded waste which is gaining attention around the world. For example, chip bags from Frito Lay are recycled into garbage cans and beverage coolers. Previously, companies used to hide their names from waste or recycled products but now it is a major social marketing highlight for big multinationals. Similarly, Pakistani companies can also dwell on the idea and utilize their resources to reduce costs and contribute towards the goal of a sustainable and green Pakistan.

Small is beautiful: revitalizing the SME sector of Pakistan

Dr. Hassnain Javed

January 25, 2019

 

 

In many countries around the globe, and in particular the developing economies like Pakistan, the governments are facing low growth in foreign investment, trade deficits and unemployment. With the increase in economic disparity, citizens are in a state of dissatisfaction with the current affairs of the state. Most importantly, there is a lack in the extent of globalisation and technology as compared to developed nations. Against this backdrop, the digital transformation and restructuring of industries in Pakistan is essential for promoting economic growth and providing a more inclusive globalisation. One such opportunity lies in developing the cottage industry or Small Medium and Enterprises (SMEs), in Pakistan.

Many industries ( like the cotton weaving, textiles, surgical instruments, carpets, leatherwear industries etc) rely on SMEs for the generation of new ideas or value addition in the current product lines. Pro-poor governments in the growing economies have introduced subcontracting policies to integrate the industries along their size and scope. One such example is of the automobile industry that has integrated almost 60-70 percent of its component part supply from SMEs. This is perhaps one of the best examples of efficient collaboration of large corporations with SMEs. Forward integration, with showrooms and repair shops are further examples of how large firms can cover the vast geography of the countries by the extensive network of small enterprises. Likewise, Pakistan can develop its own petrochemicals and mineral industries by collaborating to ensure that the benefits are not only reaped by Punjab or Sindh but also to underdeveloped regions of Balochistan and Khyber pakhtunkhwa. Such a move would provide inclusive growth opportunities, through interdependencies of the region.

The growth of cottage industries is imperative for the sustainable growth and development of the economy of Pakistan. Firstly, the cottage industry boosts economy by creating jobs in the market. Generally small firms are more labor intensive than larger firms that rely more on automation for reaching economies of scale. According to Pakistan Poverty Reduction Strategy Paper, SMEs have a huge potential for the alleviation of poverty in Pakistan after agriculture and construction of housing schemes. Secondly, SMEs have the potential for participating and creating previously unsought benefits of a globalised and digital economy. As inferred from the success stories around the globe major breakthroughs in technology are mostly brought about by innovative ideas put forward by SMEs. For instance, in China Small-medium sized enterprises (SMEs) contribute 60 percent of China’s industrial output and create 80 percent of its jobs. Breaking down the statistics, China’s Bureau of Statistics (CBS)’s 2013 report, revealed that approximately 97.9 percent of all registered companies are SMEs, that contributes to 53.4 percent of all assets in China and 62 percent of all it profits, building this amount to a whopping 4.26 billion Yuan. Moreover, the economic surveys show that SMEs also contribute to nearly 58 percent of the GDP and 68 percent of exports. According to the listing of SMEs in the National Equities Exchange and Quotations (NEEQ) system net profits have increased from about 26.29 percent in 2016. Additionally, their annual reports presented an increase over 25 percent of the annual business revenue.

Despite of the discovery of the scope of SMEs in Pakistan, the sector faces many constraints hindering its growth to the full extent. Some of these impediments include lack of skilled labor, energy crisis, poor marketing and management especially regarding exports and most importantly lack of financial capital. According to the World Business Environment survey conducted on a sample from 54 countries and 4000 SMEs, one of the major problems cited by the businesses was the lack of capital. Due to the small size of these businesses, the management lack economies of scope and therefore an information asymmetry which consequently increases the search and processing costs. Moreover, in some situations these costs may often exceed profitability of the business thus further creating panic in the investor’s mind. Mostly, banks also avoid extending small venture firms to avoid the risk of default hence further increasing the costs of credit searching for SMEs. The inability of these firms to provide a collateral renders the banks unable to identify the earning potential of the SME.

