SCENES FROM AN ECONOMIC DOWNTURN
With the country in the grips of a severe recession, even wealthy businessmen are crying out about the government’s economic ‘adjustment’ policies. But the real pain is being felt, as always, on the street...
When the leading lights of Pakistan’s financial services and manufacturing industries sat down with army chief Gen Qamar Javed Bajwa on October 2, it was on the back of one of the worst months for the country’s economy.
The stock market had hit a near four-year low — a decline fuelled in significant measure by the spiralling tensions with India after the BJP government there had abrogated the autonomous status of India-held Jammu and Kashmir. Data released only a few days earlier showed that large-scale manufacturing had already seen its worst month in July for many years, with further slowdowns coming up. Profits of the banking system had fallen sharply in the months leading up to July, in some cases by almost 50 percent and in some cases even more. All around, business and industry were in the grip of a massive slowdown and all indications were suggesting that matters will only aggravate in the coming months.
So began what eventually became one of the most talked about conversations in the country. In the days that followed, one TV anchor after another dedicated all their primetime shows to discussing this meeting and who said what during it. Newspaper columns and social media were rife with leaked tidbits of their own about what had transpired. Conflicting reports emerged, with at least one early report suggesting that the meeting had been a heated affair, but later reports clarifying that the atmosphere was cordial, but that the concerns raised were serious.
Understandably, business leaders are extremely concerned about the downturn in the economy and what many feel is the apparent drift in state policies to tackle it. It affects not only their current bottom lines but, in many cases, also their plans for the future.
In significant measure, these economic developments are the result of what economists call a “macroeconomic adjustment”, or a package of policies that is designed to rapidly shrink the mushrooming deficits that plague an economy. In Pakistan, this package of policies has been applied innumerable times over the decades, and always consists of the same set of policies: high interest rates, exchange rate depreciations, tight spending by government and rising burdens of taxes.
In fact, some of these policies had begun to be implemented much earlier. Interest rates, for example, had been rising steadily from January 2018 and more than doubled by July 2019 when the last of the rate hikes was applied. This was the fastest pace of interest raise increase in decades, and delivered a shock to business and industry the likes of which they had not felt since at least 2008, when the great global financial crisis hit. In one year alone, the cost of borrowing doubled, and those who had recently taken out loans for business expansion, found themselves holding stranded assets that had to be repaid at astronomical rates, while there was no market left for the additional output that these newly invested plants would produce. Likewise with the exchange rate, which fell by 30 percent since July 2018, an adjustment that was long in the making and glimpses of which had already been seen the previous year.
Unlike Lahore or Multan, Karachi’s industry does not compete with the rural hinterland for supply of labour. The flipside of this, however, is that the welfare of the workforce is more intimately tied to the ups and downs of the city’s industrial base.
And then came the budget in June 2019. These same business and industry leaders watched in stupefied disbelief as Abdul Hafeez Shaikh, who was to officiate as the finance minister after Asad Umar’s unceremonious departure, announced an FBR revenue target of Rs5.55 trillion for the new fiscal year, implying a jump of almost Rs1.5 trillion. Such a feat had never before been accomplished, and the business community was clear that their troubles withthe tax authorities were about to go up several notches.
The chief’s message to the delegates was simple. The adjustment is here to stay, he told them. He was not willing to bargain for any shift in course on those actions. But outside of the adjustment, if there was something that could be done to mitigate the impact on business and industry, he was willing to listen.
After their concerns about the larger macroeconomic situation were brushed aside, the business and industry delegates fell back on a familiar litany of complaints specific to their particular industries. Some wanted greater streamlining of procedures for land acquisition to facilitate builders. Others wanted more focus on construction, pointing out the ripple effects this sector produces in employment and associated industries such as cement and household fixtures. The textile tycoons brought up their perennial favourite gripe with government about sales tax refunds that continue to be held up, depriving their companies of vital cash flows to meet working capital requirements.