Here is good news! Corporate earnings in the first nine months of this fiscal year remained robust despite flat economic growth, according to a recent Dawn report based on data compiled by Arif Habib Ltd.

Combined earnings of the representative firms of corporate Pakistan rose 8.8 per cent year-on-year to Rs877.6 billion during July 2022-March 2023. The annual increase in after-tax profit in January-March 2023 was even higher — 12.7pc.

While this development is reassuring and reflects the resilience of Pakistan’s corporate sector, policymakers in the country and the private sector need to work harder to sustain the trend. That’s not going to be a walk in the park.

April-June 2023 corporate earnings may not show as promising growth as in the last quarter, reflecting the effect of the heightened political/constitutional crisis. And the performance of the corporate sector in the next fiscal year, beginning in July, depends mostly on the environment in which general elections are held and who comes into power.

Industry performance in the next fiscal year depends mostly on the environment in which general elections are held and who comes into power

It also depends on what kind of FY24 budget the incumbent PDM-led federal coalition government presents in June — and what happens to the provincial budgets of Punjab and Khyber Pakhtunkhwa. The caretakers in these two provinces have outlived their Constitutional tenures.

And the Election Commission of Pakistan and the Parliament do not want to hold elections there earlier than the next general elections as per the Supreme Court’s orders.

According to Arif Habib Ltd., growth in corporate earnings during July-March FY23 was driven by the banking, oil and gas exploration, cement and chemicals sectors. And the sectors that reported aggregate losses were fertiliser, oil and gas marketing, refineries, automobile and steel making/engineering.

Growth in Pakistan’s banking sector’s earnings often comes with a heavy price for the economy. During July-March FY23, the banking sector’s profitability was driven extensively by banks’ excessive lending to the cash-strapped federal government, which effectively means lower bank financing for the private sector. Pakistan’s economy had expanded by 6pc in FY22, but FY23 growth is estimated at 0.5pc only.

This economic slowdown, too, naturally depressed the demand for private-sector credit. So, it is natural for banks to invest excessively in government debt papers, particularly when interest rates are at the highest-ever levels.

But generally, banks in Pakistan are too choosy in lending to the private sector and shy away from penetrating deeper into the credit market with suitable financial products for micro, small and medium enterprises.

In nine months and three weeks of this fiscal year, the private sector’s borrowings totalled just Rs232bn, but the federal government borrowed a whopping Rs 2.805 trillion from banks, according to the State Bank of Pakistan.

The 8.8pc rise in overall corporate earnings seen in nine months of this fiscal year should lead to an 8-9pc full-year increase in earnings even if April-June 2023 losses of some of the already stressed sectors grow. But sustaining this growth trend in FY24 will be challenging.

We must not forget that the FY23 increase in corporate profitability has originated in large part due to 6pc GDP growth a year earlier. That high growth played a key role in keeping a large part of aggregate demand alive in FY23 and retained earnings of the corporate sector accumulated in FY22 helped them a lot in a much tighter monetary environment and low private sector credit disbursement. These two factors will not be in play in the next fiscal year.

The central bank’s policy rate, already at an all-time high of 21pc, may go further up as headline inflation remains at a 59-year high of 36.4pc. The International Monetary Fund (IMF) is also pressing for further monetary tightening disregarding concerns that further rate hikes will harm economic growth.

Besides, in FY24, the government will have to increase its borrowing from banks as the fiscal deficit is projected to peak at 8.3pc of GDP from an estimated 6.8pc in FY23. In the best-case scenario, projected by the IMF, Pakistan’s economy will grow by 3.5pc in the next fiscal year.

This much growth (coming in the wake of only 0.5pc expansion in this fiscal year) would be insufficient to help the corporate sector fare too strongly next year, more so if the country does not get out of the current political/constitutional crisis.

The corporate sector should not hope for something big in the FY24 budget either. The budget is being prepared under the scrutiny of the IMF, whose ultra-harsh conditions do not leave any room for the government to offer any big incentive to the corporate, or to any other sector for that matter.

Besides, this year’s excessive domestic and external borrowings of the government are likely to expand the debt-servicing cost to Rs5.3tr against the budgeted estimate of Rs3.95tr.

Whether corporate earnings maintain the current trend of increase in profitability — and to what extent tax evasions and leakages in revenue collection can be plugged — will be crucial for tax-revenue generation in the coming fiscal year. And that, in turn, may have a decisive impact on how the government and the public sector together will contribute to national prosperity. Let’s hope for the best, but let’s be prepared for the worst.

Meanwhile, it is good and reassuring to learn that some top-tier members of corporate Pakistan, including some multinational companies, are pressing the government and the private sector for wage reforms.

In a recent round-table dialogue in Karachi, they proposed that “minimum wages” be replaced with “fair living wages”. They called upon all the stakeholders to increase the current Rs25,000 per month minimum wage to Rs50,000 per month fair living wage. One hopes the government and the private sector heed the call and find practical ways of implanting this noble idea.

Published in Dawn, The Business and Finance Weekly, May 8th, 2023