The year 2021 was one of Covid variants and supply chain chaos across the globe but the economic story of Pakistan during the year was dominated by a swift recovery from the pandemic, and, of course, soaring inflation.
It was a year when the industry made unprecedented profits as the Imran Khan government ditched the stabilisation policies of the International Monetary Fund (IMF) to pursue procyclical fiscal and monetary policies for building on this early recovery in a bid to improve its electoral chances in 2023.
Consequently, external buffer built from generous ‘assistance’ from multilateral organisations to fight the adverse economic impacts of the pandemic, as well as loans raised from global markets was used to promote swift growth only to return into the folds of the IMF towards the end of the year for stabilising the economy as, in the words of the central bank, the growth ‘exceeded expectations’ and the country ran into its usual balance of payment crisis.
The question now is: can the economy maintain its momentum and the industry continue to invest in capacity expansions and rake in the same kind of profits as we enter into 2022? The majority of the industry representatives this correspondent spoke with were of the view that Pakistan’s re-entry into the IMF funding programme to shore up its balance of payments will mean drastic tapering of its fiscal and monetary stimulus.
The interest rates have already been hiked by 2.75 basis points to 9.75 per cent to contain money supply in the market to support the rupee and moderate import demand growth as the government raised electricity and petroleum prices, and prepared itself to end the tax exemptions and cut its development and current expenditure putting the economy back into stabilisation gear from growth mode.
The industry is also worried about the uneven recovery, with the low- and middle-income households witnessing their purchasing power eroding as the government-State Bank of Pakistan combo implemented their stimulus in complete disregard of already entrenched inflation in the economy.
“In 2021, we saw growth return but it was lopsided because it increased income inequality in the country. The industry and the exporters made enormous profits during the year while the low- and middle-income segments of population suffered greatly because of the rising costs of living and income losses,” argues Adil Mahmood, the former president of the Sheikhupura Chamber of Commerce and Industry (SCCI). “The situation is going to worsen for the majority of people as we return into the folds of the IMF and make tough fiscal adjustments. It will be a miracle if the government is able to control inflation,” he warns.
According to him, the country cannot achieve sustainable growth without policy consistency. “The IMF dollars are but a short term injection; we need to industrialise fast and follow long term policies if we want to grow sustainably.” The companies forming the Pakistan Stock Exchange (PSX) benchmark KSE-100 index reported record profits of Rs875 billion during 2020-21.
Meher Kashif, a former senior vice president of the Lahore Chamber of Commerce and Industry (LCCI), says 2021 was a year of recovery from the once-in-a-century pandemic shock. “The economy did recover but we saw a lot of confusion in the officialdom. The government was not sure what policies to pursue and shifted from stabilisation to growth to stabilisation. In between we saw unemployment rise, inflation soar, cost of production increase and families becoming food insecure. The common people did not receive the fruit of growth. Businesses made massive money but it did not trickle down to people. No new jobs were created because the profits went into real estate as the government relied on the construction sector to get growth. Also, investors are not very comfortable with the inconsistent policies of the government.”
Mr Kashif says no government could boost the economy sustainably without increasing the productivity of industry and agriculture. “That will be achieved only when the government and the businessmen are on one page for ensuring policy consistency,” he contends as he points out the need for facilitating small and medium enterprises for investment, growth and jobs.
Awais Paracha, an executive member of the LCCI, is of the view that the IMF cannot solve Pakistan’s problems. “Imported solutions have never worked. We have to put our house in order by applying local solutions.” He says 2021 was a good year for the businesses despite the Covid and expects the recovery to continue next year. “If the policymakers want to tackle the economic troubles sustainably they must take the businesses onboard. Going back and forth to the IMF will not deliver the results.”
Shahzad Ali Khan, a former chairman of the All Pakistan Textile Mills Association (Aptma), says the economy is in a bad shape due to the ensuing balance of payment crisis. “The industry has made huge profits during the Covid and afterwards. The economy will continue to grow at around 4-5pc next year despite IMF. But this could upend if the current account continues to bleed and the exchange rate weakens,” he argues, saying the economic troubles of Pakistan stemmed from the absence of long term policies for industrialisation.”We don’t even have good policies for agriculture, which remains the mainstay of our industry and exports. How can you hope to grow and enrich your people without fixing your structural issues? The global commodity prices feeding inflation in Pakistan and elsewhere will go down in the coming months and IMF dollars will come but what about the next shock or the shock after? Next year isn’t going to deliver much.”
