From stabilisation to growth

Pakistan's big businesses often operate on clutches. The winners are selected decades ago, and they have formed a strong lobby to safeguard interests. Nowadays, there are talks on opening up of economy, and let the market, and technical policy levers to determine key pricing rates - such as exchange rate and interest rates.
There is sense of giving no blanket subsidy or undue advantage to any particular industry - such as cheap gas to fertilizers, undue protection to auto and other industries, tax breaks to domestic textile supply under the cover of exports, support price to sugar at the cost of other crops, and the list goes on- the idea behind it is to let market forces find champions.
That is a medium-term plan. The idea is to increase the investment to GDP ratio and that investment to channel in sectors where Pakistan has competitive advantage. The market is internalizing the new reality; as it is the same set of big investors with deep pockets to reroute into ventures where they would find returns.
However, before they start thinking of any new investment, the existing businesses concern is on stressing margins owing to currency depreciation and more importantly high interest rates in days of inventory build-up. Now, all the business community gets under one umbrella and is lobbying on its short-term pain of higher debt servicing - till the time interest rates are high.
Business community is exerting pressure from government ministers to media to policy institutes on influencing SBP for revisiting its monetary policy stance. The stock market is in shambles and the main trigger market is finding for bull run is cut in interest rates. Technical and non-technical arguments are being presented in support of lowering the interest rates. However, there is no correlation of domestic investment to GDP to interest rates. And high interest rates are not dampening business climate - because the rates can come down as fast as they have moved up.
Businesses are talking about NPLs, but SBP's latest numbers are not showing any major increase; and informal talks to bankers is depicting that SME sector is under stress and some growth in NPLs is observed there. But it is yet nowhere close to the quantum experienced in the 2008 crisis. Banks have learned the lessons and are generally more cautious in lending. Low lending to private sector or consumers is another problem due to crowding out by government - but that is all together a different debate.
The SBP is running a simple policy. The central bank is anchoring policy rate with expected headline inflation - to keep real interest rates positive. There are signs of trend building in lowering current account deficit - but SBP would like to wait to be more confident on the establishment of trend. The other consideration is reserves building - quicker it is; less is the chance of currency depreciation.
And that will keep inflationary expectations tamed. The other element is on saving mobilization as keeping real positive interest rates is an incentive for people to save. One of the prime reasons for the 2018 balance of payment (BoP) crisis was higher consumption - both public and private. The private consumption growth is arrested by demand compression and there are early signs of informal savings (in foreign currency or bearer bonds) conversion into banking fixed deposits.
However, at the same time, too much stress on documentation is pushing some to informality - FBR and businesses are sticking to their positions waiting for other party to blink. The problem is in public consumption that remained unabated. The spending is decentralized and provinces have no incentive to save more, and there is no policy tool to control it. The dire need is to strengthen the Council of Common Interests by removing the redundant ministries.
But that won't be enough. And there are not many signs of improvement in governance in running the government machinery. Slashing development expenditure is cutting jobs while the government's promise is to generate new. The business community is feeling that burden of fiscal failure is being passed to them. The apprehension is not totally uncalled for; but in times of government support, these businesses' profitability thrived; but innovation and efficiencies were missing on their part too. All the parties including - businesses, regulators, government and consumers have to take the onus, and the need is to step up for transition from stability to growth.