The fall in economic activities, including basic transactions, is yet to touch rock bottom. There are two reasons to support the theory. One is that current account deficit is far from levels the IMF and SBP are eyeing– thus more tightening (currency and interest rates) cannot be ruled out, and even in case of no further hawkish stance, the impact of steps already taken will start translating into the demand compression in months to come.
The other factor warrants some attention. It is the issue of informal or undocumented economy where one can foresee a significant dent in transactions – wholesale and retail, due to FBR efforts to document the economy. Both the steps taken by current regime are necessary; and pain is a side effect.
The slowdown due to businesses not willing to share NIC details should be resolved amicably by a process of dialogue. The problem is that the traders, who were never keen to pay their due share of tax, are not a fan of PTI government (especially in Punjab) and do not trust the FBR at all. The mistrust with the FBR is not totally uncalled for, as in the past, the FBR harassed businesses who got documented or became part of tax net. Anyhow, that does not mean that businesses should be allowed to remain undocumented.
Somehow or the other, the trust deficit between the government and businesses and FBR and businesses should be bridged. The domestic investor (businessmen) confidence is too low, and traders/retailers are not giving good vibes. According to FMGCs sources, majority of retailers connecting to their distributors are not ready to share their NICs and other details required for documentation.
Roughly, 60 percent of 10-12 top FMCGs businesses are with multiple distributors. Around 150-200 thousand retailers are connected through the distribution universe. The distributors are claiming that a mere 20-25 percent of retailers are willing to share their NIC details while rest are not keen to do business, in case of data sharing. These businesses are at standstill for the past few days. The impact is yet to be seen on ground as previous stocks are being consumed at retail shops.
If things do not get resolved, in a few days, there will be shortage of milk, soap and other daily use products across the board. And if the supplies are not taken by retailers, the FMGCs would be forced to stop their production intermittently – like the automobile sector. The impact of 70-75 percent of retailers not picking up stuff is estimated to shrink FMGCs sales by around 30 percent, and that may result in closing factories one week in a month – more job losses across the value chain.
In case of remaining 40 percent sales, which happen though wholesale market, the impact of documentation spree is yet not clear. The sector is unorganized and it is hard to foresee an impact at this point of time. But surely, there will be slowdown and there will be cases of dip in sales in weeks to come.
The FBR and traders have to come to one page soon; else the consumer may also see the impact in terms of shortage of products and spike in prices. The buzz is that trade associations in Lahore are eyeing another strike. Lahore Chamber of Commerce is not openly with the traders at this point, as the management is rubbing shoulders with the FBR and PTI economic team. But elections of chamber are in September. Sooner or later, the chamber has to come in line with traders. And the key is how the chamber(s) reduce the mistrust between the FBR and traders.
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