There is a constant slowing down of the economy, caused primarily by low output of the manufacturing and agricultural sectors. The cost of doing business and producing industrial and agricultural products has spiraled up, causing the prices to go up.

Over the years, the cost of energy has gone up. Likewise, the price of imported raw material used by the manufacturing sector has increased too mainly due to continuous rupee devaluation. Similarly, the agricultural sector has to incur heavy input costs in the form of imported fertilisers, pesticides, seeds, raw material, etc, amid major crop failures.

Low agricultural yield per acre, lack of research in the sector, archaic methods of farming, dependence on imported seeds and shortage of irrigation water are some of the reasons why the agriculture sector has under-performed over the years. This has had an adverse impact on the agro-based industry like textile and leather.

The State Bank of Pakistan, in a move to curtail government borrowing, encourage savings and control demand, has increased the policy interest rate to 10.25 per cent. This will increase both the rates of interest charged by lending banks from borrowers and that offered to those who deposit money in savings accounts.

The rationale of this move is that due to less borrowing and more savings, the circulation of money in the market comes down and helps control inflation. But this has led to concerns among the business community which considers it an anti-investment move because businessmen say seeking expensive loans does not suit investors as well as those who want to modernise their industrial units according to the needs of the day.

In fact, high interest rate has added to the woes of businesses that were complaining about the negative impacts of rupee devaluation. Different local and global organisations and rating entities have predicted a low GDP growth in the current fiscal year, putting it to be around 4 percent to 4.5 per cent, much below the earlier growth rate target of 6.2 per cent.

The Federation of Pakistan Chambers of Commerce & Industry (FPCCI) President, Daroo Khan Achakzai, points out that large-scale manufacturing has seen slow growth and sectors like textile, food and beverages, pharmaceuticals, electronics, etc., have suffered the most. He says increase in interest rate will prove counter-productive. He believes interest rate should be brought down to promote private sector investment. "The government must explore venues to create fiscal space for itself rather than borrowing heavily from the SBP and leading to rise in inflation."

Though it is commonly believed that rupee devaluation has contributed to increase in inflation, economist Kaiser Bengali thinks otherwise. He says the impact of rupee devaluation is not yet there because it generally comes with a lag. "Once that happens, it is feared the rate of inflation will further increase."

Bengali also terms excessive government borrowing from the SBP a major cause of inflation because this increases circulation of money in the market without actual growth. "The SBP prints money for lending and the government spends heavily on non-development sector, infrastructure, payment of salaries, etc., which increases the supply of money. When money is abundant, the demand for goods and services rises in the presence of limited supply and that results in inflation."

Bengali points out that Pakistan’s industry, including the export-oriented one, is heavily dependent on imports and lately the raw material, like cotton, is also being imported. "The export industry imports accessories, chemicals, additives, etc., for use in the products it sends abroad. It is quite understandable that when inputs, including oil, are imported the impact of dollar appreciation is bound to have a negative impact," he adds.

The government, he believes, must realise that the loans obtained by the industry on higher interest rates will further push the input costs up.

He suggests the government must focus on promoting agriculture and increasing supply of food and agricultural products through supportive policies and modern research as their shortage leads to inflation. "At the same time, there should be a mechanism to fill the demand-supply gap through the year because prices keep on fluctuating between extremes. At one time tomatoes are available for Rs20 per kg and at other for Rs200 per kg."

Some budgetary measures have also had a negative impact on large-scale manufacturing sector. The automobile sector can be cited here. A representative of the sector says the imposition of ban on purchase of new cars by non-filers has hurt their sales while production has come down drastically.

The industry, he says, installed assembly plants with extended capacity to meet the existing demand but the decision of the government affected the demand side, thus making investment on expansion redundant. "The Federal Board of Revenue (FBR) is forwarded details of each and every new car buyer; so it must question them about filing tax rather than crippling the industry." The government has recently allowed the non-filers to purchase new cars up to 1300 cc engine capacity which, in his opinion, will benefit a particular assembler only.

All Pakistan Textile Mills Association (APTMA) Secretary, Anis ul Haq, says both the high interest rate and rupee devaluation directly impact the textile industry that has been planning to import modern machinery. "The increasing cost has led many to rethink and wait for a proper time." Haq says the government has offered them incentives like provision of electricity and gas at competitive rates which will help them bring down the cost to some extent.

Also read: The cost for consumer

He says tax refunds worth billions are payable to exporters by the government. If these are released, as hinted by the government, the industry will get working capital it needs desperately at the moment. He says issues of large-scale industry and small and medium-scale are the same because they are part of the same value chain and cannot work in isolation.

Gohar Majeed, a chartered accountant and director at Trust Deals -- a real estate advisory and development company -- believes the manufacturing sector will see a revival as the huge amount of money parked in the real estate sector is being withdrawn by investors. "After restructuring of the real estate sector, investments will offer modest returns in this sector. Many industrialists who had invested their money in the real estate sector will now divert it from there and concentrate on production and boosting exports," he adds.