Green shoots of a turn­around?

The Pak Banker - - 4EDITORIAL - Sakib Sherani

TWO and a half years into the IMF sta­bil­i­sa­tion pro­gramme, there are grow­ing in­di­ca­tions that eco­nomic ac­tiv­ity is fi­nally be­gin­ning to pick up. Among the bright spots: a re­ported surge in busi­ness con­fi­dence, a sharp in­crease in util­i­sa­tion of bank credit by the pri­vate sec­tor, in­clud­ing for fixed in­vest­ment, strong retail sales, a con­tin­u­ing surge in car sales and bullish con­di­tions in the hous­ing mar­ket.

The pri­vate-sec­tor in­vest­ment re­sponse has been un­usu­ally slow this time around, de­spite the op­er­a­tion of a num­ber of pos­i­tives that Pak­istan has not ex­pe­ri­enced for a long time, such as a huge im­prove­ment in the in­ter­nal se­cu­rity sit­u­a­tion and the dra­matic fall in in­ter­na­tional com­mod­ity prices. None­the­less, it ap­pears to be fi­nally tak­ing shape. The un­der­ly­ing in­di­ca­tors that show signs of a re­vival in eco­nomic ac­tiv­ity are as fol­lows. Busi­ness con­fi­dence, as mea­sured by the Over­seas In­vestors Cham­ber of Com­merce and In­dus­try (OICCI), surged to +22pc in Oc­to­ber/Novem­ber 2015 - its high­est level since in­cep­tion of the OICCI's Busi­ness Con­fi­dence In­dex se­ries in 2010. Ac­cord­ing to the OICCI, "con­fi­dence has in­creased across all lev­els (global, coun­try, in­dus­try, city, com­pany), with busi­nesses in­di­cat­ing a high level of op­ti­mism for the next six months". (How­ever, im­por­tant seg­ments of the busi­ness com­mu­nity - in­clud­ing, iron­i­cally, OICCI mem­bers - have ex­pressed reser­va­tions about cer­tain aspects of the busi­ness en­vi­ron­ment, in­clud­ing the tax­a­tion sys­tem and non­pay­ment of re­funds.)

In tan­dem with the re­ported jump in con­fi­dence of the coun­try's over­all busi­ness sec­tor, bank credit util­i­sa­tion by the pri­vate sec­tor has grown strongly in the past few months. Ac­cord­ing to SBP data, while over­all loans to the cor­po­rate sec­tor in­creased over 7pc year-on-year by De­cem­ber 2015, bor­row­ing for fixed (cap­i­tal) in­vest­ment in­creased by nearly 26pc. Loans taken for fixed in­vest­ment by small and medium en­ter­prises have jumped by 88pc year-on-year.

This cor­re­lates with anec­do­tal ev­i­dence of large in­vest­ments ma­te­ri­al­is­ing in the ce­ment, steel, con­sumer goods, durables and bev­er­ages sec­tors - above and be­yond the sub­stan­tial cap­i­tal spend­ing un­der way in power gen­er­a­tion. Re­in­forc­ing the data on bor­row­ing for in­vest­ment by the pri­vate sec­tor is the fact that im­port of cap­i­tal goods (ma­chin­ery) in­creased 14pc for the July to Jan­uary pe­riod. If the bor­row­ing data is a worth­while proxy, then it is very likely that pri­vate- sec­tor in­vest­ment will record its first uptick af­ter sev­eral years when re­ported as a per cent of GDP for the fis­cal year as a whole. Af­ter record­ing a sec­u­lar trend of de­cline since 2008, pri­vate in­vest­ment had fallen to a low of 9.7pc of GDP in 2014-15.

The weak area in in­vest­ment re­mains for­eign di­rect in­vest­ment. While net FDI (in­flows mi­nus out­flows) has in­creased mod­estly in the cur­rent fis­cal year, it has done so on the back of a much larger de­cline in out­flows (60pc) com­pared to the drop in in­flows (30pc). In­vest­ment from China, at $434 mil­lion for July-Jan­uary, pro­vided nearly 60pc of the to­tal FDI so far this year.

The per­for­mance of the large-scale man­u­fac­tur­ing sec­tor in­di­cates a de­cel­er­a­tion in head­line pro­duc­tion in De­cem­ber. How­ever, two sec­tors ac­count for the bulk of the slow­down - sugar and cig­a­rettes. Ex­clud­ing th­ese two, LSM recorded out­put growth of 4.6pc dur­ing July-De­cem­ber 2015. Sec­tors such as au­tos, fer­tiliser, phar­ma­ceu­ti­cals, pe­tro­leum, chem­i­cals and ce­ment have recorded a strong in­crease in pro­duc­tion, with pro­duc­tion of cars in­creas­ing by over 32pc.

Sim­i­larly, proxy data for con­struc­tion and retail sales point to bullish con­di­tions in th­ese sec­tors. On the flip side, how­ever, re­mains the wor­ry­ing - and dis­mal - per­for­mance of the ex­port sec­tor and of im­port-com­pet­ing in­dus­tries. Fac­tors rang­ing from the weak global eco­nomic en­vi­ron­ment to over-val­u­a­tion of the ex­change rate are play­ing an im­por­tant part in con­strain­ing the per­for­mance of th­ese sec­tors. A con­flu­ence of pos­i­tive de­vel­op­ments helps ex­plain the im­prove­ment in im­me­di­ate eco­nomic per­for­mance as well as prospects for the medium term. Th­ese in­clude: - Low in­ter­na­tional oil prices - Low do­mes­tic in­fla­tion - A sharp re­duc­tion in in­ter­est rates - A surge in op­ti­mism re­lat­ing to the prospects for CPEC - Im­proved sup­ply of in­dus­try - The re­cent injection of im­ported LNG into the coun­try's en­ergy grid - Im­proved sen­ti­ment re­gard­ing the in­ter­nal se­cu­rity sit­u­a­tion on the back of mil­i­tary op­er­a­tions in Fata, Balochis­tan and Karachi.

Many, if not most, of th­ese fac­tors are cycli­cal in na­ture. If in­ter­na­tional oil prices climb again, the gains can be eas­ily re­versed. So what should the govern­ment do to en­sure that it pro­vides struc­tural legs to the re­cov­ery? First and fore­most, since CPEC is pro­vid­ing such a large boost to in­vestor sen­ti­ment, the govern­ment needs to en­sure it lever­ages on the long-term op­por­tu­ni­ties af­forded by this mega ven­ture. The in­di­ca­tions are less than en­cour­ag­ing at this point in time. Se­cond, it has to ramp up its strate­gic com­mu­ni­ca­tion and en­gage­ment with the coun­try's pri­vate sec­tor. Chan­nels of com­mu­ni­ca­tion are not as open as they should be - and where they are, the in­ter­ac­tion is dom­i­nated by re­moval of ex­ist­ing con­straints and not how to de­velop a strate­gic part­ner­ship for the fu­ture. This will also re­quire the govern­ment to change its closed-door, non-trans­par­ent man­ner of work­ing.

Third, a long term strat­egy for ex­ports has to be pre­pared with full en­gage­ment of the pri­vate sec­tor. Are there any spe­cific ideas or ex­port ar­eas which CPEC will pro­vide a quan­tum boost to? Fourth, it has to loosen the stran­gle­hold on busi­nesses im­posed by its tax­a­tion and en­ergy tar­iff mea­sures over the past two years in the cur­rent bud­get.

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