Inflation was fairly tamed, a second policy rate cut well in play, and after a particularly gruelling exercise of announcing a tax-hefty budget, IMF funds secured. Even industrial production is improving as evidenced by positive LSM growth for four months running—in 3QFY24, recording the first positive reading in six quarters. Is the economy trudging out of the bottomless pit? Businesses don’t think so.

The business confidence survey religiously published by the SBP every month—well in advance, even—records a sobering Jul-24 where business confidence has dropped to less than 50 for the first time in seven months, down 7.5 points compared to the previous month. (For reference, if the diffusion index is greater than 50, positive views are more than negative views, if it is less than 50, positive views are less than negative views and if it is equal to 50, positive views and negative views are equal). July’s reading of 48.6 implies businesses are more pessimistic about the economy. It makes sense. June brought with it a terrifying budget for taxpayers with all manners of tax increases to meet the government’s lofty revenue targets. This will keep demand adequately suppressed to combat any dramatic increase in inflation.

Businesses’ inflation expectations are also higher than they have been in the past seven months even though the SBP was expected to—and later on followed through with a policy cut in June. The monetary policy committee justified the rate cut by citing a “significant decline” in inflation (during May) since February and said inflationary pressures were subsiding.

However, the budget certainly put a dampener on sentiments with businesses less than optimistic about inflation over the coming months. Critically, energy price adjustments and the government’s petroleum levy targets continue to threaten inflation over the next fiscal year. Meanwhile, global food and energy commodity prices will also translate into higher inflation at home. In yesterday’s monetary policy committee, the statement said June’s slightly higher inflation was better than anticipated and the inflationary impact of the FY25 budgetary measures was broadly in line with earlier expectations. However, inflation coaxed by higher taxes may be transmitted over the coming months and the complete impact may not be visible just yet.

Other oft-ignored responses in the survey are more concerning. Whereas production managers for the industrial sector are reporting improvement in production and an increase in order books, they also reported reduced raw materials procurement. Overall businesses reported lower current and expected employment, reduced expected production in the next six months, subdued capacity utilization, and worsening financial conditions firm-side.

The pessimism is mirrored in the Gallup business confidence survey where businesses complain about the business’s “unfriendly” budget, identifying inflation as a major pain point souring sentiments, and calling economic security in the country a “distant dream”. They are right. The fact is, any incremental improvement in the macroeconomic environment is just that—incremental. Even if inflation is slowly coming off of its high, SBP has offered two rate cuts in two months, and even if the government has well-secured dollar funds from the reluctant international lender, the miseries that ail the Pakistani economy are far from solved. They are persistent, they often gush like fresh wounds, and the bleeding is only stopped by a tourniquet with no other treatments in sight except prayers.