Cost of Doing Business in Pakistan

ANALYSIS OF PAKISTANI INDUSTRIES

PRESENTATION

COST OF DOING BUSINESS

SUBMITTED BY:

ARSALAN WASEEM (07192)

FAIQ MEHFOOZ (07383)

Syed Muhammad Raza (07380)

UMER RIZWAN (07191)

Submitted to: Ms. Tahira JafferyClass Number: 40162Class Timings: 11:30 AM- 12:45 PM Tuesday/Thursday

TABLE OF CONTENTS

ANALYSIS OF PAKISTANI INDUSTRIESCLASS NO: 40162

Pakistan’s Economy..................................................................................................2

Factors Effecting Cost OF Doing Business...............................................................4

Starting a Business.................................................................................................5

Labor Force:...........................................................................................................6

TRADING ACROSS THE BORDER...................................................................9

REFORMS:.......................................................................................................10

INFLATION.........................................................................................................11

SOME CAUSES OF INFLATION:..................................................................12

RELATIONSHIP BETWEEN INFLATION RATE AND EXCHANGE RATE

...........................................................................................................................13

ELECTRICITY....................................................................................................15

Registering property.............................................................................................16

Pakistan’s ranking in registering property:.......................................................18

TAXES.................................................................................................................19

INDUSTRY ANALYSIS........................................................................................22

Cement Industry.............................................................................................22

Textile Industry..............................................................................................24

BIBLIOGRAPHY...................................................................................................30

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Pakistan’s Economy

Pakistan has a semi-industrialized economy which mainly encompasses textiles,

chemicals, food processing, agriculture and other industries. The economy performed

better in 2011-12 than many other developed and developing economies. Economic

growth of Pakistan is seen through gross domestic product purchasing power parity,

which was estimated to be $ 494.8 billion in 2011. Pakistan’s estimated GDP for the year

2011 was USD 210.6 billion, while real growth rate in 2011 as per statistical data was

found to be around 2.4 percent.

The agriculture sector is an essential component of Pakistan’s economy. The

agriculture sector recorded a growth of 3.1 percent against 2.4 percent last year.

Overall, the commodity producing sectors and especially the agriculture sector have

performed better. The Services sector recorded growth of 4.0 percent in 2011-

12. According to the Labor Force Survey 2010-11, Pakistan has a labor force of 57.2

million people which is 0.9 million more than the last year. The largest industries of the

country are textile, cement, agriculture, fertilizer, steel, tobacco, edible oil,

pharmaceuticals, construction, materials, shrimp, sugar, food processing, chemical and

machinery.

Export of goods is a major concern for Pakistan economy. Exports in Pakistan decreased

to 207806 PKR Million in January of 2015 from 217338 PKR Million in December of 2014.

Exports in Pakistan averaged 33895.02 PKR Million from 1957 until 2015, reaching an all

time high of 275483 PKR Million in September of 2013 and a record low of 51 PKR

Million in April of 1958. The major item of exports includes cotton fiber, vegetables, rice,

electrical appliances, textiles, clothing, surgical instruments.

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Pakistan main exports are mineral fuels (19 percent of the total shipments),

manufactured goods (19 percent) and beverage and tobacco (13 percent). Others

include: food and live animals (11 percent), crude materials (11 percent), chemicals (11

percent), machinery (8 percent) and miscellaneous articles (8 percent). Main export

partners are United States (13.6 percent), China (11 percent of the total export), United

Arab Emirates (8.5 percent) and Saudi Arabia (8.5 percent). This page provides - Pakistan

Exports - actual values, historical data, forecast, chart, statistics, economic calendar and

news

The present government is earnestly trying to restore the confidence of foreign

investors and has adopted a positive approach for improving investment climate in

various fields of real estate, telecommunications, software, energy, fertilizer, aerospace,

textiles, steel, ship building, arms manufacturing, cement and automotives.

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Factors Effecting Cost OF Doing Business

There are a number of factors which effect cost of doing business, and they are

Starting a Business

Labor Force

Trading across borders

Inflation

Electricity

Registering Property

Taxes

Interest Rates

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Starting a Business

Doing Business sheds light on how easy or difficult it is for a local entrepreneur to open

and run a small to medium-size business when complying with relevant regulations.

Pakistan is ranked among the bottom half of the rankings of the countries where cost of

doing business is quite high. It is not high for any particular reason but because of our

bureaucracy totally sitting on their seats without taking actions or decisions in time.

Unless there is some pressure or incentive for them, the normal businesses particularly

the small and medium businesses have serious problems at the hands of bureaucracy.

Even if we have investors who are welcomed by the federal government, when it comes

down to provincial and local governments there are given a run around – the land is not

available, the water is not available, the gas is not available, electricity is not available,

road is not available. Lack of coordination among various government agencies,

innumerable laws and regulations that are antiquated and outdated have proved to be

serious impediments. Labor laws, inspections by multiple agencies, the delays in the

court system, infringement of intellectual property rights and evasion of taxes by

competing firms in the informal sector have rendered some of the well established firms

unprofitable, or the feasibility of starting near ventures questionable.

