Sunday, July 31, 2011

Cost of doing business in Pakistan

For every business to survive and grow it is very necessary for it to remain competitive vis-a-vis its competiors all around the globe and against the products that are substitute of its products . In order to remain in the field they have to check and try to reduce their cost of doing business.
Business environment in Pakistan for business entities has been very challenging for last three years and it may continue for a couple of more years as cost of doing business has increased due to so many factors. It is feared that some more businesses on the edge may close down . This  is the case especially for small businesses that are not running on economies of scale and do not have  competitive edge of any kind.
The challenges are manifold.  Electricity is scarce and there is a strong pressure of the masses on a democratic government to divert most of this scarce resource to households as the heat weave season is at its full swing. Most part of the country is one of the hottest habitable areas of the world.The shortfall is more than 5000 mw in summer while only 3200 mw was added to the national grid during the tenure of the present government.
 Secondly price per unit has been increased by the govt for all end consumers by about 24% and 2% increase in expected every month during this financial year. Govt will have to do this firstly to meet IMF conditionality to  reduce subsidies ,secondly to keep budget deficit in check which is currently at 6.2% of GDP, thirdly to address the circular debt as cost of production of electricity has increased a lot due to tilt towards thermal production. Cheap production in a substantial quantity from Bash Dam will come on line after 6 to 7 years.
An other big problem for the industries that has increased their cost of production is gas curtailment and increase in rate of gas. Like electricity gas load shedding has also resulted in loss of working hours and the costly use of alternative fuels wherever possible. Businesses have to bear fixed costs during the closure of the businesses due to load sheddings.
The third problem for them is high interest rates, though SBP has recently decreased discount rate by 50 basis points but it still stands at 13.5% which is very high. Govt must try to reduce its buget deficit so that infaltion chould be checked that will make room for SBP to bring down interest rates.

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