WHILE a few positive signs point towards relative stability and growing confidence, Pakistan’s economy is not completely out of the woods yet.

The surge in the stock market index, a tense calm in the currency market, and a more amicable stance of donors and supporting nations do not automatically translate to relief for average Pakistani households that support consumption-driven growth. The lacklustre performance of the wholesale and retail sectors further echoes this perception.

Given its expansive size and significant influence, the retail sector functions as a potent barometer, reflecting the pulse of Pakistan’s economy more accurately than the capital, currency or property markets.

Comprising 31 per cent of the vast service sector, which constitutes 58pc of Pakistan’s economy, wholesale and retail contributed 18pc to the GDP in FY23. Last year, it shrunk by 4.4pc, as highlighted in the current Pakistan Economic Survey, coinciding with the sharp decline in the GDP growth rate from over 6pc in FY22 to around half a per cent in FY23.

Discretionary spending has disproportionately declined due to uncertainty and a collective sense of depression

“The wholesale and retail sector, marked by its dynamic evolution in response to the growing consumer awareness and shifting preferences, demonstrates remarkable resilience in adapting to changing landscapes. However, it has not been immune to the repercussions of the current economic slowdown,” noted a market watcher.

The World Bank, in its report, ‘Pakistan Development Update: Restoring Fiscal Sustainability’, attributed the economic downturn to a combination of domestic and external shocks, restrictions on imports and capital flows, political uncertainty, surging world commodity prices and tighter global financing.

However, local market pundits attach significance to consumer behaviour, besides the above-mentioned factors, for growth prospects in the country.

“Pakistanis with a net household income ranging from Rs100,000 to Rs200,000 constitute a significant portion of the country’s regular customer base and appear to be the most adversely affected by the surge in utility rates and soaring inflation,” said a market analyst.

“This demographic is largely composed of educated, employed young individuals with families, encompassing lower private management, middle-tier government employees, teachers, doctors, accountants, engineers, journalists, lawyers, and similar professions. The rapid erosion of their purchasing power, coupled with an uncertain future outlook, has compelled them to tighten their discretionary spending,” he noted.

In his opinion, an improvement in market sentiments is unlikely unless there is an increase in their income or asset values, access to affordable credit, or a moderation in their living cost.

Currently, clear signs of strain are evident throughout the wholesale retail sector, although the degree of impact varies among sub-segments. The overall effect is less pronounced on grocery and high-end luxury items, where consumer demand tends to be price inelastic. However, in other segments such as fabrics, apparel, footwear, hygiene items, grooming products, confectionaries, homewares, electronics, furniture, automobiles, etc, a notable compression is apparent.

The general economic deceleration has also tempered the expansion of the virtual market in Pakistan. While several online stores and platforms have emerged, and e-commerce had been experiencing rapid growth, the high inflation and limited avenues for supplementary income have, however, acted as moderating factors.

The markets in the smaller provinces, Khyber Pakhtunkhwa and Balochistan witnessed a more substantial slowdown due to security concerns, a crackdown on cross-border illicit trade and policies aimed at expelling illegal immigrants, mostly Afghans. The prevalence of predominantly cash-based transactions in these two provinces adds complexity to accurately assessing the exact volume of activity or its decline.

Yousuf Jamshed, CEO of LXY Global, who closely collaborates with brands and retail market leaders, confirmed a decline in retail activity in the country. He emphasised that beyond other known challenges, the significant issue is escalating logistic and production costs, which have adversely impacted the sector and cast a shadow on its growth potential.

A textile tycoon, who preferred not to speak on record, expressed bitterness. “I am unsure how long we can sustain the business under these conditions. To clear the piling up inventories because of depressed sales, we are compelled to sell at discounted rates almost every other month.

“This holds true for both online and brick-and-mortar stores. If you visit any mall, you’ll observe sales happening everywhere,” he added.

A marketing executive overseeing accounts for various major local and foreign brands shared that investments in winter wear have been scaled down, considering prevailing market conditions. “Inflation is now impacting everyone except the elite, constituting hardly 1pc of the country’s population. Discretionary spending has disproportionately declined due to uncertainty and a collective sense of depression,” he remarked.

“The market for imported products has shrunk as people who switched to local alternatives chose to stick with cheaper products even after the ban on imports was lifted,” he said.

Malik Mehr Elahi, former special assistant to chief minister and President Tanzeem e Tajran KP, affirmed the existence of a retail slump. “There are a host of reasons for market shrinkage. Most importantly, there is a dip in investment. In the end, consumption levels also depend on the quality and quantity of investment,” he stated. Mr Elahi believes that the forced expulsion of illegal Afghan immigrants has heightened anxiety in an already tense province, causing people to withdraw from the markets.

Published in Dawn, The Business and Finance Weekly, December 4th, 2023