EDITORIAL: It comes as no surprise that investor confidence in Pakistan these days is very low, if not at its lowest ebb. The recent Overseas Investors Chambers of Commerce and Industry (OICCI) survey depicts similar sentiments.
Overall business confidence score (BSC) is at negative 25 percent during the survey conducted in March-April 2023 (Wave 23). There is a steep decline of 21 percent from the previous recording of negative 4 percent in the previous survey recording conducted in September-October 2022 (Wave 22).
This is in sync with a sharp deterioration of macroeconomic indicators during the last six months that has adversely impacted business sentiment. The loss of confidence is worse for the manufacturing sector that is severely constrained by the ongoing import restrictions, a halt on dividend repatriation and imposition of super tax last year amid skyrocketing inflation.
The manufacturing sector, therefore, has the highest fall in confidence at 22 percent. The other sectors are not too far behind with a fall of 21 percent in retail and wholesale trade and 18 percent in the services sector. Overall, manufacturing sector recorded net confidence level at negative 19 percent, whereas the services and retail sector stood at negative 26 percent and 35 percent, respectively.
Macroeconomic indicators and overall business confidence has fallen further since the last recording. This is evident in the steps taken by the government in the recent budget announcement where the burden of taxes has further skewed towards the documented sector.
The super tax rate has increased in the budget announced for next fiscal year. Last year, there were four slabs – with 1 percent super tax on income higher than Rs150 million, maximizing at 4 percent on income higher than Rs300 million. Now the slabs have increased, and the maximum tax is at 10 percent on income higher than Rs500 million.
To further compound the uncertainty, there is another unclear tax — the windfall tax @ up to 50 percent to be imposed on extraordinary incomes that will be applied retrospectively on the incomes for the last five years. There are ambiguities in the tax. The government needs to answer the following questions: How does it define “extraordinary” income? How will it be applied retrospectively? And at what rate? This perhaps is going to be challenged in court.
Such uncertainties and ambiguities will further erode business confidence that would surface in the next recording. According to Pakistan Business Council, for some companies (mainly group holding companies), the income tax will be at 70 percent, inclusive of all taxes. That is too high a number and would surely impact business performance, and therefore investor confidence.
On top of this, there are supply chain issues where producers are unable to procure (import) raw material in a timely manner. Companies are unable to repatriate dividends to their foreign shareholders and these withheld dividends are depreciating with depreciation in rupee-dollar parity. There are hindrances in payments made to foreign consultants and services. All these are pressuring companies to sell or reduce their holdings in Pakistan. Recently, Shell Petroleum Company Limited (SPC) showed its intention to sell its stake in Shell Pakistan Limited (SPL).
That is not good for a country that is in dire need of investment at a time when the country’s forex reserves are not enough to cover one month of imports despite the administrative restrictions.
The top threats identified by the survey participants in descending order are super high inflation, high taxation and PKR devaluation. Within these three, taxation has worsened in the budget, and the fate of other two is dependent upon the timely debt restructuring as disorderly debt handling can let the currency to depreciate further and inflation to get out of control.
Copyright Business Recorder, 2023