Pakistan’s amazing shrinking private sector
I am a stolid believer that, in the long run, it is the health of a country’s private sector that will decide how well that country will do in the coming years. It is arguably the strongest reason why India may yet prove an economic challenge to China. This idea is propagated by people like Yasheng Huang at MIT and Tarun Khanna at Harvard Business School.
When I visited Pakistan to cover the foreign ministers’ fiasco meeting, I took some time off to buy some tomes on the Pakistan economy. The bookshop proprietor was surprised, saying, “No one in Pakistan reads about the economy any more.”
While Pakistan’s economy is in rude health, thanks in part to remittances and foreign aid handouts, the story is less rosy-tinted for the country’s private sector. And, in the long run, that is what will matter when it comes to the country’s ability to produce jobs, generate growth and be globally competitive.
A couple of statistically significant pointers about the state of corporate Pakistan.
One, gross fixed capital formation by the private sector is a descending curve. This key sign of confidence in the future of an economy, GFCF in the private sector in 2009-10 was less than what it was in 2007 and almost the same as what GFCF was in 2005. That was in absolute terms, as a percentage of GDP the figures looks even worse.
Two, there is a startling trend of de-corporatization in Pakistan. In other words, firms preferring to get out of the stockmarket and the formal sector because of bad regulations or poor economic environment. In 1995, Pakistan had 13 manufacturing firms with a paid up capital over Rs 500 million. In 2009, this figure was down to only two. In 1990 there were 58 manufacturing companies with paid up capital between Rs 50 and Rs 500 million. The number in 2009: four.
Only small sector industries saw their numbers keep rising. But as the Pakistan Economic Survey of 2009, points out this effectively means these firms are giving up on trying to scale themselves larger. The State Bank of Pakistan figures show this to be the case: new capital raised and issued in the economy went from Rs 123.7 billion in 2004-05 to Rs 101.4 billion in 2008-09. Bank credit disbursement as a percentage of GDP has gone off a cliff: 6.7% of GDP in 2004-05 and 0.14 in 2008-09.
Three, this should manifest itself in stagnant corporate profits. Look elsewhere and this is confirmed. The Karachi Stock Exchange did an analysis showing that the corporate profits of its listed firms peaked in 2006 at about 375 billion Pakistani rupees and fell to Rs 250 billion by 2009. The number of loss-making firms in such mainstays of the economy as textiles and finance outnumber those that made a profit in 2008-09.
Small scale sector remains marvelously active. GFCF in this sector between 2005 and 2009 has more than doubled. And firms with a paid up capital of less than Rs 50 million have gone from 568 in 2005 to 680 in 2009. Combined with the above data and you have a remarkable story of non-dynamism in the corporate sector.
In effect, Pakistan’s private sector is moving on a path opposite to what you would expect in a thriving economy. Pakistani firms are shrinking, avoiding raising capital, moving out of the formal and into the informal sector, and otherwise declining to do what you would expect a private sector to do. Not, as they would say, a good sign.