Emergency and the economy
How will the imposition of emergency rule impact the economy? Although the state of emergency has created an environment of uncertainty for the business which is extremely bad for investment sentiment I dont think there will be any adverse impact on the national economy in the short-run, says a businessman who refused to be identified because he is on the boards of various state-owned entities. But the long-term outlook is uncertain, he added.
Several other businessmen and economists subscribe to his views. But, they insist, the government even if it does not lift emergency in the near future must announce a schedule for the general election immediately as an expression of its intention to lead the country back to constitutional rule in order to clear the fog produced by suspension of the Constitution. If that is not done forthwith, they warn, the implications for the economy will prove to be devastating in the long-run.
Business looks for clarity and certainty. Once the country is put back on the rails of political stability, things will start looking up, says All Pakistan Textile Mills Association (Aptma) chairman Shafqat Elahi. Others hold that the damage to the economy is already done and investors confidence in its future is on the wane
Whether the emergency is lifted in one week or in six months or more, does not matter much now. The harm is already done and our country perception as a politically stable nation is further eroded around the globe, says former Lahore Chamber of Commerce and Industry president Pervaiz Hanif.
Do what you may, the foreign markets view Pakistan as an unreliable source of goods. Let me tell you, this kind of perception is more dangerous for an economy than any other factor, he says. The imposition of emergency has heightened foreign customers worries about the timely supply of their orders. Such worries can make foreign buyers look toward more stable and reliable suppliers in the region and make exporters reduce their prices to get fresh orders.
Pakistani exporters had already been facing problems in convincing their foreign customers to visit them since 9/11, owing to deteriorating law and order situation, suicide attacks and continuous advance of militants in the tribal areas.
Only recently, some customers had begun sending their representatives for sourcing their orders, says a leading knitwear exporter, who did not give his name for fear of possible repercussions for his business. That flow has again been stemmed. So much for the generals promise of good governance, he says.
The government may have blocked broadcast of independent news television channels in the country and muzzled the judiciary through the Provisional Constitution Order (PCO), but foreign buyers dont depend on our sources for information. Their own channels and newspapers are providing them images of pro-democracy protests by lawyers and students and civil society. Along with protests, they are also watching the excessive use of brute force by security forces on protestors.
These images are not sending a positive signal to foreign customers, says a fashion designer from Karachi. The confidence of foreign buyers in Pakistan as a reliable supplier has further been shaken after international rating services Moodys and Standard & Poor downgraded their outlook for the country hours after proclamation of emergency and suspension of the constitution. There are also reports that Moodys may also downgrade Pakistans debt ratings.
The American administration and some European governments are also reported to be considering curbing their assistance to Islamabad because of the emergency rule. Some businessmen and analysts worry that the United States may clamp economic sanctions as it did during the better part of the 1990s if government delays elections and continues to rule the country under the PCO.
That means foreign lending will become more expensive because of increased political risks. It also means that it will become difficult for companies like National Bank of Pakistan (NBP) to float their GDRs in the international markets. Foreign investment which stood at $8.3 billion, including foreign direct investment (FDI) of $5.1 billion and portfolio investment of $3.2 billion, last year is also feared to decline this year.
Similarly, bankers fear that foreign remittances sent by overseas Pakistanis may also fall. The rapidly fluctuating fortunes of stock exchange mean foreign funds are taking out their portfolio investment in view of the uncertain political conditions.
According to the State Bank of Pakistan annual report for the last financial year, only a very insignificant part of FDI was invested in manufacturing sector leather and textile which can produce export revenues and the bulk ($5.1 billion) of FDI last year was realised as a result of mergers and acquisitions, mainly in the financial and telecommunication sectors. Other equity flows included investments in oil and gas and power sectors. A part of it was realised through privatisation of state-owned entities which has already been stalled.
If the existing uncertainty continues for long and the government does not move to rectify it, foreign equity and portfolio flows are sure to drop substantially this fiscal year, says a banker. He says the financial sector is unlikely to be hit directly by emergency. But if the overall economy suffers as a result of this action, the sector will also come under stress, he says.
Activity in the home market has also lost luster during the last few weeks. The wholesale and retail markets have been trying to discount imposition of the emergency rule and adjust themselves with the new reality since rumours began spreading in the middle of last month, says a traders leader, Ansar Butt. Sales have dropped as there are fewer customers in the shops.
It is widely believed that if foreign investment flows and remittances decline and activity in the home markets fail to pick up, the government may find it difficult to achieve its budgetary targets, including that of growth (7.2 per cent) and fiscal deficit (4 per cent), for this year.
However, the government, on the other hand, dismisses these gloomy forecasts. Finance ministry advisor Dr Ashfaque Hasan Khan says imposition of the emergency rule will have no implications for the countrys economic advance. Have our factories stopped operating? Have our farmers stopped growing crops? Has our services sector stopped expanding? Investments are being made in all sectors of the economy without any consideration of emergency. If that is so, our economic expansion will not be affected and we shall achieve our GDP growth and other budgetary target, he maintains.
Imposition of emergency is a temporary phenomenon. Things will start looking up once the president takes oath (for his fresh term) and election schedule is announced, he insists.
Dr Khans optimism must be commended in the given circumstances but it seems to be quite out of place. In the final analysis, any kind of disruption in business closure of a shop or a factory or even a school or a college or courts for any period (from a few hours to weeks or months) has an economic cost. Therefore, the country will have to pay this cost anyway even if the election schedule is announced and the lingering dispute over the presidents eligibility for another term in office and his military uniform settled leading the country back to constitutional rule as is being hoped by Dr Khan.
Emergency and the economy -DAWN - Business; November 12, 2007