Recently, SMEs have also been seen contributing rapidly towards a green economy because small firms transition more quickly to more sustainable patterns of production and consumption. Following the examples of the Malaysia around 98.5 percent of business establishments in Malaysia are all SMEs. This totals to an amount of 907,065 establishments of SMEs in Malaysia which contributed to 36.6 percent of Malaysia’s GDP in 2016. In terms of geographical locations, Malaysia has set up most of its cottage industries of apparel and textiles, along the previously underdeveloped West Coast in Johor, due to the availability of cheap lodgings. Similarly in the case of China Pakistan Economic Corridor, the initiative intends to develop the west of China’s for an inclusive economic development of the country. These trends from developed economies may serve as blueprints for expanding Gwadar as a hub for sustainable growth of the often overlooked treasure that is Balochistan.

Once the scope of the cottage industry in Pakistan is realised the next challenge for the government lies in the need to fill the gap in the demand and supply of skilled labor in Pakistan. This can only be achieved through relevant industry experience to the new working class by providing them with internship opportunities and apprenticeship programs. Moreover, educational institutions and polytechnics should be advised to implement a revised curriculum which is relevant to business today and hire professionals from the industry.

Conclusively, Pakistan is recovering from a growth which was fueled by short term debt and declining investments. The economy is in a bad shape, and by the end of year 2018 Pakistan was almost on the verge of bankruptcy. Unemployment and poverty challenges to Pakistan are major setbacks for its vision of development in future. Especially the situation in Balochistan has always been of political and economic exclusivity with post-9/11 issues in Afghanistan. With the beginning of 2019, Pakistan would be entering into the the second phase of China Pakistan Economic Corridor which promises the start of an era of development for the province. However, in Balochistan doubts have started to ebb, with a cautious optimism. The government should focus on trade policies and industry development moving on from infrastructure that is inclusive of all the provinces in Pakistan. Large multinational companies are already interested in setting up industries in the automobiles, telecommunications, energy and electronics industry, but in order to truly tap the undiscovered potential of the people of Pakistan, promotion of SMEs would be integral. A well-targeted government action plan should be set in motion provided such interventions do not intervene with the private sector.

Applied entrepreneurship and regional connectivity

Hassnain Javed

January 19, 2019

 

 

 

Currently, the youth of Pakistan is facing exasperating challenges. According to a survey by the World Bank there is a need of about 600 Million jobs in the global economy over the next ten years, in order to retain the current employment rates. Moreover, reports from the International Labour Organisation reveals that approximately 36% of people amongst the unemployed are represented by the youth. Now talking about underemployment, more than 169 Million of the youth are paid less than US$2 per day, in the developing countries. Keeping these stats in mind, it is reasonable to conclude that the youth today is exposed to increased amounts of competition, making job search more difficult day by day. At the moment, Pakistan has a growing labour force of 1.7 million young people reaching working age each year, and the estimated unemployment rate is expected to rise to 8.6 million by 2020. This places a risk of exclusion, income inequality, reduced prospects and represents a challenge to Pakistan’s productivity and economic potential.

In this regard, ‘Youth Applied Entrepreneurship’ can play a pivotal role in relevance to job creation in Pakistan. Characteristically, applied entrepreneurship would encourage the development of new innovative technologies that would further give rise to productivity and efficiency. The platform acts a catalyst to transform economies and implementation of new solutions for increased profits. Instead of finding new jobs elsewhere, entrepreneurship would facilitate the youth 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.

There are multiple advantages of youth driven entrepreneurial venture. Firstly, the creative expertise of the youth not only incorporates traditional areas of research but also unique selling ideas that lie outside the ambit of academia. Secondly, these young leaders have the ability to attract and extract new talent from their peers which further helps them in fostering a positive community. Lastly, a recent trend amongst young entrepreneurs of the world is the idea of ‘social entrepreneurship’- the main goal of their businesses is to create incentives for social and economic change. Apart from a profit motive, such a business focuses on addressing different social issues that exist in the country like malnutrition, infant death, education, environment etc.

