Business --- Viewpoint
Everyone in Pakistan well as many sitting thousands of miles away, the business community too is waiting to exhale. And so, all that’s visible in the run up to the precise moment – General Elections 2013 – are lots of breathlessly red faces. Generally, election year produces diametrically opposing reactions within the public and private sectors. While the incumbent seeks to woo fickle voters through last ditch spending (think: poverty alleviation, development projects, etc.), the private sector often buries its head and its wallet in the sand until the storm of unpredictability has passed. Consequently, the business outlook for 2013 will remain depressingly unexciting until the new government settles down. The global recession isn’t going away anytime soon and the IMF recently cut global growth forecasts for 2013 to 3.6%, down from its earlier estimate of 3.9%. Although the Pakistani Government is doing its best to convince anyone who will listen that it is going to manage ‘four’ percent growth in the coming year, nobody is really convinced. The Government doesn’t really have the money to spend. Public revenues – proposed tax amnesty schemes notwithstanding – are low; the fiscal deficit is 8.2% and, to make ends meet, the Government is borrowing heavily from the banking sector. For decent growth, the Government needs a tax-to-GDP ratio in the vicinity of 16%; all it can muster at present is 9.1%. While inflation has finally been brought into the single digit realm, few are deluded enough to imagine it will last. First, global commodity prices (particularly oil) are still heading upwards. Second, with just enough forex reserves left for three months of imports and no bilateral or multilateral donor rushing to save Pakistan from Islamabad, the rupee is poised to come under serious pressure. (In November alone, Pakistan had to repay a staggering $616 million to the IMF.) Third, the Government has the State Bank printing Rs 1.5 billion a day. All inflationary enough on their own, the combined effect of these three will make for a very painful and prolonged hangover. Further, savings are low and the cash flush banks are too busy throwing rupees at the Government to bother with the few businesses that would be willing to invest in Pakistan prior to elections. Simply put, banks would much rather bolster their profits by lending to an insatiable but dependable Government than lend to the brilliant but risky private sector. Significantly, while the Central Bank has now cut its policy rate by a cumulative 200 basis points since August, its critics are still unhappy with the decision. Their first bone of contention is that the temporarily low inflation numbers do not merit monetary easing and the State Bank is just making it cheaper for the Government to borrow more rather than hauling it up for doing so. Further, they cite data on private sector credit off take that shows that the same actually declined after the deep cut in August (150 basis points) while Government borrowing increased. Businesses, on the other hand, say that interest rates are still too high to consider investing. (Foreign investment, of course, requires a climate unavailable in a frontline state in the war against terrorism.) While the specific merits of this allegation can be argued over, the business environment in the country presents a series of uncontroverted and inescapable realities that dilute the impact of the high cost of borrowing. There are obviously those who cry about energy shortages, the unpredictability of supply and the fear that the dollar-rupee exchange rates will cross Rs 100 by June 2013. There are others who moan about the law and order situation and the fact that extortion levels jump up dramatically in the run-up to an election as political parties gather funds for electioneering. But first and foremost is the fact that the entire country is in a state of political flux and the economy is teetering on the brink of a...
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