Pakistan made starting a business easier by introducing an electronic registration system, allowing

online registration for sales tax and eliminating the requirement to make the declaration of

compliance on a stamped paper.

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Labor Force:

Pakistan is the sixth most populous country in the world. The estimated labor force is

55.8 million.

Labor force comprises all persons ten years of age and above, who fulfills the

requirements for including among employed and unemployed. According to this

concept, the employed force is approximately 49.9 million (unemployed-2.69 million)

Pakistan has five different laws relating to the payment and fixation of wages. These are:

Payment of Wages Act, 1936

The Minimum Wages Ordinance, 1961

Pakistan Minimum Wages for Unskilled Workers Ordinance, 1969

Coal Mines (Fixation of Rates of Wages) Ordinance, 1960

Newspaper Employees (Condition of Service) Act 1973

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43%

20%

37%

Labor Force

Agriculture Industries Services


Civil servants Act 1973 (Article71)

Pakistan's first minimum wage was introduced in 1992 when it was set at Rs.1,500 (US$

14.75) per month. It was, subsequently, raised:

in 1996 to PKR 1,650 (US$ 16.22) per month









RUPEES

Salaries And Benefits

(Executives)

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1992 1996 1998 2006 2007 2008 2010 2012 2013 20140

2000

4000

6000

8000

10000

12000

14000

MINIMUM WAGES IN PAKISTAN

YEARS

WAG

ES

http://en.wikipedia.org/wiki/United_States_dollar

http://en.wikipedia.org/wiki/Pakistani_rupee



















Managing Director

250000 - 500000

General Manager 150000 - 300000

Senior Manager 100000 - 150000

Manager 75000 - 125000

Deputy Manager 75000 - 100000

System Analyst 75000 - 100000

Programmer 50000 - 80000

Salaries And Benefits

(Non-Executives)

Foreman 40000 - 70000

Supervisor 30000 - 50000

E Data processing Supervisor 30000 - 50000

Boiler man 20000 - 30000

Electrician 20000 - 30000

Clerk/Typist 15000 - 30000

Data Entry Operator 15000 - 30000

Security Guard 15000 - 20000

Driver 15000 - 20000

Unskilled worker 10000 - 15000

Total 985000 - 1700000

For any business you need Human Resource, it’s an essential part of successful business.

Therefore it’s a fixed cost of business which it need to pay. By looking at the pay scale it

is evident that if a business starts with the above mentioned Human resource than its

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cost varies from Rs. 9,85,000 – 17,00,000. Thus human resource affects the cost of

business.

TRADING ACROSS THE BORDER

In today’s globalized world, making trade between economies easier is increasingly

important for business. Excessive document requirements, burdensome customs

procedures, inefficient port operations and inadequate infrastructure all lead to extra

costs and delays for exporters and importers, stifling trade potential. Research shows

that exporters in developing countries gain more from a 10% drop in their trading costs

than from a similar reduction in the tariffs applied to their products in global markets.

Cost required to export and import (US$ per container)

All documentation

Inland transport and handling

Customs clearance and inspections

Port and terminal handling

Official costs only, no bribes

According to data collected by Doing Business, exporting a standard container of goods

requires 8 documents, takes 20.7 days and costs $765.0. Importing the same container

of goods requires 8 documents, takes 18.4 days and costs $1005.0.

Globally, Pakistan stands at 108 in the ranking of 189 economies on the ease of trading

across borders The rankings for comparator economies and the regional average ranking

provide other useful information for assessing how easy it is for a business in Pakistan to

export and import goods.

Standard 20' CONTAINER

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INSIDE

LENGTH

INSIDE

WIDTH

INSIDE

HEIGHT

DOOR

WIDTH

DOOR

HEIGHT

CAPACITY TARE

WEIGHT

MAXI

CARGO

19'4" 7'8" 7'10" 7'8" 7'6" 1,172CuFt 4,916lbs 47,900lbs

5.900m 2.350m 2.393m 2.342m 2.280m 33.2CBM 2,230Kg 21,770Kg

REFORMS:

Some of the reforms to provide ease in doing the business

2011

Pakistan reduced the time to export by improving electronic communication between

the Karachi Port authorities and the private terminals, which have also boosted

efficiency by introducing new equipment.

2015

Pakistan made trading across borders easier by introducing a fully automated,

computerized system (the Web-Based One Customs system) for the submission and

processing of export and import documents. This reform applies to both Lahore and

Karachi.

COST:

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KARACHI

Stages to export Time (days) Cost (US$)

Customs clearance and inspections 3 200

Documents preparation 10 110

Inland transportation and handling 4 200

Ports and terminal handling 3 150

Totals 20 660

KARACHI

Stages to Import Time (days) Cost (US$)

Customs clearance and inspections 2 220

Documents preparation 10 155

Inland transportation and handling 2 200

Ports and terminal handling 3 150

Totals 17 725

The cost associated to import and export add on to the cost of doing business in

Pakistan. All the incurred in documentation, custom clearance, transportation and lack

of facilities accumulates and increase the cost of business.

INFLATION

Inflation is the increase in the general price level of goods and services in an economy

over a period of time. When the price level rises, each unit of currency buys fewer goods

and services. Consequently, inflation reflects a reduction in the purchasing power per

unit of money – a loss of real value in the medium of exchange and unit of account

within the economy.

