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SOMETHING is changing in the business environment in Pakistan. The latest survey of business confidence shows a drop amongst both foreign and local businesses, with the fall being particularly steep for local. The survey is conducted by the Overseas Investors Chamber of Commerce and Industry (OICCI) twice a year every year since June 2010.
Let’s start with a little history. When the surveys first began to be conducted they reported a negative confidence level, which rose slightly for foreign investors by February 2011 and returned to negative territory again. For local investors and businesses, the index remained strongly negative till August 2012. Then it spiked sharply after the election of 2013, by almost 30 basis points, remained flat till September 2014, and climbed up sharply again in March 2015. It reached a historic high in April 2016, owing in large measure to an improvement in the security situation, as well as stabilisation in the macroeconomy.
At first sight, the downswing looks like it might be easily reversible given a few policy actions by the government. There have been similar dips in the past, which were followed by large spikes six months later. But a slightly closer look shows there might be more.
For example, security remains a large concern, despite a couple of years of an improving environment. Even though 80pc of the respondents said they see an improvement in security, there remain persistent “doubts about the sustainability of such an environment”, following the incidents in Quetta (which occurred while the survey was being undertaken), followed by the attack on the Shah Noorani shrine in Hub.
A growing number of business leaders are beginning to say that the government is unresponsive to the concerns of domestic industry.
Second, “majority of the respondents did not agree that the energy situation will be resolved by mid-2018” as promised by the government, and were apprehensive that the forthcoming winter will be a bad one for Punjab-based industry due to gas curtailment.
Third, declining exports factored seriously in this survey, even though exports have been declining for over two years now while previous surveys reported an uptick in confidence.
None of these are likely to be reversed soon, so are we seeing a turning of the tide? The past two years have been marked by a steady improvement in the economic situation, accompanied by warnings that the improvement is superficial and cannot last long in the absence of deeper, structural reforms. These warnings have been sounded by the State Bank and the IMF, as well as independent commentators and economists.
It was expected, therefore, that sooner or later the tide will begin to turn if deeper reforms are not undertaken soon. The slackening of business confidence as reported by the OICCI may or may not be that inflection point (the next survey results will reveal more if the trend continues), but it definitely shows that problems are brewing within the economy, and they’re coming in earlier than expected.
The story is actually similar if one speaks with other leaders from the business community. The same day that the newspapers carried the story about the OICCI survey, for instance, the country’s largest business group — All Pakistan Textile Mill-owners Association — released a statement that imported regasified LNG was proving too costly and rendering their products uncompetitive in the world market. They pointed out a differential in energy price within the country, where producers in Punjab were actually paying more than their counterparts in Karachi, as well as internationally vis-à-vis their competitors, saying that this differential “is widening day by day”.
Some of that might be hyperbole, and the provincial angle might just be intra-business community politics, but the core argument that they advanced, that imported gas cost them almost 30pc more than domestic gas, actually highlights some of the problems involved in turning an improving macroeconomic situation into a sustainable growth story.
Recall that imported LNG was the government’s answer to growing gas shortages at home. But all the while the government worked at getting a long-term supply contract in place, it ignored one key element in the mix: the price differential between imported and domestic gas. To really make imported gas workable in Pakistan, it will be necessary to close the price difference with domestic gas, which means raising the price at home and phasing out the subsidy. And this is a step that the government is unwilling to take due to its political ramifications.
More significantly, a growing number of business leaders are beginning to say the same thing about this government: that they are aloof and heavily focused on the Chinese projects under CPEC and largely unresponsive to the concerns of domestic industry. From pharmaceuticals to textiles, from autos to agriculture, everybody now says the government is making hay under the Chinese sun even as exports languish, agriculture slumps and business confidence drops.
The OICCI has called for a “structured dialogue” with the government where they agree to meet on a regular schedule, perhaps twice a year, to hash out specific issues and ensure policy continuity and consensus. Other business bodies have to resort to news conferences and other media contacts to try and get their point across. The growing gap between business stakeholders and government makes for a deteriorating environment, under which lifting growth is going to be difficult.
For their part, the business community has not been able to think beyond their very specific vested interests, which inhibits the ability of government to engage with them. A few of the larger business entities, represented by the likes of the OICCI or the Pakistan Business Council are an exception, but the vast majority of business leaders have not been able to package their feedback for the government in a larger vision for the economy. If they can demonstrate their ability to look beyond the narrow confines of their day-to-day interests, they could strengthen their case for a place at the table when policy decisions are hashed out.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, November 24th, 2016
