Indicators such as the Business Confidence Index are useful measures to assess the efficacy of policy decisions
I have a personal confession: working in a role which requires observing as to what makes businesses tick, I often feel an entrepreneurial side stirring. At times I yearn to have my own company, being one’s own boss, calling the shots, innovating, creating, etc. But as blissful as these day dreams may be, they are quickly and rudely interrupted by that thing called reality. Leaving the all important capital constraint aside, the business environment is hardly suited for such initiatives anyway. The recently announced results of the 5th Business Confidence Survey, undertaken by the Overseas Investors Chamber of Commerce & Industry (OICCI), is reflective of the same – a serious lack of confidence amongst the business community and general pessimism with respect to doing business in Pakistan.
Business Confidence is essentially an indicator of positive / negative sentiments that prevail in the market, identifying the reasons which contribute towards the same. The survey is tabulated by assigning a positive point for each optimistic response and a negative one for a glum answer. Now here are the results: Business Confidence in Pakistan stands at -25 per cent. This is not a significant change from the previous -24 per cent; in fact the metric is totally consistent with the 4Q average of -25 per cent. Negative responses outweigh the positives; for every four greens there are five reds. Whichever way you may interpret it, bears outweigh the bulls and the business community carries depressed perceptions.
The survey yells out that the single biggest reason behind the decline in business in Pakistan is inflation; the answer of 43 per cent of the respondents. Persistent inflation is constantly raising the cost of doing business in the presence of limited demand side room. This spells gloom for profitability; the cornerstone for any business. The argument goes that a downward trend in CPI has been recently witnessed stemming from declining global commodity prices and higher domestic commodity surplus, let alone the change in constituent weights. But is the ‘Consumer’ price index a good indicator costs of business? Keep in mind that inflation in Pakistan has been cost push and impacts things like raw material prices, power costs and labor wages as far as a manufacturer is concerned. A company’s sensitivity to price of inputs depends upon its own unique overhead mix, not that which is assumed by CPI. On closer inspection, raw material prices have been going up, power costs are rising, and so are the costs of doing business.
Other drags mentioned include gas and electricity load shedding (39 per cent), poor governance and policy implementation (26 per cent), and law and order (19 per cent). So there seems to be an ironic improvement in the security situation but this has aptly been replaced by inhumane industrial gas and power shortage. The reference to absurdity of the situation is fitting as without power, how is one expected to produce, how are industries expected to run? And then to compound this, a month long suspension of gas is announced. I expect this shortage to overtake the top position in the problems list in the coming months. A reputed multinational recently announced plans to resort to wood-fired boiler systems to make up for lack of gas. Talk about going back to the stone-age.
Not to sound too morbid, however, there is a bright side as well. Some 34 per cent of businessmen expect their business to expand in the next six months, while 54 per cent are upbeat when it comes to profits. Most of these are of the manufacturing breed. Is this because they feel they have reached a bottom or is there actually conviction in their sentiments? I feel it’s a mix of both, as the country still presents opportunities to grow for those who are positioned to utilise the same.
Industry being the backbone of the economy is a no-brainer. Activity and investment in this regard is vital, without which unemployment and a general decline in living standards occur. Indicators such as the Business Confidence Index are useful measures to assess the efficacy of policy decisions – albeit in hindsight and assuming they are enacted anyway. What can be said for sure is that the economy clearly lacks confidence and rightly so. It’s up to the authorities to instigate a clean-up act; will they and will it be effective still remains to be seen.
The writer is a financial analyst at PACRA