Pakistan economy is bouncing back; so is the so-called business confidence in terms of new orders, spending, jobs and investments. The Overseas Investors Chamber of Commerce and Industry (OICCI) reported a dramatic upswing in business confidence days before the ruling Pakistan Tehreek-i-Insaf showcased its achievements in three years of its rule.

The OICCI Business Confidence Index (BCI) again moved back into positive territory after slightly more than three years. The index was last seen at its current level before the 2018 election. The rebound in the BCI is said to have posted an across-the-board increase, rising from its lowest level touched in June 2020 in the middle of the countrywide movement restrictions enforced to curb the spread of the Covid-19 outbreak.

Ironically, Pakistan had lowered down by 14.4 points on the Institute of Management Account (IMA) Global Economic Confidence Survey (GECS) in the second quarter of 2021 to June while the world reported a buoyant return to economic stability. According to the latest edition of the Association of Chartered Certified Accountants (ACCA) and IMA Global Economic Confidence Survey (GECS), the confidence index of Pakistan had dropped owing to the rising Covid-19 infections and low level of vaccination. Orders were also reported to have declined in Pakistan from 9.1 in Q1 to -17.4 in Q2.

The slightest change in the macroeconomic environment, security conditions, and monetary and fiscal policies could hit business confidence and force the investors to roll back their investment and expansion plans

The increase in the OICCI business confidence index is fueled mainly by negative interest rates being kept at 7 per cent since June last year and a large monetary injection by the State Bank of Pakistan (SBP) in the shape of long-term, subsidised finance, deferment and restructuring of loans, and disbursement of cheap loans to companies for payment of salaries to protect the businesses and jobs from the pandemic’s negative impacts. The SBP’s initiatives were followed by a massive tax amnesty given under the prime minister’s package for injecting fresh liquidity in the housing and real estate sector to boost the investors’ confidence for early economic recovery.

More recently, the business-friendly policies and a large fiscal stimulus announced in the budget for the present fiscal to rapidly grow the economy, and create jobs ahead of the next election have also contributed to improved business optimism. That the survey result shows a bigger turnaround in the confidence of the foreign investors operating in the country means the larger firms have benefitted the most from monetary and fiscal injections because of their access to and linkages with the financial institutions.

The improvement in business confidence is indeed a welcome development. Barring a period between September 2014 and May 2018, when the country saw massive Chinese loans pour in the large-scale transport and power infrastructure projects under the multi-billion-dollar China-Pakistan Economic Corridor initiative, the OICCI confidence index has mostly remained in negative territory since June 2010.

Business confidence can be fleeting in the sense that the businesspeople would report a higher faith in the economy when it is growing, and their sales revenues are increasing. The optimism reflected by the OICCI confidence survey is mostly driven by a positive perception of economic recovery in the short term owing to pro-growth fiscal policies being pursued by the government and the central bank. So what happens in the coming months will largely hinge on how gradually the SBP shifts to a tighter monetary policy stance and how long the government can afford to extend fiscal support to businesses.

In spite of a positive turn, most investors are flagging uncertainties like potential insecurity spillover from Afghanistan, exchange rate volatility, high inflation, growth in the current account deficit, the future of the International Monetary Fund programme and resurgence as putting pressure on the business environment going forward. As seen in the past, the slightest change in the macroeconomic environment, security conditions, and monetary and fiscal policies could hit business confidence and force the investors to roll back their investment and expansion plans. The prospects of a strong economic rebound have raised fears about the possibility of a sustained increase in inflation and a wider current account deficit. The rupee has already depreciated drastically from 152.28 a dollar to around 166 against all predictions of stabilising at close to 160.

So far the government appears to have succeeded in building positive business sentiment in the country through aggressive fiscal and monetary interventions despite a challenging macroeconomic environment but the business optimism cannot sustain long unless the businesses build resilience and keep rebounding even when this support is withdrawn.

Published in Dawn, The Business and Finance Weekly, August 30th, 2021