The economy is dangerously slowing down. At this point, the effects of administrative measures to apply brakes on the imports are evident. The wider impact of inflation in demand destruction is going to be visible in a few months. There is a limit for businesses to absorb growing cost and enhanced taxation pressure. The fear is of massive job losses. Demand patterns are shifting. People are postponing purchases. Middle class is shifting kids to less expensive schools. They are economizing energy consumption. Poverty is slated to increase substantially. Crime rate is on the rise. The country is going to pay a huge socioeconomic cost.
Almost all the economic sectors are in throes of pain. Engineering sectors are on the top. Most of the administrative curbs on opening L/Cs are in chapter 84 and 85. Raw materials, parts, molds, machineries all are being scrutinized and have informal quotas. There is an immense squeeze. In sectors like auto, mobile phones, white goods, steel and a few others, there is 30-50 percent volume reduction. The breakeven point is usually at 70-80 percent of capacity utilization. Many businesses are in losses. And those who are making money, the government is grabbing the lion’s share in the form of taxes.
The overhead costs are increasing while revenues are not. That is the sentiment of many in the value chain of engineering sectors. Big companies are paying super taxes. Their free cash flows is impacted. That is cascaded into SME businesses in the value chain – vendor and distribution. And these companies are shedding workforce. Many have sent ‘not-required’ employees on paid leaves. Once, paid leaves are over, and demand (or supply) is not back, they would be sent on unpaid leaves – effective unemployment. Those on daily wages are already unemployed.
“They have killed the auto sector,” lamented a big player. According to him, price increase – due to taxation and currency depreciation—has killed the demand. One big company has already laid off 10-15 percent its workforce. And more is expected. Some white goods businesses are in serious trouble. They have sold on credit in PKR and the cost is growing in USD. “There is a free-fall in demand, especially after the floods,” one player said. The cycle is broken. Some businesses may not survive after this. And not to mention, there would be layoffs in the industry.
The story of textile is not rosy either. Theoretically, the sector is to benefit from currency depreciation; but the demand dent in selling economies is doing the damage. Floods are creating problem in cotton procurement. The recent 11 percent fall in Bangladesh currency in no time is eroding the benefit to Pakistani exporters. Many units here are on two shifts (down from three shifts). Around 10 percent industry is closed and overall 30 percent capacity is unutilized. Some fear, small textile units could be wiped out.
Then the new capacities are coming, as majority of TERF was taken by textile players. Around $1.5 billion investment is being made in 100 garment units which was supposed to translate into $3 billion of additional exports. The numbers in spinning and weaving are no different. The headache today is how to pay back the concessionary TERF loans. Many beneficiaries of TERF in other businesses are thinking the same. The feasibilities were made at the currency parity of 150-170 and today the new feasibilities are being prepared at rates which are best to not be mentioned here.
Banks are fearing bad loans to grow. Unlike the equity market, credit market is backward looking. The impact of slowdown and unviability is to come in the banking businesses in the coming quarters. Already tax on banks is super high. The government has linked the taxes to Advance to Deposits Ratio (ADR). Some big banks want to increase the ADR; but at the same time, businesses want to retire loans as high interest costs amid lower revenues are making bottom lines in red. One big bank is thinking to shed high-cost fixed deposits. One silver lining for big businesses could be that banks to offer loans below the KIBOR rate.
The story of overall economy is dismal. No sector is a beneficiary of this chaos. PTI is lucky not to be in power today. The PML-N was lucky in the past to create an illusion of governance and pro-business policies, as party’s timings of power in past coincided with peaks of economic cycles. Now they are being exposed. The bubble is being busted. Some say it is karma.
Whatever it is, the fact of the matter is that the global recessionary and dollar strengthening impact had to be faced, no matter who is in the power. The pain inflicted by the floods would have been no different. However, the confidence could have not been this low. The fear of default could have confined to the drawing room talks. A leading businessman lately said that there is no ‘soul’ in the economy. Such sentiments might not have existed had there been no vote-of-no-confidence. The fear of social unrest would not have existed.
Are we at the point of no return? Well, being an optimist, the answer is no. There must be room for a national agenda of reforms. The political economy needs to be rethought. Energy sector must be deregulated, and smaller administrative (provincial) units formed. And the list goes on. However, before doing so, some sort of stability is warranted. This government is too weak and has implicitly given up. That is further eroding the confidence.
Reviving Pakistan economy is like a war against vested interests. The wars are won on passion. The soul needs to be active. And for that, the first point is to have political stability and have a government with enough mandate to introduce reforms. The way things are today, nothing short of fresh elections can lead us to the road of recovery.Ali Khizar, "Snap elections can help arrest economic slide," Business recorder. 2022-09-19.
Keywords: Economics , Business policies , Economic cycles , Political economy , Crime rate , Pakistan , Bangladesh , TERF , KIBOR , ADR , USD , PTI , PMLN