Overseas Investors Chamber of Commerce and Industry (OICCI) has published the results of its latest 'Business Confidence Index (BCI) Survey - Wave 17', conducted in December 2018.
Overseas Investors Chamber of Commerce & Industry (OICCI) serves as a platform to promote foreign investments, playing a major role in the growth of commerce and industry in the country.
As one of the oldest and largest investment Chambers in the world, OICCI draws on a diverse membership both in terms of sector and geography with the current 189 members representing 35 different countries and 14 different sectors of trade and industry. Its member companies make the largest contribution to the national exchequer in terms of taxes and duties.
As reported by OICCI, the survey conducted every six month is a comprehensive review of the perception of business leadership in Pakistan covering business environment at regional, national, sectoral and town business entity levels. The assessment takes into account the business environment in the past six months, as well as seeking respondents' feedback on the anticipated business and investment environment in the next six months.
The overall foreign investors' perception for the year 2018 was negative but shows optimism for FDI inflows in the second half of 2019 based on more clarity on the economic directions of the country.
The punch-lines of the survey as reported by OICCI are:
The overall Business Confidence in Pakistan stands at 12% negative, a significant decline from 14% positive in Wave 16, released in May 2018.
The survey results were largely influenced by pessimism in the services sector, as the Business Confidence Score (BCS) of services sector, declined by 52% against 23% positive in Wave 16. The BCS of retail and wholesale trade sector declined to 5% negative compared to 6% positive in Wave 16, while the BCS of the manufacturing sector went down to 4% negative.
The negative Business Confidence in the second half of 2018 is largely influenced by uncertain economic and political environment during the period, a significant Pak Rupee devaluation, increasing oil prices during most of this period, together with, substantial Interest rates hike to 10% by State Bank of Pakistan in November and the resultant accelerated level of inflation, which had an impact on the business confidence in the country.
Based on the recent business friendly measures announced by the Government in 2019 and increasing emphasis on improving Ease of Doing Business and regular engagement with the key stakeholders, there is expectation that, going forward, the government, including the provincial governments, will be able to monitor and deliver on a more functional business friendly environment
Business situation in the Past Six Months (P6M) declined the most (-63%), followed by Pakistan Business situation (-54%), Company Business situation (-47%), and Industry Business Situation (-45%).
A steady decline is noted over last 3 Waves in confidence with respect to the Global, Country, City, Industry and Own Company business situation, leading to a perception of expected drop in ROI (-13%), Profit (-20%) and new employment (-10%).
The overall responses on growth in sales, profitability, as well as new investments and employment, show a net negative BCS, whereas in Wave 16 all these elements recorded a net positive score.
Circular debt (61%) is the most pressing issue negatively impacting BCS of not only the power and oil sector but also their business partners, followed by lack of inter-provincial coordination on tax matters (50%) causing jurisdiction confusion for business entities, substantial delays in Tax refunds (50%) and continuation of Super Tax, for the last three years despite a commitment to end it within one year.
Most of the respondents (44%) believe that debt burden on Pakistan, as well as the changing economic policies (32%), at federal and provincial levels are negatively impacting their businesses also.
Majority of the respondents believe that the abolition of the Regulatory Duty would be beneficial for boosting exports, as well as the overall manufacturing industry.
Survey respondents suggested that exporters should improve the quality of their brands, promote new products with unique designs, explore new markets and improve the quality of their services at international level in order to boost exports, besides building trust/collaborating with international brand leaders, and competitive pricing thorough productivity and efficiency gains.
Respondents also suggested that in order to increase exports the government should create a Ministry of Exports for 3 years with full focus on export promotion only, engage with international consultants with experience in transforming export of a country and reduce energy cost.
Majority of the respondents (65%) believe that Pakistan's commitment towards FATF will reduce corruption and help in tightening other financial malpractices in the country.
An overwhelming majority believes that inflation will increase in the coming six months.
Around 76% business entities believed that Law and Order situation in Pakistan has improved.
High Energy cost (74%) and Exchange rate (70%) have been indicated as the major threats to growth of business entities, closely followed by bribery and corruption (69%) and a shift in consumer spending and behaviour (68%).
Only 23% businesses expect increase in investment in Pakistan in the coming months. Manufacturing (51%) and CPEC (33%) followed by Energy (26%) are the major areas where investment is expected.
Local investment (53%) is considered as the main source of investment as opposed to FDI (47%).
Business entities consider falling commodity prices (88%), lower financing costs (76%), financial/tax incentives (72%) and rising market demands (66%) as the key drivers of growth.
The top five reasons for the decline in local investment and FDI identified in the survey are:
1. Energy Shortage
2. Political Instability
3. Security Concerns
4. High Cost of Doing Business and Poor Perception of Pakistan.
Significant is also that only 12% of the respondents were of the view that there may be job opportunities for absorbing some of the additional 2 million persons per annum entering the job market every year ( 21% in Wave 16), 38% of the same respondents opined that only 10% of these 2 million will be absorbed by the job market while 28% believed that job market will only absorb up to 25% of the these 2 million individuals and 2% believed that more than 50% of the additional workforce will be absorbed by the job market.
The survey roughly reflects views of the 80% of the GDP participants comprising manufacturing, services and retail trade sectors.
The conclusions drawn out of the survey termed as 'Business Confidence Index Survey (BCS) - Wave 17' is a most realistic and unbiased voice of foreign investors in Pakistan and must be seriously taken into account by the political leadership and the policymakers of the country to align their policies and conduct accordingly.
Significant to note from the survey and the pointers to the government to act upon are:
The profitability of foreign investors in Pakistan is on a decreasing trend which may lead to a freeze on investments and loss of jobs.
The impact of circular debt and rising debt burden is also considered as a threat to FDI in Pakistan. Foreign Investors support the government initiatives of FAFT and the incumbent government's drive against corruption.
Foreign investors in Pakistan are the major quality job providers, in addition to being the largest tax payers. This position of advantage needs to be retained.
It's the Board of Investment (BoI) Islamabad which should pick up and spearhead these pointers and effectively act upon. But, over the last ten years, the BOI systematically lost its relevance. It is no longer a one-window operation or an autonomous entity which could effectively lead and strategically invoke foreign investments in Pakistan and address the issues of the foreign investors.
It's good to aim for mega investors and mega investments in Pakistan but its gains are long term and those based on mere MoUs are often unpredictable. What is needed is a base load driven out of multiple and smaller investments, preferably SMEs and from the existing foreign investors, to start the cycle of investment - which is now almost stagnant.
(The writer is former President of Overseas Investors Chamber of Commerce and Industry)