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INVESTMENT CLIMATE IN PAKISTAN
Over the past few years Pakistan has
become one of those few countries that have achieved an average
growth rate of over 5% over a four decades period. However
it is evident from all the indicators that while the country
has made significant economic achievements there are a disappointing
record of social developments. Taken into account that in
1947, when the country became independent, with a 30 million
population, it couldn’t feed itself and had to import most
of its food requirements from abroad. Recently the previous
Governor of State Bank of Pakistan wrote: “Over the decades
agricultural production has risen 6 folds, and with cotton
attaining a level of more than 10 million bales compared to
1 million in 1947, Pakistan has emerged as one of the leading
exporters of textiles. Pakistan hardly had any manufacturing
industries in 1947 and now five decades later the manufacturing
production index is above 17,000 with the base of 100 in 1947”.
Also other industries like cement,
automobiles, sugar, fertilizers, cloth, domestic appliances,
industrial chemicals, refined petroleum and other manufacturing
industries have made successful improvements, manufacturing
products not only for domestic market but in many cases for
world market too.
The government, however, recognizes
that despite these impressive achievements in income, consumption,
agriculture and industrial production that has lifted millions
of people out of poverty levels, there remains insignificance
when looked against the missed opportunities, primarily the
neglect of human development. One factor contributing to this
has been the lower adult literacy rate that would have pushed
the per capita income to the double that is today.
Dr. Ishrat Hussain the former Governor
of State bank also highlighted another problem. When he said,
“ But as if this neglect of human development was not enough,
the country slacked in the 90s and began to slip in growth,
exports, revenues, and development spending and got entrapped
into external and domestic indebtness”. He believed that this
was due to both fundamental structural and institutional problems
as well as to poor governance and frequent changes in political
regimes. Political regimes were not hesitant or outright willing
to take tough and unpopular economic decisions to set the
economy right. And when in May 1998 Pakistan conducted its
first nuclear test, the country became very unpopular and
this led to further economic isolation of Pakistan and a considerable
erosion of confidence by domestic and non-resident Pakistanis.
With economic sanctions by west, significant drop in workers’
remittances, negative export growth, suspension of IMF programmes
and World Bank loans, the country was on the brink of default
on its external payments.
The new Government of General Pervez
Musharaf, devoted its earlier attention and energies on economic
crises and started to design a programme of reform and implemented
with vigour and in earnest, so as to put the economy on the
path of recovery and revival. The prime thrust of this policy
was the structural reforms - Privatization, Deregulation and
Liberalization of the economy. The Government actively pursued
an aggressive and transparent privatization plan whose thrust
was sale of asset in areas like banking, Oil and gas, telecommunications
and energy sectors, to strategic investors, with foreign investors
encouraged to participate in the privatization process.
The government has shown its seriousness
to potential investors, through its policy of perceptible
liberalization of foreign exchange regime. The investors can
now bring in and take out their capital, remit profits, dividends
and fees etc, without any restrictions. Foreign Portfolio
Investors (FPI) can also enter and exit the market without
and restriction or prior approvals. It has been recorded that
in the Karachi Stock Exchange with a market capitalization
of US$15 billions, over 700 listed companies showed average
returns of 15% that were higher than those in most emerging
countries. This makes Pakistan an attractive place to invest
for foreign portfolio investors. Furthermore as part of this
liberalization, non-residents and residents are allowed to
maintain and operate foreign currency deposit accounts.
Similarly the financial sector too,
has been restructured and opened to competition. To assist
the investors the foreign and domestic private banks have
been able to increase their market share to more than 80 percent
of assets and deposits. Domestic interest rates on lending
have been dropped to as low as 5 percent from 20 percent substantially
reducing financial costs of businesses.
The other prominent areas of reform
on Government’s agenda have included the Taxation reforms
that are aimed at broadening the tax base. Tariff Reforms
where the maximum tariff rate has declined from 225 percent
in 1990-1 to 25 percent: the average tariff rate stands at
just 11 percent compared with 65 percent a decade ago. The
number of duty slabs has also been reduced to four. Quantative
import restrictions have already been eliminated except those
relating to health, security, public morals, religious and
cultural concerns. All these measures, the Government believes,
have brought down effective rate of protection, eliminated
the anti-export bias and has promoted competitive and efficient
industries.
With the financial sector reforms and
Economic Governance including the transparency, consistency,
predictability and rule based decision making, the effectiveness
of the polices have begun to take roots. Part of this agenda
has been the curtailment of discretionary powers, freedom
of press and access to information, and is having a salutary
effect on the behaviour of decision makers.
All of these and coupled with other
reforms like the a) devolution of power to local government
who will have the administrative and financial authority to
deliver public services to all citizens, and b) an accountability
process which will take to task those indulging in corruption
through rigorous process of detection, investigation and prosecution,
and c) Institutional reforms that will improve the decision
making process and professional and legal support to those
needing it.
Despite all these positive outcomes
and their impact on the business community and other stakeholders,
within the country or abroad, the incidence of poverty is
still quiet high and unemployment rates are worrisome. The
Government believes that the best way to help in this direction
is for private investors to develop industries that are primarily
manufacturing and are providing employment but also the necessary
training and skills.
Shaukat Khan
