During the first quarter of this fiscal year (July-September 2024), corporate profit fell 14 per cent compared to the last year if you measure it in terms of profits earned by the 95 top-performing companies that make up 99pc of the Pakistan Stock Exchange’s 100-index market capitalisation. And that is a very appropriate measure.

This finding of a Topline Securities research has already made headlines in major newspapers across the country. But, for the optimist, there is a heartening aspect: the cumulative profits of the top 95 companies earned during July-September 2024 are 16pc higher than the profits earned in April-June. What does this mean?

It indicates that corporate profitability has begun to rise from the start of this fiscal year, though things are not as good as last year. The year-on-year decline in profits are chiefly due to compressed demand paired with a higher cost of production thanks to back-breaking energy prices and a less-than required easing in interest rate.

The State Bank of Pakistan has already brought down the interest rate in phases from a peak of 22pc to 17.5pc, and a further cut is expected this week. If the central bank goes for a greater cut, the corporate sector will hail it, but if it opts for a moderate reduction, corporate lobbies will continue to lament.

However, if the central bank drastically cuts interest rates, that will jeopardise the current exchange rate stability, more so because the International Monetary Fund (IMF) has already been pushing Pakistan to adopt a truly market-based exchange rate regime. Deputy Prime Minister Ishaq Dar, however, believes the rupee is still undervalued.

The country must tread carefully and foster national unity while managing potential fiscal dangers

Unusual interest rate easing will bring in another trouble: foreign portfolio investment in the government treasury bills and bonds — often called hot money — will start evaporating. Pakistan has experienced this multiple times, most recently during the PTI government.

Moreover, energy tariffs will continue to rise, though not as fast as in the recent past, because circular debts of the energy sector remain high and capacity payments to independent power producers continue.

The efforts to tackle this twin problem are underway but will take a long time to bear fruits. This means that the corporate sector cannot expect any significant relief in energy costs because there is neither fiscal room available to subsidise them nor will the IMF approve of it. And Pakistan cannot disregard IMF conditions since it received the first $1.1 billion tranche of a three-year $7 billion loan after much difficulty.

But why can’t fiscal room be created for subsidies that are crucial for economic growth? The plain answer is despite the enormous volumetric increase in revenue, the total revenue collection falls massively short of being able to afford any such respite after meeting local and external debt servicing requirements, spending money on the functioning of the government, and financing growing security and defence expenses.

Furthermore, the growth in revenue collection compared with the last year is coming at a very heavy price: the imposition of new taxes and increase in the existing ones have broken the backs of small and medium enterprises and heavily burdened even large companies struggling with low demand for products and higher energy and financial costs.

The recent promise of Saudi Arabia to add another $600 million to $2.2bn worth of previously promised foreign investment is encouraging. But this $2.8bn is not going to come in immediately; it will come over a few years even if all the 34 feasible projects that the Saudis have agreed to invest in remain feasible in future.

The future is always uncertain, and with the rising Middle Eastern conflict, it seems even more so. Pakistan needs to tread carefully, not only in the geopolitical arena but also in local politics and economic development.

Nothing could be more rewarding at this stage than fostering national unity and working jointly to skip some lurking dangers on the economic front.

These include the IMF taking a tougher stance on what it views as non-implementation of some of its conditions; independent power producers opting for legal recourse if pressed too much to negotiate capacity payment agreements; an escalation in Khyber Pakhtunkhwa and Balochistan militancy; and friendly countries including China, Saudi Arabia, the United Arab Emirates and Qatar offering lesser than desired support in our balance of payment support.

These are, of course, in addition to the obvious threat of slower-than-expected economic growth, industrial recovery becoming more distant than the economic managers currently project, and the agriculture sector losing some of its resilience in the wake of growing environmental challenges.

The performance of the overall economy, particularly that of the industrial sector, in the coming months will reveal the efficiency or lack thereof of the current hybrid regime.

Published in Dawn, The Business and Finance Weekly, November 4th, 2024