CURRENT PROBLEMS OF CORPORATE SECTOR OF

PAKISTAN

Pakistani Corporate sector is reporting good profitability, despite the economic

slowdown and a spike in inflation. This is indicated by the corporate results of a wide
variety of businesses and industry for the April-June period of 2010. Profits were up 34
per cent compared to the same quarter of 2009. But will the profitability stay on that
track during the current 2011? This caution will have to be taken note of in view of the
flood devastation that started hitting Pakistan July 28 and its immediate and after
effects are still to be fully faced.

The historically worst floods left more than 20 million people homeless, up to 20 per
cent agricultural crops worth $ 19 billion were destroyed, and extensively damaging
communications, telecommunications, schools and hospitals, and rest of the
infrastructure. The GDP growth projection for 2011 has been slashed to 2.5 per cent by
IMF, but independent economists say it will be much less than that. Inflation is
projected in the range of 13-15 per cent by the State Bank of Pakistan (SB) the central
bank, but economists put it at more than 20 per cent.

The past year saw the corporate profitability ‘generally on the rise,” JS Global says.
Most sectors ranging from oil and gas to autos, and power generation to textiles
reported good profits. Textiles have not been doing well in recent years, but its profits
are now moving up. Analysis indicates that recovery in well-head gas prices and higher
production rose the oil and gas earnings. Oil and gas exploration companies reported
earnings of Rs24.990 billion up 33 per cent from Rs18.795 billion in the comparable
period.
Oil marketing companies reported 24 per cent shaded earnings of Rs3.104 billion,
compared to Rs4.075 billion, due to heavier taxation and inventory losses.

Power generation sector made a net aggregate profit of Rs2.636 billion which is 14 per
cent higher than its previous total of Rs2.312 billion. Fertilizer industry margins
improved as its product prices rose. Profits rose to Rs4.748 billion from Rs2.693
billion.

Autos saw profits rise due to larger unit sales, higher prices and cheaper raw material
like steel. Earnings of its 20 units rose to Rs1.566 billion, from Rs889 million in the
comparable period. The previously slow moving textile industry saw its aggregate profit
going up to Rs1 billion, as against Rs168 million in the comparable period. The sector
saw a 559 per cent growth, because it has low comparable base previously.

Bank profitability improved only seven per cent year-on-year as a result of “heavy
provisioning” of Rs1.5 billion for non-performing loans by the NIB Bank. But Bank other
than NIB, together, reported a 24 per cent growth y-o-y. Cement performed poorly,
showing 20 per cent losses, totaling Rs571 million, as against a profit of Rs1.508 billion
in the comparable period. Reduced selling prices of cement, due to competition, was
the reason as the formidable cement cartel broke up.

