Over the past year, confidence in the economy eroded sharply. According to report published in a local English daily, increasing court case backlogs, bureaucratic harassment, energy shortages and security concerns have left entrepreneurs wary of expanding operations and prevented them from taking new risks. Many have been forced to cut costs, scale down production or shut their doors entirely as weak demand and soaring expenses take their toll. Industry figures suggest that more than185 factories have shut down last year amid political unrest and frequent power disruptions, pushing unemployment to 3.7 percent. The cumulative effect has been a marked slow- down in private sector activities.
As a result, private sector credit growth declined further in September, hitting its lowest in four years, indicating a stagnation in new investments and job creation and this comes at a time when other economic indicators are showing positive trends as exports and remittances are increasing, and foreign currency reserves have improved. Business leaders and economists hold a combination of factors responsible for the depressing situation. High interest rates on bank loans, cautious lending by banks, and uncertainty in political situation are the main causes of the slump. Businessmen think the situation is unstable and without a clear direction the investors are reluctant to risk their capital. Now the businesses are simply trying to survive as the situation is not favourable for expansion of business.
The fall in credit growth is alarming as it indicates that investment activity is weakening. Economists also point to several reasons, including rising interest rates, a subdued business environment and structural frailties in the banking sector. They say the liquidity constraints are preventing many banks from extending loans, especially to the small and medium enterprises. According to experts, overall investment is sluggish and when investment is slow, demand for credit also drops. Besides, domestic consumption has weakened due to high inflation and declining employment, which is also weighing on credit demand. The consistent drop in credit demand suggests a wider economic slowdown. It signals stagnation in the existing ventures especially in manufacturing and services. The imports of capital machinery, especially in the readymade garments and spinning sectors have fallen. It has also been noticed by the experts that interest income of banks has dropped. It is not at all healthy for the banking sector. Neither excess liquidity nor a crunch is good, said an expert
Against his backdrop, business leaders have welcomed the announcement of election in February, seeing it as a potential catalyst for restoring political and economic stability. Entrepreneurs say that the February polls declaration has eased concern among the local and foreign investors as well as they had been waiting for clarity before making major business decisions. Yet they, according to a report, warn that any recovery will depend on how smoothly the election proceeds and how swiftly the next government can confront key challenges – from energy shortages to high borrowing costs. The business leaders are of the opinion that a stable, elected government is vital for renewed investment. They hope that the upcoming election will reduce uncertainty and create the environment needed to tackle energy shortages, monetary expansion and high cost of doing business. The businessmen are now following wait and see policy. Economists also say that stagnation in investment had kept both growth and employment sluggish. The election announcement will likely to bring relief domestically and internationally for the investors, they say.
