Pakistan’s last-minute deal with the International Monetary Fund (IMF) has given Islamabad some breathing room as the country moves towards elections, but industries and consumers are still facing the economic woes they faced head-on earlier.
A string of companies from various sectors – Sitara Peroxide, Pak Suzuki Motor Company among others – are continuing their announcement of production shutdowns, citing various reasons ranging from demand to supply-side constraints.
With Pakistan hiking fuel prices by almost 15% in half a month, the outlook on inflation and key interest rate has again been disrupted. Power tariffs show no signs of slowing down, and rising circular debt will only add to the sector’s woes, putting domestic and commercial users of electricity at unease as well.
“Elevated inflation means higher material expense, and there has been a substantial rise in financing costs,” Waqas Ghani, Deputy Head of Research at JS Global, told Business Recorder.
These factors have collectively resulted in demand suppression and an overall reduction in economic activity, he said.
“This has a cascading effect.”
A slowdown in economic activity from the supply side will also be matched by a lower purchasing power on the demand-side as Pakistan’s salaried group now faces higher taxation. These squeezed incomes will only dampen growth prospects, say experts.
Another sector facing economic headwinds is Pakistan’s auto sector. “(It is) not on the government’s priority list when it comes to Letters of Credit (LCs),” Mohammad Abrar, an auto sector analyst at Arif Habib Limited (AHL), told Business Recorder.
In addition to the LC issue, the sector is also faced with depressed demand due to higher prices and record-high interest rates. A falling rupee is not helping either.
“Companies can only reduce their variable costs. Regular shutdowns do just that,” Abrar added.
Rao Amir, another analyst at AHL, said the situation is expected to improve in the coming months.
“This depends on foreign exchange inflows.”
In an earlier interview with Business Recorder, Air Link CEO Muzzaffar Hayat Piracha said capacity utilisation at the company’s plant in Kot Lakhpat, Lahore has improved, and expected to grow in the coming months.
“We faced severe supply-chain issues due to the restrictions on letters of credit as soon as we began manufacturing last year,” Piracha had said. “However, after the IMF programme, we are now producing more cellphones than we were making before restriction started.”
Another expert said Pakistan’s economic growth is not sustainable since it “almost always relies on debt inflow”.
“Pakistan needs to focus on non-debt creating foreign exchange. It’s easier said than done, though,” the expert added.
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