Lahore School of Economics

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Business Confidence Survey 2015
September 18, 2015

Over the past few years the Pakistani economy has faced a host of challenges and there is a general consensus that economic growth has slowed down significantly. Presently, the Pakistani economy has begun to stabilize and during this time it is critical to develop policies that take into account both the long term economic needs of the country as well as the short term needs of the business community.

PHOTO: NNI Via Express Tribune

In March 2015, Lahore Chamber of Commerce & Industry (LCCI) and the Lahore School of Economics signed a Memorandum of Understanding which established a link between academia and the business community. As part of this collaboration, the Lahore Chamber of Commerce & Industry and the Lahore School of Economics have recently conducted a business confidence survey of firms in order to determine industry specific trends as well as the general macroeconomic trends. The survey was conducted with a variety of firms across three sectors, the manufacturing sector, the services sector and the retail sector, and the results from the survey show that the feeling amongst the business community is cautiously optimistic.

The first point that emerges from the survey is that firms have grown over the last year in terms of sales, investment and size. This is an extremely positive message which points to renewed economic growth in all three sectors covered in the survey.

The second point that emerges is that firms across all three sectors anticipate higher growth in 2015 and are also planning to increase their investment levels which has further spillover effects on growth. A related point that comes out in the survey is that the firms are extremely concerned about sources of financing and that the banking sector is falling far short of meeting their needs. Though firms are presently expanding based on their own internal sources of funding, the failure of the financial sector to provide adequate capital will be a significant drag on future growth and urgent policies are needed to create ways in which the financial sector can play a more constructive role in economic growth.

Another important result from the survey is that firms feel that there are significant shortages in the pool of skilled labour which is a major constraint to growth. The general feeling amongst the business community is that there has to be coherent governmental policy to impart vocational training to bridge this growing skill gap.

The firms also pointed to energy shortages as a major constraint on growth, with 8 out of 10 firms saying that this is a significant and pesistant problem. At the same time, what was surprising was that almost the same number of firms found the deterioration in law and order to be a major constraint on growth. This points to the need for a coherent set of policies to not just address the energy crisis but to also address the security related issues affecting firms, which is sometimes ignored.

Finally, firms find both provincial and federal regulations and taxes extremely cumbersomen and a significant drag on growth, because of the ad hoc nature of many of the policies, inconsistent application of the policies and because of the lack of transparency of these policies. The business community feels that while regulations and taxes are important, they must take into account the needs and requirements of the business community, since there is an urgent need for closer collaboration between the government and the business community in developing an overall industrial strategy that promotes growth.

Some of the key results from the survey were:

A majority of the survey firms said that their sales were higher over the past year and they also expected sales to be higher in 2015.
A significant number of firms in the manufacturing sector said that their export sales increases over the last year and they expected it to increase again in 2015.
A majority of firms said that investment increased over the last year and the largest increase in investment in 2014 came in the manufacturing sector where around 70% of firms were able to increase their investment.
Across all firms, the increase in investment in 2014 was not financed by bank borrowing but by the enhanced sales revenues.
More than 60% firms in the manufacturing and services sectors plan to increase their investment in 2015.
A significant majority of firms do not plan to utilize bank borrowing for financing their higher levels of investment in 2015.
A significant proportion of manufacturing and service sector firms managed to increase their number of employees in 2014 and both these sectors seem optimistic about further increases in their employment levels in 2015.
There was significant optimism when firms were asked about their expectations about Pakistan’s Economy, with approximately 50% of the firms expecting the economy to do better in 2015.
Access to finance was considered a critical element for conducting business since 58% of the firms (in the sample) found “access to finance” to have a major impact on their business.
52% of the firms considered shortage of skilled labour to have a major impact on business and this proved to be a key issue for the manufacturing and services sectors.
Slow or ineffective mechanisms to enforce contracts were significantly more important for firms in the services sector as compared to the firms in the retail and manufacturing sector.
As expected, energy shortages have had the most significant impact on firm level growth with about 8 out of 10 firms surveyed in the manufacturing and retail sector finding this to be their greatest constraint.
The survey found that problems of law and order are almost as important to firms as energy shortages with almost 7 out of 10 of the firms considering law and order to have a major impact on business.
75% of the firms considered provincial taxes to have a major impact on business.
69% of the firms considered federal corporate tax policies to have a major impact on business and 76% of firms considered import or custom duty policies to have a major impact on business.