President and CEO Engro Corporation
“The year 2021 has been a promising year in terms of corporate sector’s performance. Post-Covid, the pace of recovery for businesses has been phenomenal, owing to PM Imran Khan’s business-friendly policies. Given his focus on boosting exports, I am confident that 2022 will be the year we will collectively develop an ecosystem that increases exports and decreases dependence on imports. We are hopeful all policies to attract multi-billion-dollar investments will be expedited, and the national industrial policy will catalyse industrialisation and self-sufficiency.
Tackling climate change and enhancing the participation of women in the workforce should definitely be on the agenda for 2022. We also expect commodity prices, exchange rates, and interest rates to stabilise, otherwise, we will be faced with social unrest and a high cost of capital, while battling with energy price pressures. Omicron’s impact on the local and global economy and inflation are the biggest risks.”
Quratul Ain Irfan
President Pacific Pharma
The year 2022 is going to be a tough one for the local business community and the industry, particularly for the pharmaceutical industry. The continuous hike in the dollar value again the rupee has been a major factor behind the rising costs of active pharmaceutical ingredients (API) since 99 per cent of them are imported. As Pakistan’s pharmaceutical industry is a price-controlled sector, it cannot pass on the increase in its cost to consumers. The newly suggested 17pc tax on pharmaceutical APIs will be detrimental to this industry. New taxes and upward movement of the dollar will hamper future investment and growth of this industry. The government of Pakistan should revisit this new tax burden and revert to the previous rate of tax on raw materials to keep medicine within the reach of common people.
CEO Nishat Chunian Ltd
“The most effective measure of progress is per capita GDP. In addition, access to healthcare, the opportunity to education and speedy justice are other measures of a nation’s progress.
The fiscal woes cannot be addressed by increasing taxes, there is a dire need to reduce public expenditure. The bleeding in the public and power sectors, to the tune of Rs500bn per annum, should be the first agenda point of 2022. Instead of enabling a black market, and declaring amnesty every few years, the focus should be on reducing taxes and increasing the tax net. All sectors should be taxed at an equal basic tax rate based on income.
Till we can reduce the risks associated with doing business in Pakistan, the economy will not flourish. The risk factors result in investors demanding higher returns which increases the cost of production. For eg, ever since the first independent power producers were set up in 1994, the sector has been in the midst of some controversy. Resultantly, investors are wary of expansion and demand higher returns in every policy.
Another important issue is the performance of the public sector. Private sector organisations are better equipped to run successful businesses, because of their efficiency and the ability to take risks. This would largely be missing in the public sector, which has been paralysed due to constant scrutiny, involvement of the National Accountability Bureau and inflexible rules and regulations such as those laid out by the Public Procurement Regulatory Authority.
Progress will not happen overnight or next year — the starting point has to be the ability to understand the economic model. The GDP can be improved if the 220 million population has access to education and an opportunity to work. This also means encouraging and enabling women, who constitute 49pc of the population, to join the workforce.”
Ali Asghar Jamali CEO Indus motors
“The last year was a great one for the auto industry which witnessed an exponential growth of around 70pc owing to the auto policy, the market was expected to cross 350,000 units in 2021-22 that may end up around 315,000 units due to ad-hoc increase in duties and taxes. It is pertinent to mention that the growth has not only benefited original equipment manufacturers but largely translated to vendors and other allied industries. All of this is credited to the newly announced auto policy as transparency and predictability led to a boost in investments. Induis Motors recently announced investments worth $100m to produce 4th generation hybrid vehicles locally. However, these decisions were based on the government’s auto policy but unfortunately, recent deviations in the mini-budget will take a toll on the auto sector’s growth and investments. The deviations will hurt investors’ sentiments and confidence. It may also shatter their trust in PTI’s government. I am afraid that if duty hikes continue till budget ‘23 we see a decline of around 15pc in sales and if the ad-hoc policy continues post-budget too, the decline can be around 25pc. As a country, we must realise that only transparent and predictable policies will result in economic growth.”
Published in Dawn, The Business and Finance Weekly, January 3rd, 2022