A number of immediate steps have to be taken to bring back investors
The private sector faced the phenomena of crowding out in fiscal year 2011. According to a State Bank of Pakistan (SBP) report, the sector has shown low investment growth of mere 4 percent during the fiscal year (FY).
Most of the borrowings of the private sector were to finance running capital while investments in fixed capital formation seized minute attention. This can be considered as an auxiliary in indicating low production rate, added increase in unemployment and poverty rate in FY 2012.
The private sector obtained credit of Rs.121.3 billion and loan of Rs.173.2 billion during the period of one year, the SBP report stated. The dismal picture of investment becomes clearer at the time when allocation of acquired loan categorized into working capital and fixed investment. Out of total loan, a huge chunk of loan of Rs.163.5 billion has utilised to finance working capital while a bit amount of Rs. 9.7 billion has been used for fixed investment in FY11.
A number of factors can be cited for the need of private sector in use of loan for financing working capital and low inclination towards fixed investment. While prevalence of high interest rate over the year, threats of terrorism and bad law and order are some factors that can be considered for the later one.
The nation knotted with a continuous inflation trap from the start to the end of fiscal year 2011. The inflation rate remains at 13.9 percent on an average in FY11 according to SBP data, leading the poor to the poorer. The acute reduction in purchasing power of the people is the result of high food inflation.
Prevalence of high interest rate worked in harming the economy. It directly hit the borrowing demand of private investors, stopping them to take added loans, resultantly squeezing the production capacity. The policy rate remained around 13 percent in FY11, which is almost highest in the world. For instance, one of our neighbour countries, India, applied an interest rate of 8 percent in July 2011. The main reason to retain such a high policy rate was to control the inflationary pressure on economy.
The high input cost can be mirrored in sharp rise in Wage Price Index (WPI) which almost doubled in FY11 by 23.4 percent from 12.6 percent in FY10, on an average. According to Federal Bureau of Statistics, prices of raw material increased by more than double in FY11, in comparison with the previous fiscal year.
The average increase in raw material prices reached at the level of 57.3 percent in FY11 from 29.1 percent in FY10. Appallingly, prices of building materials and fertilizers increased during the fiscal year and reached at an average of 13.2 percent and 20.7 percent in FY11 from minus 5.4 percent and minus 4.6 percent in FY10 respectively. The high input cost combined with high policy rate worked as crowding out factors for the private investors.
Loosing of confidence of the private sector is another emerging phenomenon which can prove to be harmful for the progress of the sector. The country, at present, is grappling with high levels of corruption, and low political will to solve problems which are not allowing investors to invest in fixed capital.
Natural calamities, like floods, are not new phenomena for Pakistan as disaster hit the economy in the previous fiscal year. However, the government again showed its deficiency in properly planning how to solve the problem.
Floods always ended up hitting the economy hard, particularly, in the wake of destruction to the production and infrastructure sector. The energy crises are almost eating up the economy; businesses have been squeezed due to non availability of electricity and gas.
Poor initiative of private investors is a clear indication of low production growth rate in future. The country already showed a slow GDP growth rate of less then 3 percent in FY11. Projection of slow growth in FY12 becomes strengthened with the hitting of flood to the economy.
With the presence of such factors, the gap between supply and demand sides of production is increasing. People are forced to spend more money to purchase even basic food items as according to federal bureau of statistics, in FY11 sensitive price index remained at 17.8 percent while in FY10 it was 13.2 percent. This situation is pushing the middle class of the society into poor class category. People use most of their income to buy eatables. The lower trend in production is also indicating increase in unemployment rate.
Reduction in private investment is a very serious phenomenon and should be dealt with prompt attention by the government of the time. If the trend of low investment growth prolongs for years, it could be harmful. Retaining back the confidence of investors is almost next to impossible, at least, by the present government. While a current step of easing policy rate, 12 percent, would be helpful for retaining back the growth trends in private investment. Moreover, offering of soft loans to private investors could also work effectively.
The writer is researcher at SDPI and can be reached at firstname.lastname@example.org
This article was originally published at: The News
The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.