Political uncertainty always translates to economic uncertainty

Nasim Beg

Founder Arif Habib Investments and Director Arif Habib Corporation

Nasim Beg, a senior banker and the founder of Arif Habib Investments, divided our queries into three questions.

1. On the current economic and political situation:

“While we have managed to curtail imports and achieve a current account surplus, which is expected to improve next month, the fundamental economic situation remains extremely vulnerable. The import contraction is at the cost of industrial activity, which is causing pressure on jobs and at the same time, the wage earners and the salaried class in particular are facing the highest level of inflation in their working lives. The Employers are facing direct impact on the bottom lines, not only on account of reduced business activity, but extremely high borrowing costs as well.

The underlying cause of inflation was initially the supply disruption related to Covid-19, then the US-China trade war and finally the Ukraine war. In Pakistan’s case, this has been exacerbated by the very significant loss in value of the Rupee, owing to the lack of timely measures to fill the huge Current Account gap, through IMF and other arrangements. In a nutshell, the economy is currently in a very challenging situation. As regards the political situation, other than stating the obvious that it is extremely polarised, including excessive polarisation in all state institutions, political parties and the public at large, it is anyone’s guess as to which way things will settle.”

2. Future outlook for the economy and political situation for the rest of 2023:

“Given the fact that the political parties are unable to come together to work out a ‘save Pakistan” plan, it is not possible to try and assess the outlook – one could run various scenarios, but one would be speculating on or trying to mindread the political leaders as well as the key people in various organs of the establishment. One can only hope that all these people in leadership positions will see the writing on the wall and sit down together and work towards a survival strategy, in the immediate to midterm, and thereafter agree on structural changes to make the economy self-sustaining for the longer term. The high level of uncertainty on the political front, translates into uncertainty on the economy from the rest of 2023.”

3. On market sentiment in the finance industry (Arif Habib and its counterparts) amidst the current crisis:

“The market sentiment for the finance industry is weak to say the least – one simply has to look at the low volumes of trading at PSX, as well as shares trading at what would be considered throw away prices. The corporate earnings of the last nine months have grown by 9% despite the challenging economic conditions, however these are significantly below the growth witnessed during the preceding years. Corporates are suffering on account of supply disruptions and historically high interest rates. The only action companies like ours can take, is to remain cautious and increase our efficiency through prudent spending measures, but at the same time strive to increase our revenues both through domestic, as well as other markets.”

Haroon Sharif

Senior Advisor UNDP and former Chairman BoI

“Pakistan is paying a very heavy economic cost of the ongoing political instability, institutional fragmentation and uncertainty about the future course of action.

The economy has already been in recession for almost a year and historically high levels of inflation, debt, dollar and overall cost of doing business is giving negative vibes to existing as well as potential investors. The Chinese government and other friendly countries have clearly communicated the need to de-escalate tensions and focus on economic revival. Pakistan’s ruling elite and bureaucracy is struggling to deal with this extraordinary economic meltdown.”

“In my opinion, the political flux will continue till a settlement on election date is reached. This will mean that Pakistan may have to miss the current IMF Program and will have to negotiate a new programme after budget. The pressure on FX reserves will remain high and the only tool available for the short term will be continuation of import compression. This will result in negative industrial activity and further job losses. So, a very tough year ahead with no policy direction to address the chronic fault lines like state owned enterprises, power sector or patronage based industry.”

“Markets and investors are losing trust in the capability of state institutions. The fundamental requirement for market confidence is basic rule of law and protection of property rights. With the current situation, a possible capital flight from an already low investment base can not be ruled out. What is needed is to empower a few key institutions like the Board of Investment, Privatisation Commission and SECP etc to deal with investor complaints.

It is crucial to look after the existing investors as they are the ones who can do positive messaging. Pakistan needs to show some progress on reforms to regain confidence of friendly countries, international institutions and investors. This will only be possible if certain reforms are delegated to professionals and insulated from political interference. A few decisions will help: a) The state has no business to do commercial business; b) delegate implementation to economic institutions from ministries; and c) undertake one major reform like privatisation for instance.”

Kashif Anwar

President

Lahore Chamber of Commerce and Industry

Along with associations and industrialists, warning signs have also been coming from different commerce chambers. Speaking to Profit, the President of the Lahore Chamber of Commerce and Industry (LCCI), Kashif Anwar, warned that local investors are already backing out, let alone foreign investors.

“The current situation has had a very negative impact. We keep saying there needs to be investment and foreigners need to come in. In these conditions even locals aren’t investing. We have taken a beating first from Covid and now from the forex situation. We are already hearing that next year’s tax target might be over Rs 9000 billion then how are we expected to work?,” he asks.

“All of the indicators are negative. The Large Scale Manufacturing Index is showing regressive trends and with such policies in place industries cannot operate. As a result people will lose jobs and the condition in the country will only get worse. More than 7 million jobs have been lost just in the textile sector. This is now possibly out of the control of the politicians as well. Nothing can fix this other than all departments and stakeholders sitting together and figuring this out. The IMF is not clearing our ninth review and as a result no loans will be rolled over. Whether by hook or by crook whether it is the establishment interfering something has to be done since these are not regular conditions.”4