FeaturedNationalVOLUME 18 ISSUE # 13

Bracing for more difficult time

Pakistan’s foreign exchange reserves have plunged to an extremely low level. Business confidence has nosedived in the last six months across different sectors of the economy, while the country’s textile exports are continuously decreasing. Foreign direct investment has almost halved and inflation remains at the highest level. All these indicators paint a dismal picture of the economy and serve as a warning to the country and people to brace for more difficult times, even though they are already facing the toughest conditions.

There is no doubt about the government’s commitment to improving the economy. It has taken all possible measures to remove flaws in the economy. It withdrew all subsidies on fuel and electricity, provided by the previous government at the cost of its popularity and politics. However, recent floods and continuous political instability have heightened threats to the economy. It appears the government will have to announce fresh elections to end political instability.

On the domestic front, people are facing the highest-ever inflation of their lives and prices are not expected to reduce in the coming weeks and months as the rupee continues to decline against the dollar. According to a recent report, the Pakistani currency may devalue to 280 against the dollar by year-end. It is alarming that business confidence has nosedived in the last six months across different sectors of the economy. According to the Business Confidence Index (BCI) Survey (Wave-22), conducted across the country in September-October by the Overseas Investors Chamber of Commerce and Industry (OICCI), the overall Business Confidence Score (BCS) dropped to negative 4pc, down 21 percentage points from the previous score of 17pc recorded in Wave-21 held in March-April. “The substantial decline in the overall business confidence to negative 4pc is regrettable but not surprising considering the highly challenging political and economic situation during the past six months. Besides, high inflation, increased fuel prices and significant currency devaluation also dampened economic activity. The record level of rains during August leading to severe flooding in Sindh and other parts of the country further restricted business activities,” OICCI President Ghias Khan explained.

The highest drop in confidence was recorded in the services sector (24 percentage points), followed by retail and wholesale trade (22 percentage points) and manufacturing sector (20 percentage points). The survey sample consisted of 42pc respondents from the manufacturing sector, 33pc from the services sector and 25pc from the retail and wholesale trade. Despite a significant drop in confidence of 20 percentage points, the manufacturing sector recorded a net confidence level of positive three percentage points, whereas services and retail sectors stood at negative eight and 14 percentage points, respectively. The OICCI conducts the survey in nine cities covering 80pc of GDP, with higher weightage given to key business centres of Karachi, Lahore, Rawalpindi-Islamabad and Faisalabad.

Overall, 56pc of survey respondents were “negative” on the business environment in the past six months versus 19pc in the previous wave. Going forward, only 2pc respondents were “positive” for the next six months as opposed to 18pc in the previous survey. The confidence level of OICCI members — leading foreign investors who were randomly included to the survey — stood at positive 6pc, substantially lower than positive 33pc in the previous wave. Foreign investors in the past have also shown higher business confidence than non-members.

The three major threats to business growth identified in the survey are inflation (78pc), high taxation (71pc) and currency devaluation (70pc). Looking ahead, only 18pc respondents — as opposed to 34pc in Wave-21 — expected expansion in business operations. About 2pc respondents were planning new capital investment as opposed to 21pc previously. Around 7pc respondents expected increased employment in their respective businesses versus 16pc six months ago. The survey findings raise fears for future job prospects.

Corroborating the findings of the survey, foreign direct investment nosedived by 52pc during the first four months of the current fiscal year. The State Bank of Pakistan says the FDI fell to $348.3 million in July-October FY23 from $726.5m during the same period of the last fiscal year. The FDI has been declining while the volume of investment is also very thin compared to regional countries, like India, Bangladesh and China. The highest FDI of $74.8m came from China during the first four months of the current fiscal year against $99.5m during the same period last year.

Pakistan’s textile sector exports declined by 12.4%, clocking in at $1.36 billion in January in comparison to $1.55 billion recorded in the same month of the previous year. According to the All Pakistan Textile Mills Association (APTMA), the country’s textile exports in the first seven months of FY23 decreased by 8% to $10.08 billion, declining from $10.93 billion recorded in 7MFY22. Pakistan’s textile exports in October declined by 15.2pc to $1.357 billion over the corresponding month a year ago. Over the previous month too, its exports declined by 11.1pc, with a major reduction in cotton cloth, knitwear, bedwear, towels and readymade garments. In July-October 2022/23, the textile sector’s total exports declined by 1.34pc to $5.94 billion from last year’s exports of $6.02 billion.

Pakistan’s foreign exchange reserves slipped to the alarming level of below $3 billion for the first time in nine years, reducing import capacity to slightly over two weeks ahead of the likely revival of the IMF $6.5 billion loan programme. The State Bank of Pakistan (SBP) said the country’s foreign exchange reserves had decreased by $170 million to $2,916.7 million (or $2.92 billion) due to external debt repayments in the week ending February 3, 2023. The reserves continue to deplete for the past 18-month period due to previously elevated import payment, low export earnings and slowdown in inflows of workers’ remittances. The reserves stood equivalent to almost three-month import capacity at $20 billion in August 2021. The central bank reported that net foreign reserves held by commercial banks dropped by $32.6 million to $5.62 billion in the week under review.

According to the State Bank of Pakistan, workers’ remittance for January dropped by 13pc on a year-on-year basis. The remittances decreased by almost 10pc on a monthly basis. The workers’ remittances were recorded at an already low at $2.102 billion in December 2022. This is the lowest number in the last 31 months.

Inflation remains at the highest level in the country’s history and recent floods have worsened the problem. As the rupee continues to weaken and power and gas tariffs have been increased, it will add to inflation. In this situation, people will have to face even harder times in the coming weeks and months.