Private sector borrowings decline

According to a section of the press, private sector bank borrowing for investment purposes has been steadily declining and during the last 15 months a negative offtake in private sector credit was witnessed. This must be a cause for serious alarm for the newly-elected PML-N government that has now been in power for a little more than four months. The PML-N has always projected itself as a pro-business party, unlike its historical rival Pakistan People's Party Parliamentarians, and the 2013 election manifesto of the party reiterated its support for the private sector becoming an engine of growth.
The economic team of the PML-N has insisted that it needs some time to deal with other more pressing issues prior to it focusing on improving the business environment notably raising the low tax to gross domestic product (GDP) ratio and the energy crisis that would, amongst other unpopular measures, also require upgrading electricity tariffs. While there is a consensus that the PML-N inherited an economic morass that would take years to untangle yet there is also a consensus that the budgetary measures as well as the Letter of Intent (LoI) submitted to the International Monetary Fund (IMF), reflecting a host of commitments to the Fund, are in fact anti-business documents and would, clearly and unambiguously, lead to a reduction in the role of the private sector as an engine of growth. The declining borrowing by the private sector is, economists maintain, indicative of the failure of the new government to convince its major support base that it is pro-business, a view strengthened by the recent loss of a provincial assembly seat from the party's stronghold in Faisalabad in the recently-held by-elections.
So what are some of the anti-business budgetary and LoI policies that federal Finance Minister Ishaq Dar too supports? First of all, like Pakistan's former finance ministers Dar has relied on increasing the burden on the relatively small number of existing taxpayers, leaving the undocumented parallel economy largely out of the tax loop; and imposed a tax on immoveable assets that has already led to a drain from the banking sector valued at 1.5 billion rupees - a drain that is likely to continue if the tax is not reversed. Dar also continues to rely on easy to collect taxes thereby not placing too much reliance on the Federal Board of Revenue (FBR) plugging its annual 500 to 700 billion rupee leakage which accounts for the heavy tax component in our electricity bills as well as oil and gas purchases. The recent rise in energy costs for the industrial sector compares unfavourably with the energy costs in countries that compete with our industries for sales internationally and therefore this would have serious negative repercussions on our exports which may further compel Dar to place heavier reliance on foreign borrowing in years to come. Dar has already committed to the IMF in the LoI that the government intends to impose a tax on gas to the extent of 0.4 percent of GDP, a tax similar to the petroleum levy in force one would assume, and that too would be an easy-to-collect tax without FBR engagement.
However, what is interesting is that the LoI does acknowledge that boosting economic growth would require a sharp increase in foreign and domestic private investment and the following activities were highlighted that, in Dar's estimation, would improve the business climate: (i) contract enforcement focused on bankruptcy laws, dispute resolution on the pattern in Karachi and undertaking of a diagnostic of needs to speed rehabilitation of weak but viable corporate entities and expedite liquidation of insolvent entities; however these measures by themselves are unlikely to improve private sector investment; (ii) the old and tried and never implemented fully one stop shop for new entrants is hardly likely to encourage new investment; and (iii) access to credit where Dar reckons small and medium enterprises would be targeted. The failure to date of these three measures is evident from the fact that at the end of last fiscal year private sector borrowings were negative 19 billion rupees while in July-September 2013 private sector borrowings had further plummeted to negative 23 billion rupees.
The last three months have shown a steadily declining economic performance of the private sector with erosion in confidence in Dar's economic vision. A key component of the performance of the economy is based on market perceptions and those are clearly sending a signal to the new government that all is not hunky-dory. One can only hope that the prime minister takes cognisance of this and takes appropriate remedial measures.