State Bank of Pakistan (SBP) governor Dr Reza Baqir lately said that focusing on export can take the country out of the boom bust cycle. That is a right approach as import compression is a stop-gap solution to avert the balance of payment crisis. Now with stabilization in sight, the focus ought to be on investment in exporting sectors.
Historically, the investment in exporting sectors came merely from domestic players in textile and four other traditional sectors. On the other hand, Foreign Direct Investment (FDI) invariably flew in for catering domestic demand. The government today is trying harder to get FDI, but the focus should be on efficiency seeking (for creating exportable surplus).
Last week, there were talks about having FDI from an Egyptian investor in housing. It is not a great idea as housing is a low productivity sector: Investment to come in for building housing units and repatriation to start as soon as the units are sold. The employment generation potential is short term and nothing to export in future. Housing is a social need and having vibrant mortgage finance market is imperative for transfer of wealth from rich class to lower middle class.
The emphasis here is to focus on FDI in exporting sector. It is of utmost importance for coming out of the so called four-year growth cycle. The high growth era of 2003-07 was followed by a balance of payment crisis. The subsequent growth era from 2016-18 was short lived; and the crisis is back. The need is to probe in what was lacking in economic policymaking then and the learnings thereafter for the incumbents.
In 2003-07, the boom was by foreign flows and deregulation of a few industries. FDI came mainly in teclos, banking and oil and gas. Employment opportunities were generated as foreign expertise in newly deregulated sectors generated a new era of growth. The middle class boomed (to an extent), and that routed ways for an era of investment in retailing - both by domestic and foreign investors.
During 2008-15, despite low economic growth, the retailing sector boomed. Textile players deployed their retained earnings on exports (which doubled during 2003-07) in building domestic brands. They moved away from textile to real estate and dairy businesses, all for catering domestic market. However, the higher money routing to real estate sector crowds out the investment in more productive manufacturing sectors.
In 2015, the CPEC was signed and the country entered into another growth era based on foreign flows. But growth was hollow and not sustainable. The energy infrastructure was built. A number of IPPs either by government herself or under CPEC were installed. Investment came and went out in no time. The financing was from outside Pakistan, plant and machinery ere imported and now the profits are being repatriated. There are other repercussions of loosely designed cost plus IPPs contracts with guaranteed returns, which this writer will touch upon later.
Here is an attempt to illustrate a few examples of FDI in the past to demonstrate their impact on balance of payment. For instance, the biggest world mobile company invested around $700 million in Pakistan a few years back. Around 30 percent went out straight to pay the seller (another foreign party). Roughly, 55 percent went out within months in buying equipment from company's host country, and the remaining amount within a year or two remitted out of the country for expansion of network. Thereafter, the company is repatriating profits, which is constantly eating our exports earnings.
The other examples are from retailing businesses. In one of the leading foreign fast food companies, around Rs300 million investment is required to make one outlet; out of it 80-90 percent is spent on imports for buying equipment and machinery from approved vendors of the company. Not to mention the royalty for every burger sold is also repatriated.
The chief executive for Pakistan operations of a global cash and carry business once informally said that when the company entered the Indian market, the government made the company agree on certain quantum of sales to be of local (made in India) products. However, nothing of that sort is ever asked by authorities in Pakistan. The global retail chains have their own brands of grocery products procured by local vendors - but that is not really happening in Pakistan.
Dr Baqir should emphasize on attracting FDI with exporting potential. Apart from that, domestic investment should be incentivized in sectors where exportable surplus can be generated. The SBP has enhanced its subsidised credit limits for traditional exporting sectors. The need is to expand the horizon beyond traditional exporting sectors. The incentives should be based on incremental exports. Higher benefit to be given for exploring new markets within existing exporting sectors as well as new ones.
Copyright Business Recorder, 2019
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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