If you measure corporate profit in terms of profits earned by the 95 top-performing businesses that account for 99 percent of the Pakistan Stock Exchange’s 100-index market capitalisation during the first quarter of this fiscal year (July to September 2024), it decreased by 14% from the previous year. And that is an extremely suitable measure.
National newspapers have already made headlines for this Topline Securities research finding. However, there is a reassuring aspect for the optimist: The top 95 companies’ total profits from July to September 2024 are 16 percent higher than their profits from April to June. What does it imply?
Even though things are not as good as they were last year, it suggests that corporate profitability has begun to rise since the beginning of this fiscal year. Profits have decreased year over year primarily as a result of reduced demand and an increase in production costs as a result of high energy costs and a lower-than-needed interest rate increase.
The interest rate has already been reduced in stages by the State Bank of Pakistan, from a peak of 22 percent to 17.5 percent, and a further decrease is anticipated this week. The business community will applaud the central bank’s decision to make a larger cut, while corporate lobbyists will continue to complain if it makes a smaller cut.
However, given that the International Monetary Fund (IMF) has already been urging Pakistan to adopt a truly market-based exchange rate regime, any significant interest rate cuts by the central bank will jeopardize the current stability of the exchange rate. However, Ishaq Dar, Deputy Prime Minister, believes that the rupee is still undervalued.
The nation must exercise caution, foster unity, and manage potential fiscal risks at the same time. Unusual interest rate easing will result in an additional issue: Hot money, or foreign portfolio investment in government treasury bills and bonds, will begin to disappear. This has happened multiple times in Pakistan, most recently under the PTI government.
Additionally, capacity payments to independent power producers and high circular debts in the energy sector mean that energy tariffs will continue to rise, albeit less quickly than in the past.
The endeavors to handle this twin issue are in progress yet will consume most of the day to bear organic products. As a result, the business community cannot anticipate significant cost reductions from energy subsidies because neither the IMF nor the government have the financial resources to do so. Pakistan can’t ignore the IMF’s terms because it had a hard time getting the first $1.1 billion of a $7 billion loan over three years.
But why is it that there isn’t enough room in the budget for subsidies that are so important for the economy to grow? The straightforward response is that, despite the significant volumetric increase in revenue, the total revenue collection falls far short of being able to afford any such respite after meeting the requirements for servicing local and external debt, spending money on the operation of the government, and financing the growing costs of security and defense.
Additionally, the increase in revenue collection compared to the previous year comes at a significant cost: Small and medium-sized businesses have been hit hard by the introduction of new taxes and an increase in the amount of the ones already in place. Large corporations, which are already struggling with low product demand and higher energy and financial costs, have also been heavily burdened.
It is encouraging that Saudi Arabia has recently pledged to add $600 million to the previously promised $2.2 billion in foreign investment. However, this $2.8 billion will not be received immediately; Even if all 34 viable projects in which the Saudis have agreed to invest remain viable in the future, it will take several years to complete.
With the escalating conflict in the Middle East, the future appears even more uncertain. Pakistan must exercise caution not only in geopolitical matters but also in matters of local politics and economic growth.
At this point, nothing could be more rewarding than working together to avoid some economic threats and building national unity.
These include the IMF taking a harder line when it sees that some of its conditions are not being met; if pressured too much to negotiate capacity payment agreements, independent power producers will take legal action; a rise in the number of militants in Balochistan and Khyber Pakhtunkhwa; and friendly nations like China, Saudi Arabia, the United Arab Emirates, and Qatar that provide support for our balance of payments that is less than we would like.
Naturally, these are in addition to the obvious threat of slower-than-anticipated economic expansion, a slower-than-anticipated industrial recovery, and the agriculture sector losing some of its resilience in the face of increasing environmental challenges.
The effectiveness—or lack thereof—of the current hybrid regime will be demonstrated in the coming months by the performance of the economy as a whole, particularly the industrial sector.
