Pre-budget Outlook: Despite minor economic improvements, business and consumer sentiment continues to wane

Setting aside external factors, both corporates and public anticipate reaping dividends of political stability and the favourable stance of friendly nations and donors towards the country. However, some do not foresee an immediate change. Nevertheless, a sense of cautious optimism suggests the potential for improvement in the business environment and household livelihoods.

Nasim Beg, CEO, Arif Habib Consultancy, who also sits on boards of multiple companies, shared his insight: “The current business environment remains subdued due to significant decrease in overall demand, accompanied by a severe erosion in consumer purchasing power. Although conventional wisdom suggests keeping interest rate above inflation, the situation is complicated by the government’s borrowing, which is about four times that of the private sector.

“With the government borrowing to cover interest payments on its debts, high interest rates are contributing to excessive money supply and subsequent inflation. While the government aims to explore new avenues for tax collection, its spending continues without restraint. Given these circumstances, significant improvement in the business environment in the remainder of the current fiscal is not expected.”

The trade gap in the first nine months of the current fiscal year narrowed by 24.9 per cent to $17 billion compared to $22.7 billion in the corresponding period last year. According to the data released by the State Bank, the total liquid foreign exchange reserves stood at $13.4 billion ($8.04 billion held by SBP and $5.4vbillion by commercial banks), after the SBP’s repayment of $1 billion in International Bonds.

Experts, however, acknowledge a relative improvement in business and public confidence, attributed to reassurances received by PM Shahbaz government from friendly nations and the multilateral donors. Additionally, improvements in key economic indicators, capital and currency markets, along with some relief in the pace of inflation, have rekindled hopes crucial for growth revival.

However, they also cautioned about the heightened risk of external shocks that could derail the economy before it gains momentum. “As the deadly retaliatory cycle escalates in the Middle East, there’s a looming risk of mounting pressure on inflation and the current account deficit for oil imports-dependent Pakistan,” shared a senior analyst from a private company, speaking privately.

Some measure of stability has been achieved in the foreign exchange reserves situation, with adherence to committed repayment schedules. Improvements in the current account deficit, remittance inflows, rupee valuation and inflation, coupled with capital market setting new records, have somewhat lifted the mood in the country.

Despite challenges to the security situation faced by Chinese workers China has renewed its commitment to CPEC. Additionally, Saudi Arabia has signaled a deepening economic engagement by directing investment of $7 billion across multiple sectors in Pakistan. Furthermore, the successful conclusion of the review for the release of last tranche of IMF’s $3 billion Standby Arrangement, amounting to $1.1 billion, has strengthened Pakistan’s case for a longer and larger credit agreement with the IMF. The supportive behaviour of development partners has helped alleviate anxiety in the market.

Inflation has been on a downward trajectory in Pakistan, decreasing to 20.9 per cent in March from its peak of 39 per cent in May 23 and 30 per cent in December 2023.

The trade gap in the first nine months of the current fiscal year narrowed by 24.9 per cent to $17 billion compared to $22.7 billion in the corresponding period last year. According to the data released by the State Bank, the total liquid foreign exchange reserves stood at $13.4 billion ($8.04bn held by SBP and $5.4 billion by commercial banks), after the SBP’s repayment of $1 billion in International Bonds.

“Operating under 24-25 per cent interest rates in this suffocating business ecosystem is unsustainable. The next 75 days will be tougher, given the escalating production costs, consumer spending constraints and the dilemma of immediate procurement versus delay unless necessary.”

The Pakistani currency gained strength over the past nine months, moving from Rs 290 to a dollar in the open market (official rate Rs 287) at the start of the current fiscal on 1st July to Rs 280 currently against the dollar in the open market (official rate Rs 277 on 1st April 2024).  

While remittances increased by 16 per cent in March to $3.0 billion compared to the corresponding period last year. According to SBP current data, remittances inflows grew by 0.9 per cent to 21.4 billion in the first nine months of the current fiscal year, up from 20.8 billion in FY23.

Commenting on the matter Muhammed Sohail, CEO, Topline Securities, remarked: “With signs of economic stability, it looks that business confidence is gradually improving. This sentiment is reflected in the stock market, bond market and currency market. Additionally, the SBP confidence index is also showing improvement. The IMF’s new loan will also help boost confidence and increase chances of policy rate cut in Pakistan.”

Some key business leaders, Ehsan Malik, CEO, Pakistan Business Council, Dado Khan Achakzai from Balochistan and Majyd Aziz, former president Karachi Chamber of Commerce and Industry were more cautious commenting on the immediate future.

“Expectations of a rapid decline in inflation and subsequent policy rate reduction must be tempered by the recent escalation of tension in the Middle East, leading to potential oil price hikes. While core inflation may decrease, the SBP may not be significantly influenced by it. There’s also the risk of pressure on the current account and the exchange rate. The decision on the policy rate will factor its impact on discussions with the IMF on the 24th programme. Consumer demand will likely remain compressed, aligning with trends in the US, EU and UK, where policy rates are unlikely to decline in the coming months,” noted Malik.

“Rising fuel, gas and electricity prices are exacerbating the economic challenges. The middle class is particularly hard hit by this inflationary pressure and export- oriented industries are facing a huge debt burden,” commented Achakzai.

Aziz grimly remarked, “The future looks bleak, especially for SMEs grappling with exorbitant infrastructure costs. Those who’ve freed themselves from bank loans can barely sustain operations, while others trapped in debt must question their production viability. Operating under 24-25 per cent interest rates in this suffocating business ecosystem is unsustainable. The next 75 days will be tougher, given the escalating production costs, consumer spending constraints and the dilemma of immediate procurement versus delay unless necessary.”