Currently, the government is planning two sets of strategies: firstly, to provide interest free loans to the youth via university entrepreneurship development programs and departments and secondly, to provide equal opportunities to both the youngsters from rural and urban areas. The youth from rural areas that have the ability but lack the skills to compete are being given scholarships for short term courses at vocational institutes. Furthermore, targeted and merit based scholarships are at the heart of both these strategies. By utilizing the enthusiasm and talent of the youth the government would be able to tap onto the potential of Pakistan’s youth. Also, such initiatives would encourage the creation of small and medium enterprises that would in turn propel Pakistan towards a better economy.

One such initiative is the up and coming ‘Applied Entrepreneurship: Think and Grow International Conference 2019’ organised by the Pakistan Industrial and Technical Assistance Centre, under the Federal Ministry of Industry and Production, Government of Pakistan along with a support of academia-industry partners. This year young entrepreneurs are encouraged to submit their innovative ideas, research papers, case studies and projects with a societal impact. At the heart of the conference are five main themes: Role of Technical Vocational Entrepreneur Training (TVET) in Applied Entrepreneurship, Belt and Road Startup Accelerator Innovative Entrepreneurship, Opportunities and Challenges for Entrepreneurial Start-Ups at China Pakistan Economic Corridor (CPEC), Information Technology and E-commerce and lastly, Industry, Innovation and Infrastructure Entrepreneurial Ventures. Since the creation of Special Economic Zones (SEZs) under CPEC can facilitate the process of micro-investment in this region, by facilitating innovative entrepreneurial ventures at a small and medium size level.

This platform aims at guiding young individuals from a vision to venture. All participants would be invited to present their big idea and benefit from the expertise of top notch industrialist and successful entrepreneurs via a one-to-one mentorship process. Also, the platform would support the business ideas of the winning teams by awarding them a seeding fund. On top of that, industrial and academic research papers will also be presented and they will be award money for best research paper in every theme classified.
The idea behind the conference is to empower the youth all over the region to discuss interregional challenges and connectivity hurdles. Representatives from Russia, China, Turkey, Iran and Afghanistan are all encouraged to participate in the conference. The five themes of the conference thus reiterate the importance of development corridors like One Belt One Road initiative by China, and how the region can benefit by setting up entrepreneurial ventures along its route. In addition to generating new creative ideas and improving regional ties for the countries, the conference would also provide a shared platform for participating countries to delve in the global markets. The mutually beneficial assistance amongst nations can be in the form of shared knowledge, transfer of technology, component parts or supply partnerships. Therefore, such cooperation would also enable big Multinational companies to identify the talent of youth and provide them with business and job opportunities. This environment of conductive learning would trigger a snowball effect and enable other corporations in the region to reap benefits from the advancements in technology.

Conclusively, the tool of youth employment is of paramount importance, for stimulating the growth in the region’s economy. The reason for this spurt is that entrepreneurs not only bring welfare for themselves but also the municipality, country and region as a whole. Self-employment brings the youth more satisfaction and job security for their peers as well. Most importantly, such ventures can stimulate economic development in the rural regions where the youth can guide the natives to utilize their locally produced materials into finished goods for domestic use and consumption.

Given the right opportunity and mentorship, the youth has the ability to deliver outstanding performances. These pathways to progress would especially be beneficial by enabling them to thrive in today’s economy. Thus the objective of such a programme is essentially to reduce youth unemployment and increase sustainable economic development through entrepreneurship and leadership training.

Directionless Directions!

Dr. Hassnain Javed

January 14, 2019

 

 

The issue of privatization of industries in Pakistan has been a long standing debate. One view point of economists is that running industries and business is not the task of the government. Contrary to this belief is that privatization means that the government is no longer eligible to fulfill its responsibilities and has hence transferred them to the private sector. The idea is not far-fetched since the main motive behind a public-owned business is the welfare of people where services and products are offered free or at a subsidized rate. In contrast, the private sector is driven by profits and monetary benefits.

