The interest rate was last up in Jul-19 with a clear signal of peaking; exchange rate has appreciated in the last quarter. Many pundits believe that things have bottomed; and recovery is imminent in a few months. The question is why the anxiety in the business community is building; why the media-shy businessmen are coming on prime-time TV shows, and why the noise in the media on their recent visit to the GHQ.
This all boils down to the speeding up of the documentation efforts, after the budget. The numbers are demonstrating it - people are not buying cars; even old variants at discount are not selling, retail trade and supplier businesses are not ready to share CNIC and that has adversely affected the FMGC business volume. Inventories are building up, and the markup cost is hurting to finance working capital, and plants are temporarily shutting down. Businesses in Faisalabad are showing their worst colours, and the list goes on.
No one in the recent round of meetings with COAS and PM actually asked to undo the documentation efforts, as it is politically incorrect to say that; but everyone, invariably, is facing the brunt. The question is how to tackle it. The idea is to give something to businesses without compromising the basic objective of documenting the economy. For that, first we need to revisit the economic model of the past decade, and how to fit in the two nodes together to revive economic growth while taxing the untaxed.
In 2003-08, the private sector-ran economic growth model was adopted by Shaukat Aziz through which a large number of new job opportunities were created in financial, telecom and media industry. The private sector was receptive to investment - all big investments by local groups like fertiliser plants by Engro and Fatima, privatisation of other plants, IPPs; and by foreign groups such as banking, telecom and E&P was happening then - private credit to GDP peaked at 27 percent in 2007.
Later, the government-run development programmes - especially by provinces after 18th amendment, and investment around CPEC by Chinese was the hallmark - even big IPPs were made under CPEC or by government herself. Private sector was at the back burner - catering to meeting demand created by government spending - mostly in informal sector - the private credit to GDP dropped to 15 percent of GDP in 2018. And we all have fair idea of how much public debt has accumulated in the process.
Now the fiscal house does not have space to run extravagant development programmes; and it should not be the way as government in any country is inefficient than the private sector. The government is now trying to revitalize the economic growth through construction and development by the private sector. The model appears to replace the PSDP by private sector construction, and keep a tight rope on documentation for big retail, trade and supplier businesses.
Last week, there were talks about coming up with "Builders and developers' special procedures rules 2109" where the questions about the source of equity might not be asked. In the meeting with the COAS, for the first time, Malik Riaz was seen in the big formal businesses club. Right after the relaxation on builders' documentation was reported, there are signs of reformation of broken cement cartel as the cement prices went up, and the cement and steel stocks rallied in the stock market. The developer community is pumped up and looking for new ventures. The construction industry is an immediate impetus to growth and employment, as it is labour intensive and dozens of industries are associated with it.
However, it is not the way to move up the ladder of economic development. Global research shows that the opportunity loss due to shift of capital from other more productive industries to construction can hamper future prospects of growth. In case of housing, the immediate economic growth is there, but not much economic returns after the investment is made. Although, housing for low and middle class is an important social cause. But more importantly, infrastructure investment is required for creating economic space - for that proper public private partnership (PPP) is imperative.
There is some success in PPP in Sindh despite an inefficient and disinterested government there for past eleven years, whereas the Punjab speed could not match in Shahbaz Sharif's back to back tenures. The reason being that Punjab-based businessmen lack spark and entrepreneurship. They like to continue living on rent seeking model. The resistance to documentation is higher from Punjab economic forums and especially from Faisalabad. First these forums - like APTMA, chambers and all have less representation of good businesses as they always lobbied for concessions and personal benefits.
And in case of Faisalabad, the traders and industry always lived on easy money making. These are the people who invented flying invoices, and when in past DTRE regime was introduced, they protested. Today, they are at forefront of resisting the documentation. They should not be spared.