The State Bank of Pakistan (SBP) in collaboration with the Institute of Business Administration (IBA), Karachi conducts the bi-monthly Business Confidence Index (BCI). The objective of the survey is to provide leading indicators on economic activity to the policymakers as it encompasses short-term forecasts on important macroeconomic variables based on current values as well as expectations of different businesses across various economic sectors.
The coronavirus pandemic has created significant challenges for businesses, particularly as the government had imposed a stringent lockdown in March 2020 in order to contain the spread of the virus. But it appears businesses are bouncing back. A recent presentation on the economy by the Governor of the central bank emphasized on the latest upward trend in the expected business confidence index.
SBP officially began publishing the BCI in August 2018 around the same time that incumbent government assumed office. The overall business confidence in August 2018 was at 55, among the highest level reported. The expected business confidence, which gauges the expectation for the next six months, was at 64, as seen in Figure 1 below.
The overall business confidence had increased by four percentage points and the expected business confidence had increased by 10 percentage points since the previous survey. Although, back then business confidence was below 50, the formation of the new government was driving business confidence expectations. Thereafter, the business confidence indicators began a downward trend as macroeconomic indicators suggested imminent challenges to the economy in the form of high inflation and a balance of payment crisis requiring IMF intervention.
The delay in approaching the IMF for a bailout package raised uncertainty for businesses. The subsequent BCI waves reflected economic realities as the challenges faced by the economic managers were reflected by the sentiments of the business community. For instance, there was a sharp increase reported in the expectation for overall inflation to increase in the next six months in October 2018 as 87.2 percent of the respondents expected inflation to increase compared to 34.7 percent in the previous wave.
The latest wave of BCI released in August 2020 reported a sharp recovery in the expectation levels of businesses. Although, the current business confidence index has recovered from the slump of June 2020 it remains below 50. Businesses are much more optimistic about the coming six months. This sharp recovery in business confidence is due to the perception that the loss of lives was minimised during the pandemic while limiting the adverse effects on livelihoods. Further, the expected number of employees in the next six months have increased by at least five percentage points across both major sectors, industry and services.
In essence, the upward trend in the expected levels of the business confidence index in August 2020 invokes new hope for economic revival. The next few waves will be critical as the government makes efforts to recover from the economic losses due to the coronavirus. The challenge now is to translate this confidence into higher investments and economic growth.
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