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Firms experience improved financial performance and lower growth in investment, bank borrowing and size- A survey based on the Business Community of Lahore

Over the last years, Pakistan's trade deficit has significantly increased and the main reason for this is that exports have declined at a steady pace, while imports have gone up alarmingly. As Pakistan is attempting to transition from a low growth to a higher growth trajectory, the business community will have to take a leading role, especially for export promotion and employment generation. The Innovation and Technology Centre (ITC) of the Lahore School of Economics recently conducted its fourth business confidence survey of firms to determine the industry specific and general macroeconomic trends prevailing in the local markets. This year's survey focused on measures needed tackle the deterioration in Pakistan's trade deficit. Data was collected between April-June 2018 from 550 firms who completed the 2018 year's survey, and the firms that responded were from a variety of sectors including the manufacturing, services and retail sectors.

This years' survey found that a majority of firms reported growth in their total sales, domestic sales and export sales as compared to last year. Of the three sectors, the manufacturing sector outperformed the others in terms of financial performance which is significant for economic growth since it accounts for almost 25% of Pakistan's GDP.

In order to address the balance of payment issues, this years' survey also looked at the trends of exports in Pakistan during the last few years and what steps could be taken to boost exports in the country in the coming years. Contrary to last year, this years' survey found that exports started picking up in 2017 and the majority of this growth in export revenues is coming from the manufacturing sector, where 57% of firms said their exports sales have gone up (as compared to 22% in the previous year).

When asked about the factors that could boost exports, a significant proportion of firms indicated upgrading technology, government subsidies, promoting exports of higher value-added goods and un-interrupted electricity and gas as the most important factors. The survey results also indicated that exporting firms have limited exports destinations (with most exports going to Asia, South Asia and Europe). This strongly implies that the exporting firms need to explore newer markets for their products and services in order to optimize their role and share in the international markets. On the import side, this years' survey found that imports have significantly increased in 2017 (with 54% reporting an increase) and most of these imports were for the manufacturing and services sector firms. This is especially concerning since the survey found that 24% of imports were made up of finished products, adding to the existing trade deficit.

On the investment side, the survey results showed that firms across sectors slowed down in terms of their level of investment, bank borrowing and firm growth. Investment is considered a critical component of growth, and a comparison across sectors revealed that the largest slowdown in investment in 2017 came in the retail sector (only 21% reported an increase), followed by the services sector (only 22 % reported an increase). Bank borrowing is also an important aspect of investment. Despite the lower interest rates in Pakistan at the time, a significantly smaller percentage of firms across sectors said that they increased their bank borrowing (only 18 % reported an increase) as compared to the previous year and most of these firms did not plan on utilizing bank borrowing in 2018.

Private sector employment is also critical issue for any developing country. This year's survey showed that there was a slowdown in the growth of overall employment levels reported by firms across sectors. The largest slowdown in size was reported by the retail sector firms, with only 10% of firms said that they increased their number of employees. Further, when firms were asked about their expectations over the current year, most firms across sectors said that they were not planning to increase their employment levels in 2018.

The current year's survey also aimed to study the overall optimism in the business community by analyzing firm level expectations about Pakistan's economy and the possible impact of China-Pak Corridor (CPEC) on the business sector in Pakistan. The analysis of the results showed that the overall optimism about the Pakistan economy has fallen in the current year as compared to last year (only 24% were optimistic about the Pakistan economy). The retail sector was the least optimistic about the performance of the Pakistan economy, followed by the services sector and then the manufacturing sector. The results of the survey also showed that overall optimism about the impact of CPEC on businesses has fallen across sectors as compared to the previous year (only 39% were optimistic about CPEC). A comparison of expectations across sectors revealed that the manufacturing sector and the exporting firms were most positive about the impact of CPEC on their businesses followed by the services sector firms. At the same time, the retail sector was the least positive about the impact of CPEC.

Finally the researchers looked at the impact of some important factors on industries and the results showed that the majority of firms found that energy, political stability, law & order and corporate tax policies had the greatest impact on their businesses. The sector-wise analysis showed that the manufacturing sector firms thought that political stability, energy, access to finance and law & order were the most important factors affecting their business, while the services sector firms thought that corporate tax policies, political stability, law & order and energy as the most important factors affecting their business. Whereas the retail sector firms found law & order, energy, political stability and provincial & federal tax regulations to be the most important factors for their businesses.

Finally, the firms attributed the drag on economic growth to the inconsistent and cumbersome policies, regulations and taxation of the Federal and the Provincial governments. They felt that while regulations and taxations were important, they must account for the needs and requirements of the business community. The collaboration between the government and the business community and the joint efforts by them in developing a workable industrial strategy can have a significant the growth.