Pakistan’s economy grows ‘in spite of state’

Politicians promise change as power cuts, insecurity, corruption and inflation make life difficult for entrepreneurs.

Zia Hyder Naqi, the managing director of a plastics manufacturing company, stands next to a machine that is creating a new mold
Factory director Zia Hyder Naqi says doing business is a struggle in Pakistan [Asad Hashim/Al Jazeera]

Lahore, Pakistan – Zia Hyder Naqi started his first business when he was eight years old, turning old newspapers into paper bags in the eastern Pakistani city of Lahore. He didn’t earn much, but the 1.5 Pakistani Rupees ($0.02) he made every day was enough to buy him his lunch, and a sense of satisfaction at having made something.

Today, 40 years later, Naqi is the managing director at a plastics manufacturing firm that employs 430 people, and earned $14.2m in revenue last year.

Synthetic Products and Enterprises Ltd (SPEL) is one of the largest firms of its kind in the country, and makes everything from plastic cups to the inner sides of car doors for firms such as Toyota, Honda and Suzuki, and everything in between.

Business has been good for SPEL, Naqi says, but that’s not because the government is providing a conducive climate for economic growth.

“Let’s start by saying that we work in spite of the government and not because of the government,” Naqi told Al Jazeera. “It really means that we have to struggle. We compete against the best in the world.”

Power cuts

Pakistan suffers from a raft of economic problems – spiraling inflation and unemployment, a chronic energy crisis, a lack of implementation of existing policies and an unstable investment environment, owing to the country’s tense security situation.

Primary among those difficulties, Naqi says, is the issue of power cuts – or load-shedding, as it is referred to in Pakistan.

“Our reliability is affected when we have load-shedding, because we don’t know when power will arrive and go. So we have to create back-ups, which means that the cost of operations goes up. It affects morale, it affects our work, it affects our delivery, it affects our customers. [It affects] the cost at which we deliver, and how competitive or uncompetitive we become to the customer,” he says, estimating that the cost of putting in those back-up system raises the overall cost of his products by as much as 10 percent.

Last year, Naqi’s firm spent an extra $1.2m on putting back-up generators into place, fuelling them and paying for their general upkeep, as opposed to taking electricity off the grid. Moreover, he says, that $1.2m is a sunk cost, as it is not being invested into productive processes. The result: it’s harder for Pakistan’s products to compete in the international market, as the cost of producing electricity pushes firms into a loop of spiraling costs and being unable to further invest in new technologies. 

Pakistan’s electricity woes, analysts say, are a result of industrial growth outstripping the pace of growth in generation, and a woefully maintained distribution system that results in line losses of around 20 percent  At its peak last summer, the country’s electricity shortfall was a staggering 8,500MW – about 40 percent of the country’s total generation capacity (not counting transmission losses).

The shortfall has resulted in rolling blackouts across the country, with urban areas suffering outages for 10-12 out of every 24 hours. In rural areas, the situation is even worse.

“Two years ago, I would have said that the biggest economic problem facing Pakistan is the lack of skills amongst the labour force,” says Dr Qais Aslam, a professor of economics at the University of Central Punjab. “Today, though, the biggest economic issue facing Pakistan is the electricity crisis. Because all other sectors of the economy are linked with this energy crisis: we need industrialisation, job creation and education, but all of that is linked to cheap, sustainable, uninterrupted electricity.”

Dr Aslam terms the acute shortage, however, “a crisis of success”.

“Electricity production has not significantly diminished. It has fluctuated … but it has not significantly decreased over the years. It is the demand side that has increased significantly, and we have not been able to meet the demand,” he told Al Jazeera.

The problem, Dr Aslam says, is not unsolvable, but it does require targeted investment and a loosening of regulations governing the price and generation of electricity. Currently, among the many issues plaguing the energy sector in Pakistan is the issue of “circular debt”, where state-owned or operated as well as privately owned public utility enterprises owe each other huge sums of money as a result of subsidies on electricity.

“[You can fix this] in both the short-run and long run. First, Pakistan has about 10 different sources of producing energy, starting from hydroelectric power, to coal, to solar, to wind, to uranium, to biomass, and wave power. There are about 10 ways or producing electricity…but the government lacks the technology and management [to make them work currently].

