Pakistan’s domestic credit to private sector in terms of percentage to the Goss domestics product (GDP) has been persistently declining for the last 37 years, according to the World Bank statistics
Pakistan’s domestic credit to private sector in terms of percentage to the Goss domestics product (GDP) has been persistently declining for the last 37 years, according to the World Bank statistics, from high 29.8 in 1986 to the lowest 14.6 in 2016, registering the value 14.8 in 2022, thus having global ranking of 141 among 165 countries. This index is much lower in Pakistan compared to other regional economies; Iran 60.3, India 50.4, Sri Lanka 47.0, Bangladesh 39.0, Indonesia 35.3, and Kazakhstan 25.6. Domestic credit to the private sector, which is a major element for economic development, refers to financial resources provided to the private sector through loans extended by the banking institutions, purchase of non-equity securities, trade credits and allocation of capital. The low economic indicator essentially means that the private sector does not have adequate access to credit for investment.
Recognizing the critical importance of the private sector in driving industrial growth, job creation, and assimilation of latest technology, Pakistan needs to make concerted efforts to promote private sector and entrepreneurship-led industrialization to stimulate economic development in future. Two major factors have largely contributed to the prevalent dismal situation--- one, decimation of development financial institutions (DFIs) over the years, and second, increased investments by the banks in government’s securities and borrowings. The situation caused economic instability, erosion of foreign exchange reserves, and undermining the investors’ confidence. Resultantly, Pakistan faced decline of the industrial sector, rather than the deindustrialization of the present day.
The leading aspects of structural transformation facilitating private-sector-led industrialization are consistency of policies, minimal but strong intervention by the government, promoting business-friendly environment, balanced public-private partnership, developing & upgrading the existing infrastructure, establishing economic zones, sponsoring skill-development programs, advancement of technology & innovation, support to Small and Medium Enterprises (SMEs), and furtherance of export-oriented industries. An integrated robust Industrial Policy is required to reverse the deindustrialization, reinforcing the manufacturing sector, for economic, social and environmental development. Currently, Pakistan is ranked 108 amid 190 countries for ease of doing business, which certainly is unsatisfactory and a policy for undertaking reforms to speed-up the process of starting new business ventures is required.
Pakistan can learn from recent economic growth in many developed and developing countries like Singapore, South Korea, Taiwan, Malaysia, Indonesia, Vietnam and Bangladesh where private-sector-led industrialization has been a successful and rewarding experience. It is expected that industrial cooperation with China will be forthcoming soon, fostering industrialization through domestic and foreign investments and trade, whereas China has also planned to relocate its hi-tech industries to Pakistan. However, implementation of many projects under the second phase of the China Pakistan Economic Corridor (CPEC) that commenced five years ago, have been delayed whereas others are stalled. Nine Special Economic Zones (SEZs) were approved in 2016 to be developed under the CPEC program—seven in the four provinces and two in the federal capital. Four SEZs, currently under various stages of development, are now scheduled for completion in 2025 that are expected to attract an investment of $500 million, whereas other five SEZs will be completed in 2030.
Rashakai SEZ, Nowshera in the Khyber Pakhtunkhwa (KP), the first project launched under the program, is well-advanced and its first stage is expected to be operational by December 2023. The industries to be set up include home appliances, building materials, automobiles & parts, and agriculture- & horticulture-processing. Reportedly, joint ventures of 18 Chinese and Pakistanis companies have been concluded. Other SEZs are still at initial stages of development. Ground-breaking of Allama Iqbal Industrial City at Faisalabad (Punjab) was done in January 2020, and construction started in 2021. Industrial plots for the first-stage development have been allotted but construction on only a few plots could start. Industries to be established include textiles, light engineering, electrical & electronics, chemicals & paints, pharmaceutical, and food processing.
Land for Dhabeji SEZ, Thatta (Sindh), which was launched in December 2020, has been allocated by the provincial government. Bidding package for the project, being developed under the Public-Private Partnership (PPP) mode, has been revised a number of times. Industries to be set up include textiles, steel foundries, chemicals, pharmaceutical, electronics and others. Provision of utilities such as electricity, gas, and water is currently being made at Bostan SEZ located in Balochistan (District Pishin). Proposed industries to be established are fruit-processing, ceramic, chromite, pharmaceutical, electrical appliances and others. Bostan SEZ was approved in March 2020 and allotment of plots under stage-1 of the project development has been launched recently. Practically there is no progress on other projects planned under Chinese industrial cooperation. These are ICT Model Industrial Zone (Islamabad), Industrial Park on Pakistan Steel Mills land (Port Qasim, Karachi), Mohmand Marble City (KP), Mirpur Industrial Zone (Mirpur, AJ&K), and an SEZ in Mogpoondas area located between Skardu and Gilgit cities. In total, seven (7) SEZs have been functioning since many years, whereas another twenty-one (21) SEZs have been developed since 2014 including CPEC projects and private sector/sole enterprise SEZs.
Asian Development Bank (ADB), in association with the World Bank and the Government of Pakistan, had initiated in 1995 preparation of specific policy recommendations for socio-economic development from a long-term (15- years) perspective with the objective of moving towards a dynamic and competitive economy, known as ‘Pakistan 2010 Program’. Private Sector (and Financial Sector) Development-led Industrialization was one of the six key areas of study. Report of the Consultants, headed by Prof Dr Yoon Hyung Kim of South Korea, was finalized in July 2000, but due to lack of commitment by the government a formal ADB Project Report could not be published and its recommendations were never implemented fully and effectively. The government however did publish a document titled ‘Pakistan Vision 2025 aiming at ‘to become a top 25 global economy’. In reality, Pakistan economy global ranking has declined from 43rd in 2022 to 46th in 2023.
The Consultants’ comprehensive and pragmatic action program covered Restructuring the Industrial Management with five components of (i) transformation of economic institutions, (ii) developing a new compact between business and government, (iii) institutionalization of future-oriented “indicative planning system”, (iv) reforms in the government sector, and (v) public-private cooperation in industrial targeting/nurturing. Action program for Building-up Pakistan’s Industrial Production Capability has included (i) promoting competition and domestic entrepreneurial development, and (ii) inducement measures of FDI (foreign direct investment) and global firms (to build up “subregional” production network). The action program for Evolution of Industrialization Processes encompasses three elements, namely, (i) a vision for industrialization phases, (ii) development of small and medium–scale enterprises, and (iii) development of large-scale enterprises.
The Report also discusses ‘A New Institutional Arrangement for Corporate Financing and Restructuring of Firms’, proposing (i) establishment of a bank-led financing system for corporations, (ii) bank-firm nexus: privatization and restructuring, and (iii) restructuring of firms: the case of Korea. Another important topic discussed is the Politico-Economic Imperatives for Industrialization, proposing reorienting national outlook, establishing effective legal framework, and political stability. Some of the recommendations for Enabling Economic Environments for Industrial Reforms include (i) development of industrial estates only on basis of facilitating private sector on long term basis, (ii) development of infrastructure and human/technological resources, (iii) revival of sick units, (iv) monetary policy to cater to the aspirations of private sector, and (v) measures for lowering the interest rates significantly and increasing availability of loans to private sector for investment.
Most of these recommendations are still valid for implementation to achieving economic growth through private-sector-led industrialization. But is the implementation possible under the given conditions of a peaked interest rate, record government borrowings from banks, ever-increasing cost of electricity, gas and fuel, record inflation and other negative factors, besides the prevalent political instability?
The writer is retired Chairman of the State Engineering Corporation
