Contours of a New Industrial Policy

Pakistan is deindustrializing – the contribution of manufacturing at 12.1% in 2018 is down from a high of 17.5% in 2005. This decline in share of manufacturing has seen Pakistan’s share of global exports staying flat while those of competitor countries have seen large increases.

Manufacturing (% of GDP)
Pakistan's Share in World Exports (%)

A lack of focus on industry is seeing Pakistan lag other South Asian countries in growth in manufacturing and composition of manufactured goods in exports.

Growth of Manufacturing (%)
Manufactured Goods as % of Exports

Without significant intervention to reverse this trend of deindustrialization, Pakistan will continue to be plagued by high unemployment and a low export base as the country continues to focus on either commodities, intermediate goods or low value added finished products. The current account deficit will grow if we continue to import sophisticated consumer products for which a manufacturing base no longer exists in the country, nor there appears to be a plan to create, to leverage on a large domestic market of 200 million + consumers.

The Pakistan Business Council (PBC) has prepared this directional paper – “Contours of a New Industrial Policy” with the intent to highlight the key policy thrusts and focus areas which the government  needs to consider as it prepares a new and long overdue industrial policy for Pakistan. The new industrial policy in the PBC’s views should revolve around a “Make-in-Pakistan” theme and be driven by three key success metrics: a) creation of incremental jobs, b) an increase in value-added exports, and c) import substitution.

The key policy enablers required to ensure that a new industrial policy achieves its targeted goals include:

Fiscal Policy Reforms: The tax burden needs to be evenly spread out with all sectors paying their due share. Manufacturing with a 12.1% share of the GDP cannot contribute 58% to the tax collection. Fiscal policy making should be separated from tax administration. Taxes should be on profits as opposed to any other proxies of profit, further the number of taxes need to be reduced and multiplicity of tax authorities be rationalized through the creation of a National Tax Authority. Tax rates need to be regionally competitive and brought down significantly to ensure that there is a level playing field between the formal and informal sectors.

Tariff Reforms & Strengthening of the NTC: A cascading tariff structure for imports where tariffs are highest on finished products domestically produced while being lowest on raw materials and intermediate products not available locally. This cascading tariff structure is essential if Pakistan is to become part of global value chains. Similarly, the National Tariff Commission has to take a more aggressive approach when it comes to protecting domestic industry, it needs to take inspiration from similar institutions in India, Indonesia and Turkey.

A Pragmatic Approach to Trade Agreements: A moratorium on the signing of new trade agreements. All existing trade agreements need to be renegotiated with the aim of ensuring that trade agreements, current and future lead to preferential access for value-added items as opposed to commodities or intermediate inputs. In addition, the impact on tax revenues and jobs also needs to accessed.

Foreign Direct Investments: Policy should focus on import substitution, exports, technology, capital and risk-intensive sectors rather than on short payback, domestic consumption oriented industries that reap the demographic dividend of Pakistan’s large and growing middle class.

Corporatization & Consolidation: The formation of corporates needs to be promoted as it improves the governance standards and accountability. Companies should not be taxed at rates higher than those applicable on individuals and associations of persons. Also companies should be encouraged to grow in scale through consolidation using tools such as Holding Companies and Group Relief. Anomalies in the Companies Act 2017 need to be addressed.

A Trained and Productive Workforce: Skills need to be developed through public-private partnerships. Businesses must be allowed to retain and invest the WWF & WPPF balance (after distribution to labor) to focus on upgrading skills. A common national labor policy that benchmarks competitor countries needs to be formulated.

The Small and Medium Enterprises: The Small and Medium Enterprises (SMEs) are the engine of growth for employment, whereas larger businesses are more capital intensive. The transaction costs involved in embedding SMEs in the value chains of larger businesses especially those in the export sectors needs to be addressed. The banking sector needs to be less risk-averse to lending to the SMEs and ways need to be found to make credit available to SMEs who supply large exporters.

Specific Focus Industries to Promote Jobs, Value-added Exports & Import Substitution

  • Textiles
  • Agriculture
  • Engineering – Iron & Steel
  • Integrated Petro-Chemicals Complex
  • IT & Business Process Outsourcing (BPO)
  • Pharmaceuticals
  • Oil & Gas Sector
  • Other Sectors including ceramics, footwear, tires, mining & furniture

About PBC

The Pakistan Business Council (PBC) is a private sector business policy advocacy forum composed of Pakistan’s largest businesses / groups including multinationals that have significant investment in and a long-term commitment to the growth of Pakistan. Members’ turnover represents every ninth Rupee of Pakistan’s GDP and together the members contribute 25% of the annual tax revenues and exports. More information about the PBC can be found on our website: www.pbc.org.pk

Download