Oct 1 - 7, 20

Despite general perception of growth in turnover and profitability, as suggested by recent corporate results, business sentiment dipped by 9 percent over the past six months due to growing concerns related to energy shortages, worsening security and inflation.

This was revealed in the 6th Wave Business Confidence Index (BCI) survey undertaken by the Overseas Investors Chamber of Commerce and Industry (OICCI) between June and August 2012. The survey is largely attitudinal and carried out by-annually to evaluate business sentiment.

Business Confidence In Negative Territory
The Confidence Index is the net of positive and negative responses
(Wave 6: Negative Response 47% - Positive Response 13% = 34%, Remaining 40% were neutral)

Compared to the 5th Wave BCI survey, recent results show a further decline from negative 25 to negative 34 percent. The sharp drop in business confidence is led mainly by poor sentiments of the retail sector where the BCI score went down from negative 29 to negative 48 percent and of the manufacturing sector which also declined significantly from negative 23 to negative 37 percent. This decline was partially offset by the relatively positive outlook of the service sector where BCI improved by 7 percent from negative 24 to negative 17 percent.

Apart from increase in negativity, the 6th wave also records a shift in opinion of respondents from positive to neutral zone, reflected in the decline of the overall business confidence score. Interpreting the feedback, it appears that business people have now lowered their expectations from the authorities.

The survey reveals sentiments of respondents on various aspects related to business operations in Pakistan and their views on macroeconomic matters. Some of the highlights are given below:

* In the past six months, energy crisis/ load shedding has been cited as the main factor causing restlessness among the business community, followed by continuing deterioration in the law & order situation, high inflation, governance issues and high cost of doing business.

* The above factors have resulted in a decline in expectations of business expansion from 34 percent in November 2011 to 19 percent in August 2012. However, in respect of plans for the next six months, 16 percent of respondents expect to expand business and have a positive outlook in increase in sales, profits and return on investment.

* Of these, the service sector has the highest positive outlook at 33 percent for business expansion, within which finance is the most optimistic sub-sector. In the manufacturing sub-sectors, the auto industry is the most optimistic.

* A notable feature of the survey is that the perception on government policies has improved by 12 percent from the previous survey

* Challenges for the next six months in order of importance are load Shedding (39 percent) high inflation (26 percent), followed by security issues (23 percent) and poor government policies (18 percent).

* The business community is of the opinion that overall global economic situation improved in the current survey period. However, this does not seem to be reflected in the response with respect to business situation in Pakistan, where the BCI shows further negativity, both in the respondents' specific industry as well as their own organization.

* Although the latest survey shows a decline in the number of respondents with positive outlook for the economy, there is significant variation in the opinion pattern between various cities. The reduction in positive outlook and increase in negativity is much more pronounced in Peshawar and Quetta, followed by Islamabad/Rawalpindi and Faisalabad, as compared to the declining sentiments in Karachi, Lahore and Multan.

According to the survey, leading challenges for business entities during the last six months were load shedding/ energy crisis (35 percent), followed by corruption (24 percent) and increase in inflation (20 percent).

Decline has been noted in capital investment plans for the next six months, which has fallen from 69 percent in the previous survey to 55 percent in the current survey. The respondents have also indicated no plan to increase employment levels in their business during next six months.

Upon being queried more specifically, approximately 10 percent of respondents have indicated planned capital expenditure for capacity and/or productivity expansion. A small percentage of this capital expenditure is being considered for new facility, renovation and improvement in quality.

The biggest factor impacting business in next six months is expected to be inflation. This is followed by fuel prices, uncertain security environment, government policies and rupee devaluation.

A majority of all business sector entities consider that Most Favoured Nation (MFN) status to India and liberal Afghan transit trade will have an adverse effect on business. A very high proportion of retail business entities (48 percent) consider MFN status to India will have a negative impact on their business. Only 7 percent of the respondents consider that MFN status to India will result in a positive impact on business.

Volatile law and order situation has been cited as the main reason for fast-declining local and Foreign Direct Investment (FDI) in Pakistan. Ineffective governance, energy shortage and overall cost of doing business have been given as other key reasons.

Overall, business entities of Karachi followed by Islamabad and Lahore are the main victims of law and order issues. These include street crimes, extortion, kidnapping for ransom, threats and expatriate security.

60 to 67 percent of respondents consider Federal Budget 2012 -13 did not have any positive impact on their business or the overall economy, whereas only 6 percent feel there was a positive impact. One third of the respondents believe the 2012-13 budget to have a negative impact on their business and the overall economy.

Strong opposition has been expressed by majority of business sector entities about stamp duty being demanded in recent months on various procurement instruments, the levy of Sindh Development and Maintenance Infrastructure cess, gradual devaluation of rupee and increasing level of extortion money demanded from the trade.

The BCI is the only survey which measures business sentiment at equal time intervals and provides a valuable gauge for policy makers as well as all stakeholders in the country's economy.