Generally, the trends in privatization of industries in Pakistan show that the rich and elite have always benefited from this policy however, the working class has always suffered. Despite of government promises, workers have lost permanent jobs and they have not been given legal protection against downsizing.
Although there have been no recent studies on the impact of privatization on Pakistan’s economy but a 1998 report by the Asian

Development Bank revealed some shocking results. Statistics show only ’22 percent of the privatized units performed better than in the pre-privatization period; 44 per cent performed the same whereas approximately a third (34 per cent) performed worse’. In light of the mentioned results many economists argue that the privatization did not contribute to the growth of the GDP [gross domestic product], investment and employment.

Keeping in view the case of KESC privatization, Dr Akhtar Hasan Khan, former federal minister called it an ‘unmitigated disaster’ and ‘the biggest blunder’ of Pakistan’s economic policy. He argues that the initiative failed due to the fact that the government had invested 147 Billion rupees during 2002-2010. Out of which 109 billion were given before privatization and 38 billion rupees after its privatization. Moreover, Water and Power Development Authority was instructed to supply 700MW to KESC despite outstanding payments of 81 billion rupees. The motive behind privatization has been to rid the government of the loss making company, however the funding to pull the company off debts continued even afterwards.

Another lesson for policy makers lies in the case of the privatization of Pakistan Telecommunication Limited during Pervez Musharaf’s era. The company was sold to Dubai-based Etisalat by giving away a 26 percent stake with a full managerial control. The decision makers saw PTCL as incompetent and outdated but a few knew that before the privatization PTCL was ranked amongst the biggest telecoms in South Asia. Even looking at its financial position at the time of its privatization in 2005 the company reported revenue of 84 billion rupees, with earnings before interest, tax and depreciation of 54 billion. But due to government’s lack of a long term strategy, the company was sold out instead of using these funds to invest in telecom abroad. What is even worse is the fact that after almost 10 years, the government still has not been able to recover the 800 Million dollars in outstanding payment and in fact, itself paid the amount it had received in technical fee and other charges.

Previously the government had promised that a privatization policy would reduce debts on the Pakistan economy by improving the performance of tertiary and banking industry. The improved performance was expected to increase quality, reduce costs and accelerate production. Many believed that this policy would exacerbate foreign direct investment, local investment and export but the reality has been far from expected. Debt tolls have accelerated to record levels and there has been an accumulation of wealth in a few hands. The prices of commodities and prices have risen to the point that even the basic necessities are out of the reach of a common man in Pakistan.

Looking at Britain’s example one of its government’s largest contractors Carillion, announced bankruptcy, leaving 20,000 of its employees without any jobs. The company is £1.5 billion in debt. This is what happens when governments outsource the tasks what should have been under their control. Similarly, in the United States the system is heavily privatized with $3.3 trillion being spent in 2016.

Currently, the government claims to have been following China’s model of economic development however, if that is true then why there are new talks about privatizing state owned companies. Another thing that must be noted over here is that a common thing amongst these world renowned Chinese companies like Temasek (which also controls majority shares in Singapore Airlines and SingTel), China National Offshore Oil Corporation (CNOOC), Haier, Emirates airlines, Dubai Ports, and Petronas (Malaysia), is that they are wholly or partly state-owned. The reason behind this is that China harbors its country’s assets with a long term vision towards success and strong desire to produce national winners.

After analyzing at all the good, the bad and the ugly of the policy of privatization in Pakistan and around the world it is safe to conclude that privatization creates a divide in the society where the elite are encouraged to pay more and the working class instigated to opt out of even the basic of necessities. Critics also argue that state owned monopolies have been conveniently turned to private monopolies as the transfer of wealth was used to enrich only certain ruling elites. Therefore, the history of privatization of industry in Pakistan has been littered with corruption allegations, political patronage, manipulation and cartelization. Thus, public-private partnerships should be encouraged but to an extent that masses benefit at large