Distressed businessmen lose confidence in Pakistan’s economy

Pakistan’s precarious financial situation is having unprecedented impact on the lives of various stakeholders in the economy. Different sections of society are facing glaring indifference of the political leadership and policymakers fixated on the next release by the International Monetary Fund (IMF). The ninth review remained stalled for long due to fund’s differences with Islamabad over policy actions, budget and external financing needs. Nevertheless, the reforms demanded by IMF are bound to expose poor masses to severe financial hardships with steep inflation in food and energy being most dreaded.

The middle class is already suffering from gradual erosion in its income and purchasing power. Another important constituent of the economy, the Pakistani industry is also looking shaky amid the turmoil. A combination of inflation, uncertain policy environment and volatile banking rates is making the business class depress about its prospects in the country. Recently released results of a survey by the Overseas Investors Chambers of Commerce and Industry (Oicci) reveal a grim account of businessmen’s faith in Pak industry and economy. According to the report, Overall business confidence score (Bcs) stood at negative 25 percent during the survey conducted in March-April 2023 (Wave 23). It was a sharp decline of 21 percent from the previous level of negative 4 percent seen during last such survey conducted in September-October 2022 (Wave 22). A decline of 25 percent in a matter of 6 months is indicative of the pace at which the confidence in Pak industry is waning.

The three major threats to business growth identified in the survey were high Inflation (82 percent respondents), high taxation (74 percent), and Pak rupee devaluation (72 percent). Amir Paracha, President Oicci said, “The significant drop in the overall Business Confidence was not a surprise considering the volatile and extremely challenging economic situation during the past year. The acute forex shortage has affected import and operations of many businesses, with hyperinflation, very high interest rates, and rapid devaluation of the currency negatively impacting the business environment”. The loss of confidence is said to be specifically severe for the manufacturing, retail and services sectors which are prone to multitude of miseries. Constrained by the crippling restrictions on imports, manufacturing witnessed a decline in confidence of 22 percent. Additionally, the services and retail sectors recorded figures of negative 26 percent and 35 percent, respectively.

The fall in business confidence seems to be flowing from a consistent deterioration in key economic parameters during the last six months. A halt on dividend repatriation and imposition of super tax last year also played role in lowering businesses’ faith. Ironically, the recent budget is likely to increase burden of taxes further as rise in super tax rates was announced. Last year, there were four slabs – starting with 1 percent super tax on income higher than Pkr 150 million till a maximum rate of 4 percent on income more than Pkr 300 million. The tax rates now have a maximum rate of 10 percent for income higher than Pkr 500 million.

The super tax will be topped up by a windfall tax set to be levied at a rate of up to 50 percent on extraordinary incomes. Interestingly, it will be applied retrospectively on the incomes earned during last five years. The moves are expected to have a demoralising effect on big businessmen who may chose to hold back or scale down their investment plans. According to some estimates worked out by the Pakistan Business Council, some group holding companies may effectively end up paying total taxes of 70 per cent on their incomes. The number seems scary for the investors looking at new opportunities. Compounding the problems of economic mismanagement are the ones originating from the ongoing tussle among institutions of governance in Pakistan.

In an election year marked by clashes on roads, the business environment is muddled by a lack of clarity over political direction. Frequent security incidents are also intimidating the foreign investors away. A steady requirement of investments calls for structural reforms in the country. However, it does seem likely in near future considering the surrender of Pakistan’s polity to factionalism and radicalization.