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Economic conditions unsettled; SEZs should be made part of the overall growth strategy.

Byline: Khalil Ahmed

Interview with Engineer Daroo Khan Achakzai - President, Federation of Pakistan Chambers of Commerce and Industry (FPCCI)

PAGE: What are your views about the current state of the economy of Pakistan?

Engineer Daroo Khan Achakzai: The economy appears to be on shaky ground over halfway through the current fiscal year, which ends in July. In December, international reserves fell to the lowest level in nearly five years, covering less than three months of imports. Although the current account deficit reduced slightly due to inflow of remittances but it remained high. Pakistan has secured financial support from the UAE and Saudi Arabia and China but option is still open to receive bailout package from IMF.

The overall macroeconomic environment remained challenging which is creating a tough time for the government. The inflationary pressures remain strong and the twin deficits staying at elevated levels which advocate SBP to present contractionary monetary policy. The policy rate was raised by 25 basis points in the current Monetary Policy Statement (MPS), which ultimately creates problems for trade and industry of Pakistan. Higher fiscal deficit was financed through increased government borrowing from both domestic and external sources. Overall economic conditions are still in state of uncertainty which gives weak or negative signal to the investment inflow.

PAGE: Could you tell us about the exports and imports during the current fiscal year?

Engineer Daroo Khan Achakzai: Exports from Pakistan have starts moving upwards and growing. During the first four months of the current financial year registered a growth of 3.52 percent to US$7.285 billion against $7.037 billion during the same period of the last year. According to monthly summary on export and import statistics for October 2018 released by the Pakistan Bureau of Statistics (PBS) recently, exports for the first four months of 2018-19 grew by 3.52 percent.

On the other hand imports, which are one of major causes of depletion in reserves and trade deficit still on increasing trend. During the period the imports witnessed an increase of 0.06 percent, which remained $19.071 billion against $19.060 billion in the same period of the last year. One of the major reasons for low exports growth from Pakistan is smaller basket of export items and limited markets.

Pakistan top exports commodities which share 57.9 percent is cotton manufacturers, leather 4.3 percent, rice 8.3 percent, while Pakistan's export destinations are USA, EU, UAE, Saudi Arabia and have very limited access in the African markets.

PAGE: How could Pakistan improve its industrial productivity?

Engineer Daroo Khan Achakzai: Pakistan's poor performance in the world market reflects primarily its generally deficient competitiveness. Apart from quality considerations, a country's competitiveness depends on its direct labor cost and the costs associated with physical infrastructure (transport, power supply, etc.) as well as on the general business environment (regulations, governance, etc.).

Pakistan is notorious for its poor infrastructure, especially for the power shortages that have become progressively worse. With supplies unpredictable and plants operating far below capacity due to the lack of natural gas and frequent power outages, industrial efficiency has suffered seriously while production costs have risen. The state of road transportation and ports - never good - has also deteriorated and added to producers' woes.

Taking into account the costs associated with its poor physical infrastructure leaves Pakistan with an enormous competitive disadvantage in the world market. The direct labor cost in production is a composite of wages paid and the labor input per unit of output, i.e., the inverse of labor productivity. The data on wages in Pakistan are not systematically collected and are unreliable. Human capital, promotion of technology infrastructure, openness, and stable and consistent policies are important determinants of productivity growth in the large-scale manufacturing sector of Pakistan.

To put the manufacturing sector on the high growth path there is a need for the accumulation of knowledge and human capital to encourage RandD activities, especially in the industries with large export potential. Such a strategy will not only raise the level of productivity but also enable the manufacturing sector, particularly export-oriented manufacturing, to improve its competitive strength in global markets. However, a complete understanding of the role of these sources of productivity growth requires a detailed understanding of the state of existing technology apparatus in the country, besides recommending a policy framework to improve its role in raising productivity in the economy.

PAGE: What are your views on special economic zones?

Engineer Daroo Khan Achakzai: Economic expansion, high prices and inflation are the issues on which one can talk for hours. The scarcity of resources, energy crisis and lack of industrial modernization are the challenges which Pakistan has been facing for past many decades. Despite the advantages of geographical setting, the country could not sufficiently expand its economy until 20th Century. However, the China-Pakistan Economic Corridor (CPEC) has brought with it various infrastructural, energy and industrial projects that show smooth progress in these sectors.

One of the most significant developments is the establishment of Special Economic Zones (SEZs) under the Long Term Plan (LTP) of CPEC. As Pakistan desperately needs a more developed industrial sector to lay a solid foundation for its economic revival, SEZs are to provide a number of opportunities to fast achieve a higher path of industrialization. By making industrial zones production and export hubs of high quality manufactured goods, Pakistan will be more 12 favorably positioned in the international market.

SEZs will work as a strong economic incentive for Pakistan's government to introduce reforms to improve domestic business environment, style of governance, productive capacity, export base, and enhance commercial attractiveness for more foreign investments. SEZs will enable firms to agglomerate and get benefits of external economies and will thus provide opportunity to put domestic industries on a higher path of the learning curve. Trade creation opportunities will induce both countries to further strengthen their trade relations. Opportunity for domestic allied industries to expand their ancillary businesses with SEZ firms.

Within SEZs, Pakistani companies either competing or complementing Chinese companies will learn modern business and effective trade techniques from their Chinese counterparts. Global firms that are increasingly organizing their production and trade in increasingly complex global value and supply chains and are looking for the least cost locations, SEZs would provide a platform to reap the benefits of such opportunities that are virtually missed so far in Pakistan.

SEZs by establishing backward linkages with the large Chinese market and Chinese SEZs in China can create strong and sustainable business integration through trade and investment. Given their importance, development of SEZs should be made part of the overall growth strategy of Pakistan. Only in this way, Pakistan will be able to achieve the objectives of pro-inclusive and sustained growth.
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Author:Ahmed, Khalil
Publication:Pakistan & Gulf Economist
Article Type:Interview
Geographic Code:9PAKI
Date:Feb 17, 2019
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