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http://en.wikipedia.org/wiki/Purchasing_power

http://en.wikipedia.org/wiki/Currency

http://en.wikipedia.org/wiki/Economy

http://en.wikipedia.org/wiki/Price_level


SOME CAUSES OF INFLATION:

Foreign Remittances Increase in foreign remittances is increasing the money supply in

our country.

Increase in money supply leads to inflation.

Foreign Aids Foreign aids are also a source of mobilization of resources form rich

countries to poor countries. It is also a cause of inflation in Pakistan.

Non-productive Expenditures

Government of Pakistan has to make a lot of non-productive expenditures like defense

etc. Such Unproductive expenditures lead to the wastage of economies precious

resources and also lead to Inflation.

Corruption & Black Money

Corruption and black money leads to increase in aggregate demand, which is cause of

inflation.

These evils increase aggregate demand and import volume.

Slow Industrial Growth

Our industrial sector is not at developed form due to use of backward techniques of

production.

Less production also creates shortage in market and caused in inflation.

Increase in Wages & Salaries

Now labor is demanding more wages and salaries. Increase in wages and salaries leads

to increase in cost that increases the prices. On the other hand due to more wages and

salaries there is an increase in income and it caused in inflation.

Increase in Prices of Imports

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Increase in the prices of imports also leads to creation of inflation. If there is an increase

in the prices of oil and other imported raw material then it will cause to reduction in

supply.

Devaluation

The value of our currency is decreased due to devaluation. It makes imported goods

more expensive and it leads to shortage of supply.

RELATIONSHIP BETWEEN INFLATION RATE AND EXCHANGE RATE

Expectations play the most important role in determining the value of currency and

inflation rate at a given interest rate. Increase in money supply leads to the depreciation

of currency in foreign exchange market. The chain of causation runs like this: as money

supply increases, it generates inflation, which raises interest rates and hence

depreciates the currency in foreign exchange market. When the domestic currency

depreciates it increases the imported prices, such as raw material, which leads to

increase in the cost of production and in turn increases the domestic prices and change

the aggregate demand and hence generate inflation.

Usually movements in exchange rate affect the monetary policy stance and the central

bank has to adjust monetary variables in the economy. If Pakistan’s currency

depreciates in the foreign market then it exerts pressure on State Bank to decrease the

money supply either via interest rate effect or by applying quantitative controls. In

Pakistan exchange rates were fixed until 1990s. No clear-cut relationship exists between

the two variables. Foreign investors have seen their incomes reduced as inflation has

reduced the value of Pakistani rupee by over 38 per cent in last five year. Earlier they

repatriated their income at the rate of Rs60 a dollar now they have to pay Rs99 for one

dollar. Their costs in Pakistan have increased due to local inflation, high power and

energy costs and higher labor wages while the profit margins have declined despite

increase in rates of their products. Domestic manufacturers that get working capital at

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12-15 per cent have to first earn this much just to pay back to the banks and then earn

another 3-4 per cent just to cover recurring expenses like wages, electricity and gas bills

etc. This is asking too much from them as the persistent inflation besides higher interest

has increased their production cost. Thus increasing the cost of business

How Inflation, exchange rates affects business?

High inflation rates increases the cost of business as this means that same Rs.100 will

buy less and less that implies, to start up and run a successful business, they have invest

lot of money than buy land, machinery, raw materials, utility bills, salaries would be high

so it will cost a lot to business than if they would have started when the inflation rate

was low. It also leads to uncertainty, making planning of production difficult. Prices need

to be raised and this angers the consumers who blame producers for increasing prices.

Companies who need to buy significant raw materials will find their Profits getting

squeezed while the cost going up.

Moreover as inflation affects the exchange rates therefore companies who deals in

imports and exports find their cost of business rising. Inflation results in the devaluation

of money which mean that a company will have to pay more to import the same stuff

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while exporting if they charge more so their product become less attractive in the global

market.

INTEREST RATES:

The benchmark interest rate in Pakistan was last recorded at 8.50 percent. Interest Rate in

Pakistan averaged 12.48 percent from 1992 until 2015, reaching an all-time high of 20 percent in

October of 1996 and a record low of 7.50 percent in November of 2002. Interest Rate in Pakistan

is reported by the State Bank of Pakistan.

Interest rates highly affects those business which are dependent on credit. The rise in interest

rates reflects that the cost of borrowing also increases. As now the business will have to pay

more therefore their cost increases while vice versa is also possible.

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Average Exchange Rates for Pakistani Rupee to US $

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YEAR EXCHANGE RATE1990 21.711991 23.801992 25.081993 28.111994 30.571995 31.641996 36.081997 41.111998 45.051999 49.502000 53.652001 61.932002 59.722003 57.752004 58.262005 59.512006 60.272007 60.742008 70.412009 81.712010 85.192011 86.342012 93.402013 101.52014 101


EFFECT OF EXCHANGE RATES ON BUSINESS:

Pakistan’s imports are also highly concentrated in few items namely, machinery, petroleum and

petroleum products, chemicals, transport equipment, edible oil, iron and steel, fertilizer and

tea.

