Political concerns will trump all else in an election year
This is the elections year. We cannot call it an economic year for the country. The pre-election activity has already started. Therefore, all government considerations will be of a political nature and not economic ones and that might lead to an economic slowdown. The ruling party will lose ground fast. It has no magic wand to overcome the energy crisis, liquidity crunch, market access for exports and incentives to investors for job creation in country. Benazir Income Support Programme (BISP) and other food support schemes are well in place but still more and more people are slipping below the poverty line.
The Lahore Chamber of Commerce & Industry (LCCI) leadership has recently witnessed registration of FIRs against it on holding protests against energy crisis. It happened for the first time in the history of Pakistan that the Chamber leadership was booked for protesting in the larger interest of business community. The All Pakistan Textile Mills Association (APTMA) leadership also took out a protest rally and staged a sit-in at the Sui Northern Gas Pipelines Ltd (SNGPL) head office against gas curtailment to textile mills. But all these protests, rallies and sit-ins proved useless, as the energy crisis continued due to inability of policymakers to come up with a solution. The upcoming summer season is likely to be the worst one with the addition of home appliances including refrigerator and air conditioners to the load system. A shortage of over 5000MW would keep the economic activity at an abysmal low. The Non Performing Loans (NPLs) would keep multiplying and scarcity of working capital would keep worrying the business houses.
The political parties would be more interested in turning the prevailing energy crisis into an election slogan than looking for practical solutions to overcome it at the earliest. Therefore, the business community should take a back seat and wait for a favourable environment until the election fever is over. Especially, the energy crisis would carry on throughout 2012 and even after that, as the PML(N) chief Nawaz Sharif has said recently that overcoming energy crisis would be a challenge for next government. It means that no immediate solution to the energy crisis can be expected.
Cash flows to the economy have dried up due to complexity of relations with the US and ongoing crisis in the EU. NATO supplies are at halt. The US has already delayed the idea of Reconstruction Opportunity Zones (ROZs) in tribal areas. The dream of market access of Pakistani products to the US market is unlikely to materialise.
The official statistics show that the foreign aid as well as the Foreign Direct Investment (FDI) is likely to remain suspended throughout 2012. Further, no improvement is imminent in the near future. The energy-dependent industrial sectors are already bleeding fast, massive layoffs are common, factories are turning into graveyards, and many are ready to be tagged as sick units.
The falling private sector investment demand in the economy amidst the Herculean challenge of financing fiscal and external current account deficits would keep creating difficulties for the Pakistan economy ahead.
Already, the government has championed the borrowing spree against private sector, squeezing the availability of credit for the industrial sectors in the economy. There is a strong demand of bringing the interest rate regime to single digit to make it globally competitive. An absence of an ideal interest rate regime has slowed down the growth in Large-scale Manufacturing (LSM). The factors like continuing energy shortages, unfavourable law and order conditions, and an uncertain political environment have added fuel to the fire, subtracting the business confidence.
Meanwhile, the SBP Monetary Policy Statement suggests that the full year expansion in credit to the private sector is expected to remain weak during FY12 despite interest rate reductions. Its year-on-year growth is already negative in real terms and indicates depressed private investment demand in the economy. In addition, given substantial government borrowings from the scheduled banks together with rising NPLs, banks are likely to continue to avoid lending to the relatively riskier private sector.
The average inflation in FY12 is likely to remain in the range of 11 to 12 percent, which would keep pressure on supply side of credit to private sector. Increases in electricity and gas prices, high international oil prices, impact of exchange rate pass-through, increase in support price for the upcoming wheat procurement season, and substantial government borrowings from the banking system would keep private sector demand under pressure.
The SBP has emphasised that the implementation of the Medium Term Budgetary Framework (MTBF) is imperative for inflation to come down further. The MTBF envisages a systematic reduction in the fiscal deficit to 3.0 percent of GDP in FY14 by increasing the tax-to-GDP ratio and stipulates inflation targets of 9.5 percent for FY13 and 8 percent for FY14. Decisive reforms in the energy sector can also go a long way in achieving the MTBF targets. These reforms not only will reduce the government’s reliance on banking system borrowings but also minimise the need to adjust the energy prices in a sporadic and unpredictable manner. Both these factors would help in improving the effectiveness of monetary policy.
In my view, the business community should adopt persevere behaviour while dealing with ongoing shortfalls and shortcomings. They should gear up for the worst, defer investment plans and be ready to pay the cost of political activity in the country.
The writer is President American Business Forum, Chairman and CEO NetSol Technologies, Honourary Consul of Australia for the province of Punjab, Pakistan and former Co-Chairman of Federal Government’s Task Force on Information & Communication Technologies