Pakistan economy has been heavily hitted by slow down and down turn prevailing
globally and small and medium size industries are badly affected due to it as compared
with corporate sector which have better access to financial institutions. Due to huge
amount of financing involved, Bank in Pakistan are very much accommodating towards
corporate customers. Likewise Government is also giving more importance to
Corporate entities. On the other hand small and medium size businesses and industries
are dependent on corporate sector to a great extent and does not possess enough
shock absorbers against higher cost of production and like factors. Given on next page
are some of the main problems/observation pertaining to SME sector in Pakistan.
• Severe electricity load shedding and disconnection of Sui Gas supply for
industries in winter season is the biggest problem faced by SME sector in the
country. Small and medium size manufacturing units are badly affected to the
power crises as they do not have alternative resources as corporate sector have,
like their own power generation houses. Due to power crises prevailing for last
many years, unemployment in the country has also increased to considerable
extent. In majority of sectors work force/labor works on daily wages basis and in
constant power break downs they are deprived of even basic necessities of life
which is least desirable in any civilized society. Today Load Shedding has
become major problem of Pakistan and small and medium sized
industries/traders are suffering to worst extent. In order to save SME sector and
Industrial Sector as a whole which is main contributor of production of goods and
services in the country State Bank of Pakistan should take matter with the
Government of Pakistan for taking necessary measures enhancing power
generation capacity in the country as well as exploration of cheaper means of
electricity generation within shortest span of time.
• Presently finances classification criteria of SBP need major revision due to ailing
health of SME sector in Pakistan. Financial relief be given to the industries
suffering from crises and down turn. In this context SME Prudential Regulations
may be got reviewed jointly in consultation with the representatives of the trade
and industry to provide relief to industrial sectors suffering from deep crises.
• Increasing trend in the cost of inputs has become common practice in our
Country due to which SME Industries cannot compete in the markets. Due to
increase in prices of inputs used in manufacturing process like Electricity, Sui
Gas etc, our SME sector is not able to compete/sell their products at higher
prices due to multiplied cost of production. On the other hand imported/smuggled
goods are commonly available in the markets at much cheaper prices. Chinese
Goods are one of the best examples, which are available throughout the country
at much lower prices. Today Chinese goods have become major threat to
Pakistani economy especially to industries operating on small or medium scale.
In Pakistan costs of production are much higher. Although it is in the knowledge
 of the Policy makers, but they are paying deaf ear to such problems which is
very much unfortunate. SBP should take up these issues with GoP/Policy
Makers and prevail upon them to chalk out course of action & strategy to coup
with this situation.
• Deteriorating political, law and order situation in the Country is one of the major
reason of Industrial down turn. Industrial activity cannot flourish in an
atmosphere of disturbances and fear. Sincere corrective measures
• Textile crisis is becoming severe in the Country due to over all recession and
slow down of economies around the globe. Our Textile sector is heavily export
oriented and International sales in Textile Markets suffered a lot as a
consequence of which manufacturer and traders who supply goods & services to
exporters have suffered heavy losses. Such provider of Good & Services to
direct exporters are usually operating at small or medium scale and they remains
at the mercy of export houses. Power loom sector is worst example of such a
hard hit from direct exporters, majority of which enjoys status of Corporate
Entities. According to the norms of trade small scale suppliers of grey fabrics
provide woven fabrics to exporters without any documented arrangements
enforceable at law. They work on “Kachee Parchi” system and have no security
regarding their debts with exporters. SBP should interfere to develop a system
educating to business community and simultaneously forming a system for
documenting such transactions.
• Textile weaving sector has been hit due to other several reasons. In the past
many of SME Weaving Units worked on orders with cost much higher than price
in order to survive in the market. Presently they are unable to carry on weaving
process as price offered is much higher than cost of production. The main
reason behind it is extremely higher rates of electricity in the country. Labor
crises are also becoming prominent due to all above reasons. For example a
Factory previously working 24 hours is operating only for 12 hours resulting in
lower production. On the other hand permanent & temporary labor costs remains
the same. Daily wagers are paid inspire of the shutdown due to power in order to
retain them on the payroll.
 • Pakistan is a country where policies are rapidly changed even in days and
weeks. In the past, aim of the monetary was credit expansion. All types of
lending were made at very nominal rates. Quite liberal atmosphere of lending
was created where purpose of finance was not properly monitored at Banks level
as well as SBP has also shown lenient view of the situation in the past. In recent
past we have observed vertical shift in the monetary policy and KIBOR rates
along-with spread of the Banks have been increased to multiple extent.
Considerable amount of finances obtained at lower rates were invested in real
estate sector and purpose of finance defeated totally. Such types of entities are
now facing deep crises, firstly due to slump in real estate sector and secondly
due to much higher mark up rates of the Banks. Such types of borrowers are in
deep trouble and SBP in collaboration with Banks and Representatives of
Industry & Trade should sort out way out to come of the Problems.
• SBP and institutions who are stake holders should come forward at gross root
level and have direct interaction with ailing SME entrepreneurs to have deep and
true insight of the problems faced by the people who are operating all over the
country who are indigenous entrepreneurs and real builders of our economy,
who are termed as SMEs now a days.

So for almost all sectors, except for a couple of them, has been good. But what will
2011 bring for corporate ‘How for the economy will reward them, What will be the
aftermath of the huge floods translate into for the economy and the individual
businesses and industry’ Can there be any demand side problems due to reduced
purchasing power of the flood-hit people? On what scale the government, and more
prominently, the NGO’s will undertake reconstruction of houses and infrastructure that
will generate demand for all types of construction materials? Most of this domestic
effort, coupled with help from the foreign donors and investors will determine the scale
at which the economy will move up. It will also indicate the future profitability of
corporate, businesses and industry.