Pakistan being an agricultural based economy needs to import machinery, pesticides etc and

this is affected by the exchanges rates.

Furthermore, any business which requires raw materials and other products from different

countries their cost of business will be affected. If rupee gets depreciated, firms who buy raw

material will see an increase in the cost of buying raw materials and their revenues going down.

ELECTRICITYAccess to reliable and affordable electricity is vital for businesses. To counter weak

electricity supply, many firms in developing economies have to rely on self-supply, often

at a prohibitively high cost. Whether electricity is reliably available or not, the first step

for a customer is always to gain access by obtaining a connection.

Pakistan had 60 MW of power generating capacity for 31.5 million people in 1947, and

this was extended to 119 MW by 1959, just as the country was entering a period of

development that required consistent infrastructure. In 1952 the government acquired

a majority shareholding of the Karachi Electric Supply Company (KESC) and in 1958

formed the Water and Power Development Authority (WAPDA). The purpose of the

formation of WAPDA was to manage the growth of schemes in water and power.

WAPDA expanded the electricity generation capacity to 636 MW. WAPDA produced

3000 MV in 1970, 7,000MV in 1990, 19,550MV in 2005 and 22,263 MV in 2010.

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However, fast urbanization and industrialization increases the demand of electricity day

to day

Although the country experienced over 100 per cent growth in terms of installed

capacity over the last two decades, it has not been smooth sailing. Hardly any value-

engineered projects were developed over this period. Other than the 1450MW Ghazi

Barotha project and a couple of nuclear power plants, there is not much to be satisfied

about. Meanwhile, the list of blunders in terms of the dumping of essential projects and

the orchestration of unviable and counterproductive projects is very long. The

independent power producers’ (IPPs) Programme of the 1990s, for example, could have

been quite beneficial but ultimately turned out to be counterproductive due to issues

such as the lack of transparency, excess-generation capacity, high-tariff structures and

unviable power-generation technologies. Interestingly the World Bank, one of the key

players in the IPPs Programme, has also acknowledged the existence of issues such as

the lack of transparency, political influence in the award of contracts and excess

generation capacity. Therefore, although the IPPs brought one of the few periods of

electricity prosperity, they ended up with grave economic implications for the Water

and Power Development Authority (Wapda) and the country. Some of the other crucial

setbacks inflicted on the energy sector during this period include the dumping of

Wapda’s power development Programme in the 1980s, the binning of the State

Engineering Corporation’s plan to indigenize power plants in the 1990s, barring Wapda

from thermal power generation in the 1990s, the persistent shelving of the Kalabagh

dam project, the failure to institute large new hydropower projects and growing reliance

on thermal power. This sequence of irrational and absurd decision-making, either by

incompetence or by design, gradually put the energy sector in trouble. Ironically, even in

the midst of a devastating energy crisis, the same mistakes are being repeated: evidence

of this is the rental power Program that is now actively being pursued. It is time national

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interests were put before petty personal and political interests, for the change needs to

go beyond mere rhetoric.

Electricity is very important for any business. However, its availability is not unlimited.

Electricity crisis, as well as high cost of fuels disturbs the proper supply of electricity. The

industry currently faces the problem of shortage of electricity and high interest rate.

Due to the shortage of electricity and high interest rate, the cost of production of

industry increases because the production of the textile industry is decreases and fixed

cost of the industry remains the same. The factories operate less time due to electricity

shortage and production is also less. If the factories generate private electricity than the

cost of electricity is high. A huge amount of money is required for the purpose of

generating the electricity.

The electricity crisis and interest rate affected the production of Pakistan’s industry very

badly. The high cost of production resulting from electricity crisis and high interest rate

has been the primary cause for negative growth of the industry. The above factors

increase the cost of production which decreases the exports.

Registering property

In Pakistan private companies are regulated and incorporated by companies Ordinance

1984, while SEPC is the regulatory authority established for companies’ ordinance, 1984.

SECP is the Securities and Exchange Commission of Pakistan, it is the financial

regulatory agency in Pakistan whose objective is to develop a modern and

efficient corporate sector and a capital market based on sound regulatory principles, in

order to encourage investment and foster economic growth and prosperity in Pakistan.

This commission issues incorporation certificates when all requirements are met by

promoters as per law.

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There are some basic steps which need to be followed to get a company registered,

these are

1. Naming the company

2. Get name availability certificate from SECP.

3. Decide authorized capital or share capital of your company.

4. Copies of CNIC’s of each subscriber.

5. Memorandum of association tells about the business.

Importance Of property registration:

Registered property rights are necessary to support investment, productivity and

growth. Cadasters or surveys, together with land registries, are tools used around the

world to map, prove and secure property and use rights. These institutions are part of

the land information system of an economy. With land and buildings accounting for

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between half and three-quarters of the wealth in most economies, having an up-to-date

land information system clearly matters.

Evidence from economies around the world suggests that property owners with

registered titles are more likely to invest. They also have a better chance of getting

credit when using their property as collateral. In Argentina a study observed greater

investment in homes after formal titles were granted to squatters. Compared with the

squatters who did not receive title, title holders increased the overall value of their

homes by 37%. In Nicaragua, having a formal title not only made owners more likely to

invest but increased land values by 30%. Following a land titling project in Thailand,

property increased in value by 75–197% after being registered.

