During my two days in Karachi we met a total of 13 companies at our hotel. The companies were from the automobile, banking, cement, chemical, fertilizer, insurance, IT, oil distribution, pharmaceutical, power generation and textile sectors.
One of the highlights was a meeting with a deputy governor of the State Bank of Pakistan and his staff at their fortified office in downtown Karachi. Our group was briefed about the economic situation and outlook and especially the situation of the Pakistani Rupee (PKR) and the team’s expectations for interest rates and inflation. Imran Khan, the new Prime Minister and former captain of the Pakistani cricket team which won the 1992 World Cup, became the country’s 22nd Prime Minister on 27th July 2018 and since then he and his ministers have achieved, after some initial hiccups, a remarkable stabilization of the economy.
More or less all of the company officials we met gave very positive feedback about the outlook for the economy and generally it seems that everybody we talked to had much more confidence in the current government and were decisively more positive about a possible turnaround of the economy in the near future. A good example for the increased trust in a turnaround of the Pakistani economy is the PKR which appreciated by about 5% since its low on 27th June 2019 after falling from 105 to the USD to 163 within 18 months. This impacted almost all industries negatively with the exception of oil and gas producers and IT companies. It is further expected that monetary easing will start from the 2nd quarter of 2020 onwards, after the inflationary pressure due to higher prices of imported food, electricity, and gas, has peaked.
After the International Monetary Fund (IMF) loan program was executed in July 2019, the foreign exchange reserves of Pakistan began to stabilize and in the past weeks finally started to increase. The FX reserves currently stand at USD 18.1 billion, which compared to other economies is still low. It is further expected that the current account deficit will go down to 2.6% of GDP in FY 2020 compared with 4.6% in FY 2019 thanks to lower imports (about 21% lower) and slightly higher exports (+5%).
The government is now also focusing on bringing improvements into the real economy through inclusive growth in agriculture and the industrial and services sectors (especially IT). Another major achievement of the current administration has been the broadening of the tax base which has resulted in higher tax revenues, which again compared with other countries is still far too low (only 11.6% of GDP) but at least the current government is tackling the problem with some tough measures. For example, the government has implemented a higher sales tax for buyers without tax identification numbers for certain luxury products such as cars.
However, Imran Khan’s government has also had to make some unpopular decisions like increasing electricity and gas prices for industrial users and private consumers, but surprisingly without too much resistance. Hopefully these measures will sooner or later end the “circular debt crisis” which impacts suppliers and producers related to gas and electricity. The IMF now forecasts that Pakistan’s GDP should grow this fiscal year by 2.4%, followed by 3% and 4.5% in FY 2021 and FY 2022 respectively. Obviously, most of these decisions related to gas and electricity price increases are part of the IMF loan program.
On a slightly negative note is the issue regarding the upcoming decision by the Financial Action Task Force “FATF”, the international body which oversees a country’s money laundering and illicit financing regulations, to potentially put Pakistan (and Mongolia) on the black list which could have significant ramifications for the country and especially the banks and FDI (foreign direct investments). However, Pakistan has made progress in overcoming many of the issues with respect to financial and money laundering regulations which has so far allowed it to remain on the grey list.
In the evening, we ventured out to have a quick stroll through Karachi’s largest shopping mall, the “Dolmen Mall” in Clifton, which was built in 2011 with an integrated underground car park. It hosts lots of smaller local and international shops such as a Carrefour Hypermarket, a Debenhams department store, many restaurants, coffee shops, and a food court. As can be seen from the picture taken below, on an early Thursday evening, the mall was crowded with shoppers.