Improving business confidence

12 June 2024

Published in: Business Recorder

It’s welcome news, of course, that the 25th wave of the Business Confidence Index (BCI) conducted by the Overseas Investors Chamber of Commerce and Industry (OICCI) registered a four percent improvement in Mar-Apr2024 over Oct-Nov2023.

The survey draws samples from about 80 percent of GDP stakeholders, so a consensus seems to be building that improving growth, declining inflation and a stable exchange rate are powering a bottoming out of the economy after a long period of stagflation.

It is interesting that this news comes just ahead of the crucial interest rate announcement next week, when these improvements are widely expected to make the State Bank begin easing rates from record-high levels, bolstering investment and expansion.

Breaking down the survey results, while firms in the manufacturing sector showed declining confidence, no doubt because artificially high input costs still hamper production, an impressive 16-percent jump in retail sector confidence is indicative of healthy consumer confidence and a more vibrant economy in the coming fiscal.

Yet caution is advised. Despite the 4 percent improvement – to -14 percent from -18 percent – the index is still in red. For it to reach positive domain a lot of sustained momentum will be needed. Also, the OICCI is prudent enough to warn that “going forward, anticipation of rising inflation, high taxation and inconsistent government policies” are “key threats to business growth”. Indeed, part of the overall optimism factors in the upcoming IMF programme, most likely another Extended Fund Facility (EFF).

And while it will beef up reserves, rule out default, improve sentiment and probably ignite another bull run at the equity market, it will not come without its fair share of hiccups.

For, as righty feared by OICCI, it will also force another round of tax hikes and subsidy cuts, which will inflate utility bills and stoke cost-push inflation, probably catching the SBP wrong footed if it does turn dovish on Monday. If past experience with EFFs is any guide, this shift should come around the time the second tranche is due; turning sentiment and the capital market.

All this makes the next couple of quarters even more important. Ideally, the finance and commerce ministries should gear up to work overtime to exploit this mild tailwind. They would have noted from the OICCI survey that the investment dropped to -12 from -4 last time; attributed to “ineffective commercial and trade policies and an unclear global security situation”.

There’s not much anybody in Islamabad can do about worsening exogenous factors, but for flawed policies to continue would be simply unforgivable.

The government’s recent desperate efforts to get the Chinese to roll over some loans and Gulf sheikhs to commit their petrodollars are welcome, but optics can rally sentiment for only so long. Unless principal parties sign on the dotted line, and those investments make their way to the central bank’s vaults and reflect in official reserves, all this shuttling from capital to capital amounts only to a drag on the official finances.

It’s much better to formulate a concrete plan to attract more long-term investment, especially now when the overall environment is conducive and surveys like OICCI’s will make serious money look a little more favourably towards the Pakistani market.