The benefits of land registration go beyond the private sector. For governments, having

reliable, up-to-date information in cadastres and land registries is essential to correctly

assess and collect tax revenue. In Thailand, where annual revenue from property and

transfer taxes rose from $200 million in the 1980s to $1.2 billion by 1995, a land titling

program that increased the number of registered property owners during the 1980s is

perceived to be one of the reasons for the increase.

Pakistan’s ranking in registering property:

Pakistan’s ranks 141 in getting property registered as compared to India’s 121 And

Bangladesh’s 188 as of ease of doing business 2015, while in 2014 it had 111th position

and registering property in Pakistan requires 6.0 procedures, takes 50.0 days and costs

7.6% of the property value.

Registering property has a significant impact on cost of doing business in any country,

particularly in Pakistan’s case as we see it’s easier to see get property registered in

comparison to India and Bangladesh that means it way easier to start a business in

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Pakistan and Its only because the days required to get property registered and get going

with a new venture is easier here

Although the reforms by government have never been enough for the entrepreneurs as

we see In 2008, Pakistan made registering property more expensive by increasing the

capital value tax, which in turn had negative impact on small businesses

TAXES

Taxes in Pakistan play a very vital role for formulating the cost incurred while doing any

business, the journey from starting a business towards its end contains different

transactions, situations where at each and every step tax is deducted from each and

every purchase, or from salaries or in any investments.

Pakistan's Current Taxation system is defined by Income Tax Ordinance 2001,

promulgated on 13 September 2001, which became effective from 1 July 2002.

Taxation in Pakistan is a complex system of more than 70 unique taxes administered by

at least 37 agencies of the Government of Pakistan

Taxes in Pakistan have a large spectrum which include taxes at muncipal level upto

Federal Level. Legislation and Law exists to regulate all type of taxation. A broad

description regarding the nature of administration of these taxes is explained below:

Direct Taxes

Direct taxes primarily comprise income tax, alongwith supplementary role of wealth tax.

For the purpose of the charge of tax and the computation of total income, all income is

classified under the following heads:

Salaries

Interest on securities;

Income from property;

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http://en.wikipedia.org/wiki/Government_of_Pakistan

http://en.wikipedia.org/wiki/Tax


Income from business or professions

Capital gains; and

Income from other sources.

Here is a brief bar chart of the sales tax rate in Pakistan during the past 10 years.

Personal Tax

All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the

rates ranging from 10 to 35 per cent.

Tax on Companies

All public companies (other than banking companies) incorporated in Pakistan are

assessed for tax at corporate rate of 35%. However, the effective rate is likely to differ

on account of allowances and exemptions related to industry, location, exports,

etc.

Good economic governance in areas such as taxation, regulations, and business

licensing is a fundamental pillar for the creation of a favorable business environment

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In the latest edition of the Doing Business report, Pakistan is currently ranked 172 which

is 4 ranks below than its previous rank in 2014 which was 168 which implies that the

situation in paying taxes by the people has gotten much more worse in the past year.

While comparing Pakistan to its competitive countries like China or India, Pakistan is not

that far behind these countries in terms of paying taxes as China ranks 120th in the list

while India ranks 156th.

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INDUSTRY ANALYSIS

Cement Industry

Since the industry faces a situation where sales price will be fixed by mutual consensus,

the cost of production will be the most critical factor of profitability. Due to increased

cost of input such as electricity, coal, paper bags, mark-up rates etc, the cost of

production of cement has increased over the years.

Energy cost is a major component of total cost of production. It contributes at an

average 40 to 45 percent towards total cost of cement production. Energy cost is even

higher in case of those plant which use wet process. A cement plant based on wet

process consumes 165 kg of furnace oil to produce one ton of clinker as compared to 85

kg of furnace oil used in dry process to produce the same quantity of clinker. Since

cement plants use both furnace oil and electricity, any increase in the prices of these

two products is detrimental to profitability of the industry. Ever since October 1995,

however, there has been more than 60% increase in the price of furnace oil.

Another significant cost component is packaging material. Cement is rarely sold in bulk

in Pakistan — almost all cement sales are in four-ply paper sacks. Cost of paper sacks

has gone up by almost 90% since December 1994. The packaging cost has also increased

due to new taxes being imposed on import of sack kraft paper.

Power tariff for industrial consumers has been increased by almost 46 percent to Rs

15.31 from Rs 10.51 per unit whereas Time-of-Day rate was increased by 35 percent to

Rs 18.81 from Rs 13.99 per unit. The off-peak rate of this category jumped up by 62

percent to Rs 13.31 from Rs 8.22. This has also substantially raised the cost of

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production of cement. The packaging cost has also increased due to new taxes being

imposed on import of sack kraft paper.

There is urgent need for installing “bulk loading facilities” at ports in order to facilitate

the cement industry to export in large quantity. Presently, only one company has

arranged a limited bulk handling facility.