“In the short run, it’s a simple matter of conservation. If they would allow industries to produce and sell electricity to each other, you’d take many of them off the grid and find they were able to manage.”

Crippling corruption

Load-shedding, however, isn’t the only issue facing the Pakistani economy. Along with a low literacy rate of 55 percent – putting it at 113 out of 120 countries in UNESCO’s rankings – and a resultantly uneducated and unskilled labour force, the country also face huge challenges in terms of cyclical balance of payments crises, and endemic government corruption.

That last issue, business owners say, whether it is in the form of the small bribe paid to a clerk to obtain the correct forms, or a larger kickback paid in order to obtain a tender, has crippled their ability to engage in commerce. Last year, Pakistan ranked 33rd in Transparency International’s annual Corruption Perception Index. TI estimated that corruption in 2012 amounted to about $128bn (or 60 percent of the country’s GDP) 

“The basis of all of our economic problems is that our rulers are crooked,” said Syed Tariq Manzoor, 46, who has been running a paper notebook and file manufacturing business in Lahore’s historic Urdu Bazaar for about 20 years. “All of them [politicians] make promises, but they achieve nothing. Even I can make promises!”

Other traders in the market agreed with that assessment, attributing high unemployment and inflation statistics to both the country’s energy crisis and a lack of capable leadership. Unemployment is officially at six percent, but that figure, analysts say, is misleading, because it does not include widespread underemployment as well as the country’s large undocumented economy. Inflation, meanwhile, has come down from levels of around 20 percent (year-on-year) in 2011 to now stand at about 7.8 percent.

“There’s no business these days,” says Malik Umair, who works at a shop in Urdu Bazaar. “People just don’t have the money to spare.”

Differing approaches

Pakistan is, of course, gearing up for general elections on May 11, and whichever party comes to power will have a handful to deal with the economic problems. Nawaz Sharif, the leader of the PML-N and a man tipped to be next prime minister, said the country is “a mess”.  

Sharif’s PML-N is campaigning with the economy at the centre of its strategy, banking on voters to look to its record in government in Punjab, Pakistan’s largest province, and previous experience implementing reforms that liberalised an economy the party feels is over-regulated.


Muhammad Shahid, 37, says that he’s been making a large profit selling elections-related merchandise over the last two weeks [Asad Hashim/ Al Jazeera]

The party’s manifesto promises to double the current GDP growth rate of around three percent to over six percent in the next five years. The PML-N’s strategy focuses on trickle-down economics, by allowing businesses to grow and create jobs, which, in turn, the party argues, will address other issues. Its focus, according to its manifesto, will be on the industrial and manufacturing sectors.

The incumbent Pakistan People’s Party (PPP), meanwhile, considers itself a left-leaning socialist party, and has promised to address economic challenges by supporting the country’s working classes, leading its manifestowith programmes for providing adequate healthcare, housing and income support for the country’s poor. Its proposed economic policy is also more geared towards implementing reforms in the agriculture sector.

The Pakistan Tehreek-e-Insaf (PTI), the party led by cricketer-turned-politician Imran Khan and the wildcard in this year’s election race, meanwhile, promises a blend of both approaches.

“We will reprioritise the Pakistani economy away from the elites and towards the masses,” Asad Umar, a senior vice-president of the PTI, told Al Jazeera.

“We will ensure that we collect taxes from the country’s rich and powerful elite,” he said. Currently, only about one percent of the country’s population pays income tax. He pledged, however, that his party would not impose additional taxes on productive sectors.

The revenue generated through the collection of income tax, coupled with government spending cuts in non-social welfare sectors would fuel new social welfare programmes and targeted investments in electricity and infrastructure development, Umar said.

Meanwhile, far from the think tanks and policy committees, the entrepreneurial spirit of the eight-year-old Naqi is still alive and well. Over the last month, dozens of shops have sprung up all over Lahore, selling elections campaign-related merchandise – everything from pins and badges (for about $0.40 each) to gigantic flags ($2.44), from T-shirts ($3.05) to stuffed soft toys in the shape of party election symbols.

“With the amount of money that I’m making right now,” says Muhammad Imran, 30, the owner of one such shop, “we could have built a whole bridge!”

Follow Asad Hashim on Twitter: @AsadHashim

Source: Al Jazeera