Notwithstanding the lacklustre performance of the economy, the financial performance of the corporate sector is improving on the back of the stimulus received by business and industry including financing to retain workers, government’s cash relief to the vulnerable poor and switch over to smart lockdown.

It is higher earnings and savings of both foreign and local companies that hold the promise of some fresh investments as indicated by the surge in the number of new companies registered with the Securities and Exchange Commission of Pakistan (SECP). And a fresh impetus has now been provided by the announcement of a major power tariff relief package by the government to boost industrial production, employment and exports.

The industries would be provided electricity at off-peak hours rate round the clock for the next three years. The small- and medium-sized industries (SMEs) would get 50 per cent tariff discount on the additional use of power for the next six months. All the industries would be provided additional electricity on 25pc reduced rates for the next three years.

The federal development spending has increased by 13pc during July-September to provide stimulus to the economy

The National Coordination Committee has also decided not to close down industries and business despite the second wave of coronavirus to protect the livelihood of the people. Prime Minister Imran Khan says the country cannot afford a complete lockdown. The power tariff relief package would help activate idle industrial capacity and may also stimulate industrial consolidation with an improvement in corporate earnings.

In the first quarter of this fiscal year, the repatriation of profits and dividends on account of improved returns of foreign direct investment (FDI) shot up by 70pc to $559 million as compared to $329m in the same period last year. The three sectors accounting for major outflow were food ($151.7m), telecommunications ($103.9m), financial business ($88.5m), followed by transport ($47.5m), tobacco and cigarettes ($47.7m), chemicals ($44.5m) and rubber and rubber products ($44.3m).

Similarly, domestic listed companies have also recorded higher returns. Recently, media reported margins in many cases, particularly in cement and banking sectors, have improved over the past nine months or first quarter of this year against the same period a year ago. To quote a couple of outstanding examples, Askari Bank’s year-on-year profits after tax (PAT) in nine months of this calendar year swelled by 87pc and Bank Islami’s by 81pc. Meezan Bank’s consolidated profit went up 74pc. Lucky Cement earnings surged by 132pc. Kohat Cement’s PAT at Rs507m was a leap forward six times from Rs88m compared to the first quarter last year. The General Tyre and Rubber Company’s PAT shot up to Rs126m from Rs15.8m posted for three months of last year.

Higher corporate earnings in the three quarters were followed in September by a 69pc jump in the number of new firms (2,365) registered with the SECP compared to the same month last year. Unchanged, however, was the pattern of ownership reflected in the newly registered firms. Of the total incorporated firms, 68pc were private limited companies, 29pc single-member firms and 3pc unlisted public limited companies.

Similarly, the preference of potential investors for the areas identified for capital spending was also not largely different from the past trend. The first choice was the trading sector with incorporation of 414 companies. This was followed by construction (294), IT sector (289), services sector (226), real estate (139), food and beverages (87), corporate agriculture farming (73), e-commerce (70), engineering ( 61), pharmaceutical (59), textile (46) and transport (42).

As registration is the easiest part, it is not clear at this point of time how many incorporated companies would go into actual operation. To quote SECP, 99pc of firms were registered online and 40pc were incorporated the same day. The regulator does not inform the public of about the actual number of firms that become operational over time.

The period under review has however witnessed diverse macroeconomic trends. In the first quarter, private sector businesses retired loans of Rs101 billion on a net basis against Rs85bn in the same period last year. And the imports of machinery fell by 17pc despite the sharp drop in interest rates and unusual liberal loan facilities extended to businesses following the Covid-19 outbreak and lockdown.

Though the federal development spending has increased by 13pc during July-September to provide stimulus to the economy, an independent economist says the pace may not be sustained without a corresponding increase in tax revenue. The provinces, he points out, are already facing liquidity constraints. In four months of this fiscal year, the tax revenues collected by the Federal Board of Revenue (FBR) rose by four per cent. In October the FBR collection fell short of the target of Rs352bn by Rs19bn.

Finally, the extreme political polarisation in the country has the potential to hit the emerging fragile recovery with more serious consequences than experienced following PTI’s dharna launched during moderately high economic growth under the last PML-N rule. In September foreign investment was reported in 43 new companies registered with SECP. The amount of stipulated FDI was not mentioned. The surging repatriation of profits and dividends, officials hope, would strengthen investors’ confidence. However, during July-September the FDI inflow amounted to $416m, lower than repatriation of profits and dividends of $559m.

The International Monetary Fund expects the overall investment this fiscal year to fall sharply to 13.8pc from 15.4pc of GDP before recovering to around 14.5pc in 2021-22.

Given the current state of the economy, rising unemployment and high inflation have emerged as a major national concern. One reported estimate is that more than 14m people have lost their jobs in the last six months. Dr Farukh Saleem says unemployment is approaching 15pc, per capita income is declining and inflation is ‘sky high.’ The food group prices rose by 16.5pc year-on-year and 3.9pc month-to-month in October.

Ruling out any political shock, the trends towards improved corporate earnings and the surge in registration of new companies on the back of the latest impetus provided by the power tariff package have the potential to stimulate production and investment that leads to short-term recovery. Sustainable economic growth is however inseparably linked with inclusiveness and participatory development process.

Published in Dawn, The Business and Finance Weekly, November 9th, 2020