Cement prices have gone down considerably despite substantial increase in prices of

major inputs like coal, electricity, paper bags and markup rates. Consequently, current

price of cement has become much lower than its historical prices due to two factors viz.

fierce competition and government pressure to keep the prices low.

A price level of Rs.260 per bag seems to be a viable price for cement industry, although

it is still lower than the cement prices in other countries. Undue pressure of

government to keep the prices lower than the prices of other countries would prove to

be counterproductive for the economy.

About 100 percent increase in the prices of imported coal, from around US$ 40 per ton,

few years back, to US$ 80 per ton, has greatly affected profitability of cement industry.

Also, about 30 percent fuel cost affected cost of production.

Taxes on Cement in Pakistan are the highest than most of the countries i.e. about 30

percent, as compared to 10 percent in Indonesia, Philippines, Egypt, 7 percent in

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Thailand and zero percent in Iran and Malaysia. As such, rationalization of taxes on

cement in Pakistan should be considered.

Government should consider switchover to concrete roads, as maintenance cost of such

roads is almost zero, although initial capital cost is higher. As per an Indian study, there

would be about 12 per cent saving in fuel consumption on plying vehicles on concrete

roads. Substantial savings can be achieved by this switchover.

Excise Duty on cement may be reduced by at least half, to bring the taxes on cement at

least to the level of India, if not to the level of other countries.

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Textile Industry

The Pakistan textile industry contributes more than 60 percent (US $ 9.6 billion) to the

country’s total exports. However, currently this industry is facing great decline in its

growth rate. The major reasons for this decline can be the global recession, internal

security concerns, the high cost of production due to increase in the energy costs etc.

Depreciation of Pakistani rupee that significantly raised the cost of imported inputs, rise

in inflation rate, and high cost of financing has also effected seriously the growth in the

textile industry.

Finance Bill to Burden Industry Further

All Pakistan Textile Mills Association (APTMA) has told that government’s actions are not

matching with its words for the textile industry. Referring to the Prime Minister Yusuf

Raza Gilani speech at the launching ceremony of the Infrastructure Development of the

Pakistan Textile City at Port Qasim Industrial Area, where Prime Minister spoke high of

the textile industry contribution towards the country’s economy, Chairman APTMA

Tariq Mehmood said the federal budget 2009-10 is a total negation of the

acknowledgement of the role of textile industry on the part of the Prime Minister.

According to him, reintroduction of minimum tax on domestic sales would invite

unavoidable liquidity problem, which is already reached to the alarming level. He said

the textile industry was facing negative generation of funds due to unaffordable markup

rate on the one hand and acute shortage of energy supply & unimaginable power tariff

for industry.

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Increasing Cost of Production

The cost of production of textile rises due to many reasons like increasing interest rate,

double digit inflation & decreasing value of Pakistani rupee. The above all reason

increased the cost of production of textile industry which create problem for a textile

industry to compete in international market.

1. Internal issues pose a Larger Threat for Pakistan’s Textile Industry

Pakistan’s textile industry is going through one of the toughest period in decades. The

global recession which has hit the global textile really hard is not the only cause for

concern. The high cost of production resulting from an instant rise in the energy costs

has been the primary cause of concern for the industry. Depreciation of Pakistani rupee

during last year raised the cost of imported inputs. In addition, double digit inflation and

high cost of financing has seriously affected the growth in the textile industry. Pakistan's

textile exports have gone down during last three years as exporters cannot effectively

market their products since buyers are not visiting Pakistan due to adverse travel

advisory and it is getting more and more difficult for the exporters to travel abroad.

Textile exporters rightfully demand reduction of Kibor rate to 8% to avoid a severe

decline in exports. This rate is inflation adjusted rate and then banks by adding 2 or 3%

in KIBOR rate charge their customers for their profit. A three-year comprehensive textile

policy is expected to be announced before budget 2009-10.

2. Energy Crisis

• Electricity Crisis

As a consequence of load-shedding the textile production capacity of various sub-

sectors has been reduced by up to 30 per cent. The joint meeting of APTMA & other

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related organization was held at APTMA House to formulate a joint strategy to address

the alarming electricity crisis being faced by the textile industry. The meeting

unanimously decided to constitute a joint working group of electricity management for

the textile industry in the larger interests of the value chain of the textile industry. The

joint working group will meet shortly to design a detailed plan to pursue the following

goals; immediate total exemption from Electricity load shedding for the textile industry

value chain; Rationalization and reduction of electricity tariff. The load-shedding of

electricity cause a rapid decrease in production which also reduced the export order.

The cost of production has also risen due to instant increase in electricity tariff. Due to

load shedding some mill owner uses alternative source of energy like generator which

increase their cost of production further. Due to such dramatic situation the capability

of competitiveness of this industry in international market effected badly. Fig. 1.

Illustrates comparison between electricity production and consumption.

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Figure 1: Comparison between Electricity Production and Consumption

• Gas Shortage

Gas load-shedding continues in Punjab and NWFP despite a significant increase in

temperature. A spokesman for the All Pakistan Textile Mills Association (APTMA)

claimed that 60 to 70 per cent of the industry had been affected and was unable to

accept export orders coming in from around the globe. He said the textile industry had

already endured over 45 days of gas disconnection over a period of four months,

causing extraordinary production losses and badly affecting capability of the industry. In

Punjab, energy supply disruption only was causing an estimated loss of Rs1 billion per

day.

