THE BUSINESS ENVIRONMENT - ARE WE REALLY DOOMED?

SCENARIO IS NOT SO BLEAK

SHAMSUL GHANI (shams_ghani@hotmil.com)
Dec 01 - 07, 2008

The news on the business horizon remains depressing. Short and expensive power and gas supplies, squeezed and high cost bank credit, dearer imported raw material in the backdrop of a sliding rupee, bashful foreign investment and worsening law and order situation are the dilemmas that choke Pakistan's business and industrial activities.

Historically high inflation giving rise to demand for higher wages and salaries on one hand and job-cut pressures created by the impending economic slowdown on the other stare in the face of a country already bogged down by the wave of terrorism.

The fiscal, monetary and external account pressures have combined together to spell doom and gloom. Yesteryear's burgeoning economy finds itself suddenly entrenched in the quagmire of recession. More than 25,000 jobs are reported to be lost during the last three months. The global financial meltdown has forced the foreign banks, financial institutions and insurance companies operating in Pakistan to resort to massive layoffs. The literally dysfunctional stock market is also a threat to the already worsened employment situation.

Our commitment to IMF of not using public funds to support stock market also dampens the prospects of an early stock market revival. The present policy bank rate of 15 per cent is subject to a possible further notch-up of 150 basis points early next year. IMF has given us a target to bring down the inflation rate to 6 per cent by 2010. While it is a tough ask it gives State Bank a reason to further jack up the bank rate the ongoing debate on the effectiveness of a higher bank rate to control inflation notwithstanding.

To somewhat quantify the impact of worsening business environment, the perception survey carried out by the Overseas Investors Chambers of Commerce and Industry, OICCI has reported eighteen foreign companies planning to close down their Pakistan operations for security reasons. Most of these companies belong to the pharmaceutical sector wherein some closures have already taken place. As reported in a Dawn article, "Their main complaint is that they are not allowed to increase the price of their products". This might appear anomalous as two entirely different reasons have been cited for the prospective closure of business. Maybe, higher profits are a compensating factor for the high security risk.

According to the survey, more than 60 companies have shelved their plans to go for market expansion. Besides law and order concerns, energy crisis, lethargic government-policy-implementation and higher corporate taxes are the root causes contributing to foreign companies' disenchantment. The ratio of foreign companies detracted by the security concerns has increased in 2008 in comparison to 2007. This poses a serious question.

In which areas the new set up has outperformed the previous government. It is economy, not for sure. The already under-performing manufacturing sector is likely to be further affected by the hampered flow of industrial credit and mounting cost of doing business in the security deficient environment. From 19 per cent in 2004-05, the sector growth has drastically come down to 5.4 per cent during the previous fiscal year. The first quarter of the current fiscal year has seen a comparative drop of 6.2 per cent. The daily six to eight hour power-shutdown has been instrumental in bringing the industrial productivity down. During the said quarter, the productivity of power looms dropped by 64 per cent. In the electric appliances sector, the productivity of refrigerators dropped by 1.6 per cent while for deep freezers and air conditioners it decreased by 29 and 23 per cent respectively.

NOT SO BLEAK!

Caught in the financial meltdown and recessive economic downturn, most of the world economies have embarked on interest rate cuts and increased government spending to give wheels to the halted growth process. We were already on this course till 2006-07 and would have been in the mainstream by now to benefit from the economic formula of the bigger economies.

Unfortunately, within the shortest possible time we placed ourselves in a situation that totally changed our imperatives. A steep rise in the policy rate, reduced government spending, a truncated PSDP, and a dormant stock market are what the doctor (IMF) prescribes. These measures are now the only option for our survival - and we asked for them. Ironically, it is a homegrown economic package that the IMF has simply endorsed.

While the IMF package has drawn varying analyses, the fact remains that in the given circumstance, it was the only option left. Instead of cherishing the past, we must move forward now and focus on our positives instead of lamenting the negatives. Let's briefly recall the positives.

According to the said OICCI survey, a good number of foreign investors have expressed their confidence in the buoyant disposition of our economy and have resolved to go ahead with their expansion plans. More than 60 per cent foreign companies responding to the survey have decided not to apply cuts to their future investment outlays. HUBCO is one of them, planning to go ahead with its two $600 million power projects.

Many business circles in spite of the bleak economic scenario derive strength from the recently concluded IMF deal. They are of the view that the coming two years will see Pakistan moving in the right direction. Chinese, Japanese, Indian and UAE investors still consider Pakistan a promising economy with openings in many areas of mutual interest. Setting aside the decades-old political mistrust, India and Pakistan can become good business partners. China and Japan the two cash-rich Asian countries have ample interests in Pakistan's economy. Through some realistic and win-win economic policies supported by the fast track implementation, they can be invited to become partners in a number of attractive projects in the energy and agriculture sectors. President's recent visit to UAE has opened doors to many economic possibilities and investment opportunities in agriculture, energy, construction and infrastructure development projects. So, the scenario is not as bleak as it was in 1998 when we were breathing under global sanctions. The world is comparatively in a better mood. It now depends on how we gear up ourselves to take the situation with a positive frame of mind.