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Sentiment weakens on energy, security, inflation concerns

Despite a growth in turnover and profitability in the recent corporate results, business sentiment further dropped by nine percent during the last six months owing to concerns related to energy shortage, worsening security and inflation, the Overseas Investors Chamber of Commerce and Industry (OICCI) said in a report issued on Wednesday.

According to OICCI’s Sixth Wave Business Confidence Index (BCI) for the period June and August 2012, business confidence index declined to a negative 34 percent from previous BCI’s negative 25.

“The sharp drop in business confidence is led mainly by poor sentiments of the retail sector and manufacturing sectors,” the OICCI said. “This decline was partially offset by the relatively positive outlook of the service sector,” it added.

The overseas chamber also observed a shift in opinion of respondents from positive to neutral zone, which reflected in the decline of overall business confidence. “It appears that business people have now lowered their expectations from the authorities,” the report said.

The business survey revealed that in the past six months, energy crisis has been cited as the main factor causing restlessness among the business community, followed by continuing deterioration in the law and order situation, high inflation, governance issues and high cost of doing business in Pakistan.

“The above factors have resulted in a decline in expectations of business expansion from 34 percent in November 2011 to 19 percent in August 2012,” the report said and added: “However, in respect of plans for the next six months, 16 percent of respondents expect to expand business and have a positive outlook in increase in sales, profits and return on investment. “

The services sector has the highest positive outlook at 33 percent for business expansion, within which finance is the most optimistic sub-sector. In the manufacturing sub-sectors, the auto industry is the most optimistic, according to the BCI.

The survey noted that perception on government policies had improved by 12 percent from the previous survey.

Challenges for the next six months in order of importance are electricity outages, high inflation, followed by security issues and poor government policies.

The business community responded that overall global economic situation improved in the current survey period. “However, this does not seem to be reflected in the response with respect to business situation in Pakistan, where the BCI shows further negativity, both in the respondents’ specific industry as well as their own organisation,” the OICCI survey said.

Although the latest survey shows a decline in the number of respondents with a positive outlook for the economy, there is significant variation in the opinion pattern between various cities.

The reduction in positive outlook and increase in negativity is much more pronounced in Peshawar and Quetta, followed by Islamabad/Rawalpindi and Faisalabad, as compared to the declining sentiments in Karachi, Lahore and Multan.

The report said that leading challenges for business entities during the last six months were energy crisis, followed by corruption and increase in inflation.

The OICCI observed that a decline had been noted in capital investment plans for the next six months that had fallen from 69 percent in the previous survey to 55 percent in the current survey. “The respondents have also indicated no plan to increase employment levels in their business during next six months,” it added.

A majority of all business sector entities consider that Most Favoured Nation (MFN) status to India and liberal Afghan transit trade will have an adverse effect on business. “A very high proportion of retail business entities consider MFN status to India will have a negative impact on their business,” the report said.

Volatile law and order situation has been cited as the main reason for the fast declining local and Foreign Direct Investment (FDI) in Pakistan. Meanwhile ineffective governance, energy shortage and overall cost of doing business have been given as other key reasons, the report said.

Overall, business entities of Karachi followed by Islamabad and Lahore are the main victims of law and order issues. These include street crimes, extortion, kidnapping for ransom, threats and expatriate security, the report observed.

About the federal budget, one third of the respondents believe the budget 2012-2013 to have a negative impact on their business and the overall economy.

Strong opposition has been expressed by a majority of the business sector entities in regards to the stamp duty being demanded in recent months on various procurement instruments, the levy of Sindh Development and Maintenance Infrastructure cess, gradual devaluation of rupee and increasing level of extortion money demanded from the trade.

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