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3. Tight Monetary Policy

The continuity of tight monetary policy cause an intensive increase in cost of

production. Due to high interest rate financing cost increases which cause a severe

effect on production. The withholding tax of 1% also effect the production badly. The

high cost of doing business is because of intensive increase in the rate of interest which

has increased the problems of the industry. The government should take immediate

measures to remove slowdown in the textile sector.

4. Removal of subsidy on Textile sector

The provisions of Finance Bill 2009-10 are not textile industry friendly at all. Provisions

like reintroduction of 0.5% minimum tax on domestic sales, 1% withholding tax on

import of textile and articles etc., are nothing but last struck on industry’s back.

Reintroduction of minimum tax on domestic sales would invite unavoidable liquidity

problem, which is already reached to the alarming level. The textile industry was facing

negative generation of funds due to unaffordable markup rate.

5. Lack of new investment

Pakistan textile industry is facing problem of Low productivity due to its obsolete textile

machineries. To overcome this problem and to stand in competition, Pakistan Textile

Industry will require high investments. There is a continuous trend of investing in

spinning since many years. Pakistan’s textile industry estimates that around Rs1, 400

billion (US$32 billion) of investment was required till 2010 in order to achieve the

government's export target.

6. United States & EU cuts imports of textile from Pakistan

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United States cancel more than 50% of textile orders of Pakistan .US also impose a high

duties on the import of textile of Pakistan which effect the export in a bad manner. US &

EU are the major importer of Pakistan textile which create a huge difference in export of

Pakistan textile after imposing a restriction on import of Pakistani textile goods.

7. Raw material Prices

Prices of cotton & other raw material used in textile industry fluctuate rapidly in

Pakistan. The rapid increase in the price raw material effect the cost of production

badly. The increase in raw material prices fluctuate rapidly due to double digit inflation

& instable internal condition of Pakistan. Due to increase in the cost of production the

demand for export & home as well decreased which result in terms of downsizing of a

firm.

8. The Effect of Global Recession on Textile Industry

Pakistan is 26th largest economy in the world, and 47th largest in terms of the dollar. It

is sad to see our economy like this now. Pakistan is actually a very economically diverse

country with boasting industries of textiles, agriculture, etc.

The main reason for this slump has largely been the political instability over the past few

years; no proper economic policies were implemented; at least none that succeeded.

This caused a very high rate of inflation, which, in 2008, had increased to a whopping

25% as compared to a 7.9% of 2006. What occurred afterwards is what we call the

domino effect. The value of the Rupee crashed from 60-1 USD to 80-1 USD in only a

month, the prices of commodities soared through the roof, the number of people living

below poverty line increased from 60 million to 77 million, and consequently, the

working class layman became virtually deprived from basic necessities like water,

wheat, electricity, natural gas, and cooking oil; add to all this, the preposterous amounts

of load-shedding, and what we get is a nation in shambles.

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The above all situation of the economy badly affected the textile industry also. The

demand for textile product cut down locally & internationally as well. The export order

reduced due to unpredictable conditions of Pakistan & political instability. The cut down

in the production of textile cause further unemployment level which decrease the living

standard of peoples.

9. Effect of Inflation

Inflation rate is measured as the change in consumer price index (CPI). Inflation is

basically a general rise in the price level. It is decline in the real value of money. Inflation

can have adverse effect on economy. Pakistan is one of prey of inflation. It still faces

high double digit inflation. The increase in inflation cause the increase in the cost of

production of textile good which return in downsizing. The double digit inflation cause

reduction in exports of textile.

CONCLUSION

Pakistan’s textile industry is going through one of the toughest periods in decades. The

global recession which has hit the global textile really hard is not the only cause for

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concern. Serious internal issues also effected Pakistan’s textile industry very badly. The

high cost of production resulting from an instant rise in the energy costs has been the

primary cause of concern for the industry. Depreciation of Pakistani rupee during last

year which has significantly raised the cost of imported inputs. Furthermore, double

digit inflation and high cost of financing has seriously affected the growth in the textile

industry. Pakistan's textile exports in turn have gone down during last three years as

exporters cannot effectively market their produce since buyers are not visiting Pakistan

due to adverse travel conditions and it is getting more and more difficult for the

exporters to travel abroad. Pakistan’s textile industry is lacking in research &

development (R & D).The production capability is very low due to obsolete machinery &

technology.

Pakistan is facing high cost of production due to several factors like the hike in electricity

tariff, the increase in interest rate, energy crisis, devaluation of Pakistani rupee,

increasing cost of inputs, political instability, removal of subsidy & internal dispute. The

above all factor increase the cost of production which decreases the exports. Exports

receipts decrease from $ 10.2 B to $ 9.6 B. The global recession also hit badly the textile

industry. Double digit inflation also caused decrease in production in textile sector

which cause the increase in unemployment level.

On imposition of 16% FED on banking and insurance services such advance taxes would

play havoc with the growth of the industry in already existing adverse circumstances

and needed to be withdrawn immediately. The government should not withdraw sales

tax and withholding tax exemption on machinery and parts, as it would add cost besides

liquidity problem for the industry.

