FeaturedNationalVOLUME 18 ISSUE # 04

More difficult time ahead?

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 in the last four months 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 270 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 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. During the month under review, cotton cloth exports reduced by 16.5pc to $169.6 million against $203.1 million in September 2022, while compared with October 2021’s exports of $183.6 million, it went down by 7.65pc.

On the other hand, foreign exchange reserves held by the State Bank of Pakistan (SBP) plunged by $784 million to a nearly four-year low of $6.72 billion during the week that ended on December 2. According to the central bank data, SBP reserves were last recorded below this level during the week ended on Jan 18, 2019, when it had some $6.64b. Net foreign reserves held by commercial banks now stand at $5.867b, meaning the country’s total liquid foreign reserves are now $12.58b.

The rupee is projected to devalue to 270 against the dollar by the end of the current fiscal year or June 30, 2023, according to a report. The Topline Securities, a leading brokerage house, predicted the rupee to reach 270 by Jun 2023 with FY23 average of Rs241. “With the rupee likely to weaken further, inflationary pressure may persist even after a 900bps increase in the policy rate by the SBP in the last 1.5 years,” it added. The report said that since the SBP had tightened rules for exchange companies, there was hardly any foreign currency supply in the open market except for a few currencies available for travellers at a premium of 3pc. “The reemergence of black market with a 10pc difference cannot continue for long as it has started affecting dollar inflows, especially inward remittances. Given low foreign reserves, it is highly likely that the official exchange rate will adjust to close to the black market rate,” it noted.

Inflation remains at the highest level in the country’s history and recent floods have worsened the problem. As the rupee continues to weaken, it will add to inflation. It appears that people will have to face even harder times in the coming weeks and months.

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