KARACHI: Pakistan has been largely off the radar screen for direct investors for quite a long time despite improvement in some economic indicators in the recent past, a highly liberal trade and investment regime and a large market.
“What explains this persistent under-investment – both domestic and foreign – in Pakistan in spite of a liberal trade and investment regime and a large market size?” the State Bank of Pakistan (SBP) raised the question in its Annual Report 2018-19 on the State of Economy issued last week.
Both types of investments – local and foreign – in different sectors of the economy like industries and agriculture have dropped, particularly over the past two years when the national economy slowed down.
Investment in Pakistan has gradually dropped 3.3 percentage points over the past four decades to 15.4% in fiscal year ended June 30, 2019 compared to 18.7% in the 1980s and the 1990s, according to the Economic Survey of Pakistan 2018-19 and the SBP.
The investment has remained critically low both in absolute terms and in comparison with other emerging and developing economies. It has been on a downward trend for the past many decades.
Effectively, Pakistan features as the only country in the Asian region with falling growth potential.
“According to the World Bank’s estimate, the persistence of current investment growth rates will make it extremely challenging for the country to reach the middle-income status in the coming three decades – the required rate is at least 25% as against the current rate of around 15%,” the SBP said in the report.
Industrialists in the private sector have mainly attributed the recent halt in new investment to the massive hike in benchmark interest rate (7.5 percentage points to 13.25%) and a huge depreciation of the rupee against the US dollar (net 47.5% to Rs155.65) over the past two years.
The central bank and its officials, however, do not agree with the industrialists’ thinking. They said the investment-to-GDP (gross domestic product) ratio – particularly from the private sector – had remained the same as it was during the low interest rate regimes in the past eight years.
They linked the low investment with some structural issues like cumbersome process for setting up a new industrial unit keeping in view the acquisition of land, power, gas and water connections, taxes, corruption and bribery issues.
A foreign investors’ representative, however, has an entirely different view. He said it was the failure of the government and its officials to properly market potential projects in order to encourage foreign investors to pour capital into the country.
This came despite the fact that a handful of economic indicators had started improving like the return of stability to the rupee-dollar parity and a notable drop in the current account deficit since the beginning of current fiscal year in July 2019, he said.
Apart from these, the availability of electricity and the security environment have also improved in recent years.
Pakistan’s existing investment policy framework, set in 2013, was “liberal and fairly open” in terms of facilities offered to prospective investors, the SBP said in its report.
Non-discriminatory regulations, openness to foreign direct investment (FDI) in all segments of the economy (except those reserved on account of national security concerns), the possibility of 100% ownership in most of the sectors and absence of any restrictions on currency convertibility and repatriation of profits lead foreign investors to tap the strong and expanding domestic market of Pakistan.
However, it said, discrepancies in the country’s investment policies, laws and bilateral treaties increase the risk of potential contract enforcement disputes arising between the state and enterprises.
Similarly, the noticeable difference in de jure versus de facto investment regime results in time- and resource-sensitive operational challenges for the business enterprises.
Concerning the private sector, the SBP said, the stagnancy in the small and medium enterprises (SME) segment is found to be a major reason for the dispersed and inadequate nature of investment activities in Pakistan.
In this regard, poor management practices of small enterprises are highlighted as the foremost hurdle to their innovation, diversification and growth strategies.
Lastly, the poor state of human capital development, dysfunctional institutional and operational infrastructure and an unsatisfactory focus of the government on investment retention practices leave the ecosystem deficient in terms of facilitation and attractiveness.
Resultantly, both the existing and potential investors find it hard to commence, conduct and expand their business activities in Pakistan, the SBP said in the report.