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COMPARISON WITH COUNTRIES

INDIATo begin with here is just a brief overview of the rankings between India and Pakistan for the different factors/drivers of the cost of doing business.

Now we’ll look into these factors simultaneously and have an idea of how much cost is needed or required to do this in each country.

India currently ranks much lower in terms of starting a business than in Pakistan which clearly shows us that setting up a business in Pakistan is much more feasible for any random person. The question is why is it feasible to do it in Pakistan?While setting up a standardized company in India, it requires nearly 100,000 INR in paid in minimum capital requirement along with a startup capital of 10 times GNI per capita. On the other hand setting up the same kind of a business in Pakistan requires 0 PKR in paid in minimum capital requirement along with a startup capital of 10 times GNI per capita which shows us how it is much more beneficial for a person to start a business in Pakistan rather than India and therefore India is ranked lower in this case.

Pakistan is ranked higher in terms of dealing with construction permits than in India because of the estimated cost associated with constructing a building in Pakistan currently is PKR 6,601,001 while in India the same cost would be around INR 4,496,273 which when converted into Pakistan ruppes would cost around PKR 7425795.40. In terms of registering a property in both countries, same costs are applied.

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INDIA PAKISTAN


IN TERMS OF INFLATION RATE:

It can be seen here that in terms of inflation rate, India has been able to obtain a much more sustainable position because of its huge population which results in less inflation. On the other hand, in Pakistan we can have a fair idea from the above graph that there has been a rise as well as a decline over the years which affects the cost of doing business in the country and is one of the most vital factors.

IN TERMS OF INTEREST RATES:

The graph above provides us with a clear picture of how both the countries over the years have been in terms of interest rates. We can see here that the interest rate in both the countries over the years have had ups and downs but recently Pakistan has a relative lower interest rate when compared with India.

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INDIA PAKISTAN


IN TERMS OF TAXES:

It’s clearly obvious from the figure to the right that in terms of taxes India would be more preferred while doing a business because of its los sales tax rate which means that there could be more profit and higher revenues.

Furthermore, here is another picture which shows us the Tax Revues generated in Pakistan and India comparatively. Tax Revenue is basically the amount the government receives from its citizens because of the tax rates.

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IN TERMS OF TRADING (IMPORTS, EXPORTS):

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Trading is usually required in each business today and the importance of trading has recently reached to its peak with the introduction of many new platforms from where it could happen. The two graphs given above shows us the cost of imports and exports in India and Pakistan in terms of US Dollars. Both the graphs are in favor of setting up a business in Pakistan because the cost is much lower in Pakistan when compared with India. India lags behind both in the cost to import and in cost to export.

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COST TO EXPORT COST TO IMPORT


BANGLADESHHere is just a brief overview of the rankings of Pakistan and Bangladesh in terms of doing business in their respective countries

Pakistan and Bangladesh are not much parted from each other in terms of setting up a new business with there being only 1 place in difference. To make things easier for tis citizens, the government in Bangladesh has launched various reforms like launching a full-fledged online business name clearance and registration process, eliminating the requirement to buy adhesive stamps and further enhancing the online registration system and automating the registration process and reducing the time required to obtain a trading license and to complete the tax and value added tax registration. While Pakistan only launched a single reform in the year 2010 which has already been mentioned in the report earlier.

IN TERMS OF INFLATION RATE:

It can be seen in the graphs posted above that the inflation rate in Pakistan is relatively a bit higher than in Bangladesh which tells us that the cost of doing any business in Pakistan would be slightly higher than doing the same business in Bangladesh.

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BANGLADESH PAKISTAN


IN TERMS OF INTEREST RATE:

The graph above provides us with a clear picture of how both the countries over the years have been in terms of interest rates. We can see here that the interest rate in both the countries over the years have had ups and downs but recently Pakistan has a relative lower interest rate when compared with Bangladesh.

IN TERMS OF TAXES:

In the Pie charts shown in the start of the comparison, we can see that Bangladesh ranks much higher than Pakistan in terms of paying taxes which shows that the people living there do not consider taxes a major threat for their business therefore are eligible enough to pay the taxes.

We can see that in this graph given above as well that sales tax rate in Bangladesh for quite some time now has been stable since the year 2006 which shows that the cost of doing any business is not much affected by the taxes. Bangladesh would be preferred while doing

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business over Pakistan in terms of taxes because of generating higher revenues and greater profits.

IN TERMS OF TRADING (IMPORTS, EXPORTS):

The pie-chart shown in the start shows us that Pakistan is ranked higher in terms of trading. This can be seen in the graphs given below:

It can clearly be seen in the graphs given above as well that Pakistan is by far much more better than Bangladesh in terms of importing or exporting goods with any country. The graphs given above shows the cost to import and export in terms of US Dollars.

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COST TO EXPORT COST TO IMPORT


EXCHANGE RATES:

The picture above shows the exchange rates of the currencies of each currency with US Dollars. We can see it in the graph that in terms of exchange rates Pakistan has the highest, with Bangladesh and India being just slightly less than Pakistan.

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