NationalVOLUME 17 ISSUE # 3

Rising business confidence

The confidence of businesspeople in the national economy has started rising and it has reached the levels last seen before the 2018 elections. Pakistan hopes to attract local and foreign investment after the Overseas Investors Chamber of Commerce and Industry’s latest Business Confidence Index noted “record improvement” in overall business confidence in the country in recent months. It is a great achievement of the government, especially at a time when the country is still grappling with the COVID-19 pandemic and business confidence had plunged to an 11-year low in June last year when a national lockdown was imposed to contain the spread of the virus.

Business confidence in the national economy is rising because of negative interest rates in the last year and a huge monetary package announced by the State Bank of Pakistan to protect businesses and the economy from the negative impact of the pandemic. A tax amnesty scheme and the prime minister’s construction package for the housing and real estate sector for an early economic recovery also played a big role in boosting investor confidence. Furthermore, business-friendly policies and a large fiscal stimulus announced in the recent budget to rapidly grow the economy ahead of the 2023 polls have also contributed to the cause.

According to a survey conducted by the Overseas Investors Chamber of Commerce and Industry (OICCI), Pakistan’s overall Business Confidence Score (BCS) stood at 9pc, up from minus 50pc in the preceding survey held in May 2020. The survey, which collects feedback from frontline business stakeholders on the environment and opportunities impacting their respective operations, found a positive BCI, which was last seen in April 2018. The survey is done face-to-face and across the country in nine cities. It covers 80pc of GDP, with higher weights given to key business centres of Karachi, Lahore, Rawalpindi-Islamabad and Faisalabad. The survey sample consisted of 40pc respondents from the manufacturing sector, 35pc from the services sector and 25pc from retailers and wholesalers. The growing confidence of the business community is driven by the three sectors, with the first two recording an increase of 65 percentage points each – manufacturing from negative 48pc to 17pc and services from negative 59pc to 6pc. The retail/wholesale sector went up 44 percentage points from negative 44pc to zero.

According to the survey, many manufacturing concerns went back to their 100pc capacity of production after lockdown restrictions were lifted. Retailers and wholesalers were more affected by the restrictions as their business hours were cut short. They believe the next six months will be better with more sales and profits. The main driving force behind the turnaround in the latest BCS is the significant increase in the optimism of respondents for the next six months about their respective city’s business situation (21pc), industry-business situation (19pc), own business situation (20pc), anticipated sales volume increase (20pc), profit increase (22pc) and return on investment increase (19pc). Feedback from OICCI members, who were randomly included in the survey, also recorded a “sharp turnaround”. It showed an improvement of 108 percentage points from minus 74pc to 34pc. Looking ahead, survey respondents expressed optimism for the next six months, with 25pc expecting expansion in business operations, 39pc planning new capital investment and 12pc indicating plans for increased employment in their respective businesses. The 2021-22 budget proved positive for the business community as the BCI score was significantly higher after the budget announcement, with respondents perceiving new policies more transparent, consistent and predictable. The three major threats to business growth identified by survey respondents are corruption (67pc), volatile energy costs (66pc) and currency devaluation (60pc).

However, despite the positive development, net foreign direct investment (FDI) in Pakistan has slowed down to an eight-month low at $89.9 million in July, according to the central bank. The gross inflow of FDI amounted to $176.3 million in July 2021, which was partially higher compared to $168.7 million recorded in the same month last year. However, the gross outflows more than doubled to $86.4 million in the month under review compared to $40 million in the corresponding month last year. Accordingly, the net inflows dropped to an eight-month low at $89.9 million, according to the State Bank of Pakistan.

Foreign investment is declining in the country despite improving business sentiments because investors are still uncertain about the situation in Afghanistan, exchange rate fluctuations, high inflation, rising current account deficit, the future of the IMF programme and pandemic resurgence. Experts say the drop in net FDI inflows was witnessed as local projects being run on foreign investment made higher outward payments to their headquarters during the month. Moreover, inflows from China dropped during the month due to a temporary lull in the second phase of the China-Pakistan Economic Corridor (CPEC) and Belt and Road Initiative. They say almost all foreign projects, such as power projects under Thar Coal and investment in 3G/4G and 5G in the communications sector, were progressing well.

Moreover, infrastructure development and branchless banking in the financial sector, investment in local mobile manufacturing and exports, manufacturing of electric cars and charging infrastructure and oil and gas exploration are progressing at a rapid pace. China is also expected to increase investment in Pakistan’s Special Economic Zones (SEZs) and the agricultural economy under the second phase of the CPEC. The inflow of investment from China has temporarily slowed down following the completion of most of the power projects in Pakistan under phase-I of the CPEC. Most telecom companies have already conducted successful trials of 5G. They are expected to attract new investment to deploy 5G technology and infrastructure in the country.

Besides, Pakistan has also started manufacturing mobile phones and exported the first consignment of 5,500 smartphones to the UAE recently. New players are expected to invest in mobiles and electric car manufacturing in the country and the investment climate is favourable. It should drive FDI upward in the coming months and years. The incentives announced for the IT and telecom sector by the government with an aim to increase exports are also expected to attract new foreign investment in the country.