A survey of large business firms and companies of Karachi during January-June 2008 confirmed overall slowdown of economic growth and rise in inflation, reflecting growing inflationary pressure on big firms during the period under review.
The Pakistan Institute of Development Economics (Pide) on Tuesday released 'Business Barometer' to share with people the results of business survey of financial sector covering textile, sugar and allied industries, cement, oil and gas exploration companies, engineering, automobile assemblers, automobile parts and accessories, fertilisers, pharmaceuticals, chemicals, banaspati and allied industries, food/personal care products and glass/ceramics.
The findings of the survey are based on the data collected from 61 selected firms listed at Karachi Stock Exchange (KSE). The survey results showed that there would be further decline in the economic growth during second half of 2008.
Despite sluggishness in business activity during 2008, the PIDE survey results showed increase in production, investment and sales in domestic market. The report shows that during first half of 2008, economic growth declined as compared to the second half of 2007. Majority of firms, 68.3 percent, saw slow economic growth, followed by 18.3 percent firms indicating the same level of growth. However, only 13.3 percent of the respondents indicated a faster growth in economy.
According to majority of the firms, input prices had increased during the study period. The increase in input prices ultimately forced the business firms to raise their own final goods prices. Only 2.1 percent of the respondents reported decrease in the prices of their inputs.
A large number of them, 95.7 percent, indicated that their input prices increased in the first half of 2008 while 2.1 percent reported no change. For the current half of the year 2008, 93.5 percent expect a rise in the prices of their inputs, while 4.3 percent expect it to stay the same. Only 2.2 percent of the firms said they expected a fall in the prices of their inputs.
The business sector noted that the level of growth of economy during first half of 2008 had declined as compared to the growth level during the previous six months. The difference in the assessment of the financial and non-financial sectors of the country diminished for the year 2008. The financial sector had joined non-financial sector in comprehending slower pace of growth for the first half of the year 2008.
The expectations of the business sector, about the pace of growth of the economy in last six months of 2008 were pessimistic. The net balance remained consistently negative, as in the case of previous two assessments. Therefore, decline in the economic growth was expected for the second half of 2008. The overall net balance of the growth was negative, meaning thereby that majority of firms were anticipating lower growth. Even the financial sector, which was initially showing positive net balance, had moved into the negative zone, as its optimism resided.
In the survey, all the firms unanimously experienced higher prices in the first half of 2008. Their expectations were also higher for the second half of 2008. The analysis showed that both financial and non-financial sectors, neither of them experienced nor anticipated any fall in the general price level for the year 2008. With 100 percent respondents reporting higher prices, the net balance remained consistently positive for the general price level.
Moreover, there was increase in input prices, output prices, rate of interest on deposits, interest rate on advances and wages. This upward assessment of business sector was in line with high inflationary expectations. The financial sector was expecting increase in the rate of interest on deposits, interest rate on advances and reserves which would be in line with the tight monetary policy adopted by the State Bank of Pakistan. Its future expectations about its activities were also high. Business sector was expecting the level of investment to be higher in the second half of 2008. The higher investment expectations were driven by the visibly higher expectations of the financial sector.
As far as the other economic variables were concerned, majority of the firms was reporting increase in production, investment and sales in domestic market. This was mainly driven by the higher expectations of the rise in the final product prices. At the same time, the firms' expectations of an increase in the input prices and wage pressure was leading to the piling up of the inventories. The employment levels were reported to be stable as the firms continued to operate at below capacity level. The financial sector optimism about employment indicated that more jobs would be created. The leading constraints affecting firms' production were the regulatory environment and the insufficient demand. The insufficiency of
The crux of the survey was that growth has slowed down and inflation had risen up during Jan-June 2008. Further decline in the gr demand, particularly in the international market, could be attributed to the rising global inflation.
The crux of the survey was that growth had slowed down and inflation had risen up during Jan-June 2008. Further decline in the growth level and rise in the rate of inflation was expected during the second half of the year, thus implying an urgent need of a comprehensive macroeconomic policy framework for the control of inflation by the authorities.
As pointed out in the last edition of 'Business Barometer', the problems of declining expected growth and rising inflationary expectations were demanding co-ordinated efforts by the State Bank and the Federal Government.
About the constraints faced by the non-financial sector of the economy, 50 percent of the firms reported that their production was constrained by different factors. Out of the constrained firms, 50 percent of firms thought that improper regulatory environment was the most important constraint, followed by insufficient demand (ie 38.5 percent) and insufficient skilled workforce (ie 18.8 percent), while 16.7 percent of firms thought that insufficient access to credit created hurdles in business growth while insufficient access to imports and insufficient capital was felt by 9.1 and 7.7 percent of business firms respectively.
Interestingly, 50 percent of the respondents reported increase in their activities (Deposits, Advances, Investments) in the international market during Jan-June 2008, as compared to the second half of 2007; 50 percent reported no significant change.
Regarding future activities, the evidence showed that financial institutions were optimistic about the international market, as 50 percent of the institutions hoped that their activity would increase, and 50 percent expected that there would be no change in the size of their international market activity. None of institutions expected decline in activity.
Looking at the interest rate, 91.7 percent of the respondents said they experienced increase in interest on deposits during the first six months of 2008, while only 8.3 percent respondents reported that interest on deposits remained the same. None of the respondents report that interest was lower in the first half of 2008. For the next six months, only 8.3 percent reported that the interest rate on deposits would stay the same, and 91.7 percent expected that the interest rate would increase, while none expected fall in the rate of interest.
The financial sector was feeling upward pressure on the interest rate on advances due to increase in the deposit rate, wages, and other expenditure, forcing it to raise the prices of their advances. None of the respondents reported decrease in the interest rate on advances, whereas 83.3 percent indicated that interest on advances increased during the first half of 2008 as compared to the second half of 2007.
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