OPINION
Uzair Younus
investors with an environment where volatility is the exception, not the norm. For investors looking to set up manufacturing units, such volatility is unacceptable. Think of a world in which there are only two mobile phone manufacturers, and one is deciding to set up an assembly unit in Pakistan. When developing the financial models to figure out the exnother day another industry raising its voice about pected returns and profitability of the said unit, the manufacturer makes issues it is facing with regards to doing business a set of assumptions on a whole host of issues, including operating in Pakistan. It is a common enough trope - induscapacity, cost of electricity, currency value, and taxation rates. tries complaining and asking the government to fix Based on these assumptions, the manufacturer develops comthings for them. While most of the time it is just fort around the expected rate of return of the said unit, which in most industry associations cribbing, on rare occasions cases has a lifespan of over 5 years. What this means is that should the complaints point towards deeper issues that we may have. This the assumptions prove to be wrong in the coming years, or should the time around it is the Mobile Phone Importers and Manufacturers government change its policy environment related to things such as tax Association (MPIMA), a group that represents significant players in rates or cost of power, the financial viability of the entire investment is the Pakistani market. put at risk. Their concerns revolve around measures being taken by the This said investor, when looking at Pakistan, would of course look country to save foreign currency, which are scarce and are leading to at the sovereign’s behavior in the past. Based on this analysis, an astute sustained depreciation of the rupee. The issues being faced by the ininvestor would conclude that the Pakistani government cannot be taken dustry are yet another exhibit of why Pakistan continues to struggle at its word, meaning that the investor must bake in a high-risk premium when it comes to attracting investment, both domestic and foreign, when assessing the viability of an investment. into new manufacturing sectors. Now assume that despite these issues, one of the two investors The issues identified by MPIMA are as follows: a hundred moves ahead and sets up shop in Pakistan. It quickly runs into the percent cash margin on imports of mobile phone kits into Pakistan; issues identified by MPIMA which are mentioned above, meaning that increased red tape from the State Bank of Pakistan for import of its operations are not as profitable as they were expected to be. In such goods by the industry; failure to issue an SRO related to an approved a scenario, if the issues remain unresolved, this investor is likely to cut duty drawback scheme; and an increase in research and development production, delay investments in further expansion, and plan to divest allowance that is comparable to peer countries such as India and its operations in the coming months and years. The second manufacVietnam. turer, who may have been looking at Pakistan following the entry of its While the merits of the above issues can and should be debated peer into the country, is also scared away, given that the first mover in by folks much more knowledgeable than this author, it is important Pakistan is facing an uncertain and volatile policy and macroeconomic to recognize that the cash margin imposition and increased red tape environment. around import approvals is a result of macroeconomic instability the Given this outcome, the mobile phone manufacturing industry country is experiencing at this point in time. in Pakistan is likely to face a premature death or face stagnation. What Additionally, delays in issuing an SRO, following an agreement, ends up developing is a stunted sector where the investor is unlikely to is also indicative of bureaucratic hurdles being created to find a way reinvest its profits to improve capabilities and manufacture next-generato reduce the pressure on the fiscal balance. Both are a result of a tion mobile phones or their components. consistent failure, across governments over the decades, to provide The ongoing experience of mobile phone manufacturers in Pakistan is a perfect case study of how and why foreign investors look at other jurisdictions, while domestic investors either siphon off their wealth abroad or stash it into Plotistan. After all, why bother with all this uncertainty and drama when one can buy a few plots, pay literally no taxes on profits, and declare the wealth gains by paying a pittance when The writer is Director of the next real estate amnesty is declared? the Pakistan Initiative Some may argue that mobile phone manufacturers are not manufacturing phones in Pakistan, they are at the Atlantic Council, a just assembling them, meaning that there is little value addition in the country. Washington D.C.-based This is a fair argument, but one must recognize that any new industry begins in this way. It is only think tank, and host of the through the right incentives and stability that investors grow their local capacity and catalyze the developpodcast Pakistonomy. He ment of an ecosystem. Such things do not happen overnight, and they are surely not going to happen when tweets @uzairyounus. first-movers are left dealing with a sovereign that is neither able to provide macroeconomic stability nor interested in honoring its commitments.
What imperils the mobile phone industry?
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