BUSINESS confidence in the country’s economy has rebounded to levels last seen before the 2018 elections. The bounce-back in the Overseas Investors Chamber of Commerce and Industry’s latest Business Confidence Index is no doubt good news as it indicates an across-the-board upswing in business confidence from an 11-year low touched in June last year when a national lockdown to curb the spread of Covid-19 disrupted economic activity and trade.

       The increase in business confidence was mainly driven in the last one year by negative interest rates and a massive monetary stimulus announced by the State Bank to shield businesses and the economy from the pandemic’s negative impact. An unprecedented tax amnesty given to tax evaders and the prime minister’s construction package for injecting liquidity in the housing and real estate sector for early economic recovery also played a big part in boosting investor confidence. More recently, business-friendly policies and a large fiscal stimulus announced in the last budget to rapidly grow the economy ahead of the 2023 polls have also contributed to increased confidence.

       While improvement in business sentiments is a welcome development, investors are still flagging uncertainties such as the unrest in Afghanistan, exchange rate fluctuations, high inflation, the current account deficit, the future of the IMF programme and Covid-19’s resurgence as putting pressure on the business environment going forward. The optimism reflected by the index is mostly fuelled by positive perceptions of economic recovery and growth in the short term owing to the pro-growth policies being pursued by the government and State Bank. Although many investors are planning to expand their operations through capital investment in their respective businesses, even the slightest change in the macroeconomic environment or monetary and fiscal policies could see them roll back their plans.

       Read: Business has its own sword of Damocles

       What will happen if inflation continues to rise, the currency depreciates, and fiscal and current account deficits expand beyond present estimates? Until now, the low interest rates have helped businesses offset the impact of a high inflation and weak exchange rate. But the central bank cannot keep the rates in negative territory for very long. Nor can the government continue to spend its way to growth.

       The survey result shows a bigger turnaround in the confidence of foreign investors operating in the country. Yet new private foreign investment flows into Pakistan are falling in spite of a 20pc rise in FDI in South Asia last year. What may happen in the coming months will largely hinge on the ability of businesses to keep rebounding without the assistance of the government and central bank since the ongoing economic recovery is closely linked to lax fiscal and monetary policies.

       While policymakers should use the opportunity afforded by the ‘current economic boom’ to address structural issues in the economy by implementing financial and governance reforms, businesses need to learn to sustain themselves without the government help.

       Published in Dawn, August 25th, 2021