Less than modest economic recovery?

International Monetary Fund (IMF) programme under the Extended Fund Facility rolled out this September has spurred some elements of country’s fiscal and economic recovery. A number of survey reports on the economic health of the country, announced this week, spell out that some betterment is on the way.

The Overseas Investors Chamber of Commerce and Industry (OICCI) has unveiled this week the results of its Business Confidence Index (BCI) Survey-Wave 26.

The OICCI flagship Business Confidence Survey (Wave 26) conducted throughout the country during October and November 2024 reflects a notable improvement in overall business confidence in Pakistan, which improved significantly by 9 percent, i.e., from negative 14 percent to negative 5 percent as compared to the previous wave.

The improvement in business sentiment is driven by positive economic growth, a stable exchange rate, and a notable decline in reported inflation.

Confidence in the services sector saw the largest increase, with a rise of 16 percent (improved to positive 2 percent from negative 14 percent, in wave 25), followed by the manufacturing sector with a 12 percent increase (from negative 15 percent to negative 3 percent). However, the retailer and wholesale sectors registered a further decline in confidence to negative 18 percent versus negative 15 percent, previously.

Moreover, 43 percent of respondents showed optimism for the next six months, compared to 34 percent in the previous wave. While persistent challenges such as high inflation, political instability, and rising fuel prices remain top concerns, with 66% of respondents expressing negativity about the past six months.

The primary factor driving the improvement in the overall business confidence is the positive outlook for business conditions over the next six months.

Although there is a notable improvement in the negativity in overall business confidence in Pakistan, the overall business confidence still remains in the negative.

This fact is reflected on ground that despite the New Orders Index and New Jobs Index showing improvements, the New Investment Index has declined sharply to negative 23% in Wave 26 versus negative 12 percent in Wave 25, reflecting heightened caution among businesses. A turnaround could happen when the business confidence moves from negative mode to positive mode, and this is the real challenge.

Challenges such as inflation, political instability, rising fuel prices and electricity tariffs and ineffective trade policies remain critical concerns for foreign investors.

Ipsos Group S.A, a multinational market research and consulting firm, in its quarterly Consumer Confidence Index (CCI), conducted from November 11 to 30, reveals a surge in optimism about the country’s future, despite persistent concerns over inflation and unemployment.

The survey indicates a shift in attitudes towards the economy itself. While only 12 percent of respondents rated the economy as ‘strong’, the proportion of those who view the economy as ‘weak’ has steadily decreased from 76 percent in September 2023 to 65 percent in December 2024. More than one-third of respondents now believe the country’s economic condition is moderate, signalling a cautious optimism that has replaced the pervasive pessimism of previous years.

However, despite optimism in some sectors, there are areas of concern. The confidence to make major purchases, such as buying homes or cars, has remained low, with only 4.0 percent of respondents feeling comfortable making such decisions. Similarly, confidence in long-term savings, including for retirement or children’s education, has slightly improved, but only 14 percent of Pakistanis express increased confidence in their ability to invest for the future.

Confidence in the job market has remained steady, with 15 per cent of respondents expressing no concern about their employment status. The survey found that a significant proportion of Pakistanis — 85 per cent — still feels uncertain about their job prospects, indicating a cautious approach to economic recovery.

Coinciding with the survey reports of OICCI and Ipsos the Asian Development Bank has published its latest report “Asian Development Outlook”, which states that Pakistan’s GDP growth in fiscal year 2025 is projected at three percent, revised upwards from 2.8 percent, while inflation forecast is revised downward for fiscal year 2025 to 10 percent from 15 percent in 2024.

Industrial output growth is projected to accelerate with the suspension of import management measures, higher investor confidence, and easier access to foreign exchange.

The report further noted that a more accommodative monetary policy because of faster-than-expected easing of inflationary pressures should further support economic activity through rebounding private investment. However, growth in agriculture is expected to weaken due to the heavy monsoon downpours during July–September 2024 and flood-like conditions in parts of the country. Wheat and cotton, two of Pakistan’s five major crops, are projected to perform poorly in fiscal year 2025.

On the other hand, the downside of the IMF programmes had been that the gas prices rose by 840 percent, electricity by 110 percent; rupee fell 43 percent since 2019, whereas sugar, wheat, palm oil, crude oil prices also saw major increases.

The government spelled out this week that a record 840 percent increase in gas prices, over 110 percent rise in electricity tariffs and a 43 percent currency depreciation under the International Monetary Fund (IMF) programme have contributed significantly to the unprecedented inflation that has eroded the purchasing power and living standards of many Pakistanis.

“Under the IMF stabilisation programme, the government has increased the long-due utility prices (electricity and gas),” Finance Minister Muhammad Aurangzeb said in a written testimony before the National Assembly this Wednesday.

Pakistan’s economy is at a crossroads, with some positive trends but significant challenges that require ongoing attention and reform to achieve stability. Continuous monitoring of political and economic conditions will be crucial for the country’s future economic trajectory.

Political uncertainty continues to pose a risk, affecting investor confidence and policymaking. High public debt levels raise concerns about fiscal sustainability and the ability to meet international obligations. Ongoing security challenges can deter foreign investment and disrupt economic activities.

Copyright Business Recorder, 2024