Investment in Pakistan: the way forward
Growth in a country’s economy is determined by the high level of investment, exports and employment of more considerable human and financial resources. Unfortunately, investment inflow numbers for Pakistan are not very much appealing during the last five years.
The current government, which took over in 2013, saw an investment inflow of $2665.3 million in its first fiscal year, which till March 2018 showed a slight decline to $2631.1 million. Contrary to the inflow figures, the government tried to control the outflow of investment in which they somehow succeeded by taking the numbers from $1208.9 million in 2013 to $537 million in 2018.
Conventionally, the cost of capital, trade openness, tax, regulatory regime, an enabling infrastructure including energy resource, the ability of the state to enforce contracts, availability of financial intermediation, improved security situation, connectivity, type of investment agreements and the role of investment agencies and its connectivity with partner agency across the border are seen as key determinants of investment activity.
Pakistan seems to have made some progress on improving its security outlook. The improved economic growth rate in this regard has been accredited primarily to China-Pakistan Economic Corridor and how low levels of interest rates allowing private sector credit to increase have been other positive signs besides investment agreements, pledges and promises. However, progress on other indicators seems to be slow which can be seen as one of the reasons for disintegrated investment framework.
If one starts digging deep into Pakistan’s bilateral investment treaties, out of 53, there are only 32 functional, 16 signed and not yet operational, whereas five agreements have been terminated. Within these 32 operative treaties, Pakistan signed the first back in 1959 with Germany which was implemented in 1962. For over 16 years there was no other treaty in practice. It was in 1978 that Pakistan signed and implemented its second investment treaty with Romania which was later replaced by a newer one. Going down the lane post-2000, Pakistan was pushing itself towards more investment integration and agreements. As a result, there were 14 new agreements out of which five are signed whereas nine are enforced agreements. Within these agreements, the only arrangement in which the outgoing government succeeded was with Bahrain back in 2014 (It is to note that Pakistan-China investment treaty is working since1989-90).
But if one looks at this whole framework of investment from as early as the inception of Pakistan, there has been a very minimal or no importance given to investment connectivity within the South Asian region. Pakistan signed its first bilateral investment treaty within South Asia with Bangladesh in 1995. Whereas the second agreement Pakistan signed was with Sri Lanka in 1997 and it was made functional in 2000. During 2013-18 period, investment from both the countries was below $3 million with maximum coming from Sri Lanka during 2017 at about $1.1 million.
If one looks at the whole framework of investment since Pakistan was founded, there has been minimal importance given — if any — to investment connectivity within South Asia
With a weak and disintegrated framework of investment, one needs to look into the factors and challenges due to which Pakistan is unable to expand beyond its capacity within and outside the region.There are both political and non-political reasons.
In one of the recent studies conducted by Sustainable Development Policy Institute (SDPI), efforts were made to identify challenges faced by investors from Pakistan (investing in trade, manufacturing and service provision) within and outside South Asia. First, there are challenges related to procedures of FDI regulations in host countries. These procedures are either complex in terms of understanding or are too rigid resulting in the discouragement for the investors. Procedural challenges are also due to lack of coordination between investment bodies within Pakistan and board of investment of respective countries.
Second, as far as enterprises from Pakistan are concerned, there are challenges related to cross-border management and retention of labour. Within this cross-border management, there are multiple layers of clearance,and it results in more compliance cost at the border. This case is particularly happening in case of Pakistan while having investment relations with Afghanistan and India. As far as Afghanistan is concerned, in terms of trade-related investment, there are challenges for investors while getting clearance. The investors need to get their commodities cleared from Afghan customs in order to make it a formal part of the economy.
Third, Pakistan’s own complex administrative structure also is one of the barriers for investors. There are multiple administrative units involved from policy formulation to implementation with its own framework. These units involve the role of State Bank of Pakistan, Ministry of Finance and Federal Board of Revenue having major share. Unfortunately, the Board of Investment being key and responsible entity on investment in Pakistan has no connection to the working of any of these units.
Fourth, besides a complex administrative structure within Pakistan, there are also uncertainties in the implementation of policies. For example, as far as trade policy is concerned, there is no firm implementation. This weak implementation of the policy itself is because of many challenges starting from governance and going down the lane to doing business including tax culture.
Fifth, markets have diversified significantly both at regional and global level. Within this diversification, Pakistan’s position is evidently weak. This weak connectivity is primarily due to major corridors which Pakistan has outside South Asia.
Sixth, demand for Pakistani product is low within the region which also serves as one of the challenges for investors and the business community. The key reason behind this weak demand is a comparative advantage mainly in low value-added consumer goods categories, for example, textiles and clothing, leather and its products and vegetables. Besides these products, there is also low advantage in minerals, animals, pharmaceutical products, chemicals, machinery and technology.
Seventh, this low comparative advantage highlights the fact that enterprises in Pakistan lack capacity to produce more. This weak capacity thus becomes the core of all challenges failing to meet demand.
Eighth, while taking into the account trade-related investment activities, Pakistan’s weak trade diversification can be attributed to the weak custom procedures which are ineffective in comparison to neighbouring countries such as Bangladesh, India and Sri Lanka. This weak custom procedure is in place because of the national single window which is missing from the framework thus hindering activities associated to trade facilitation.
Ninth, Pakistan is yet to recognise its importance with regards to its position within the region. On the one hand, where it is using the CPEC as a tool of connectivity and integration, on the other, it is failing to bring in trade and investment diplomacy. This lack of diplomacy has not only cost this country of having a disconnect within the region at different platforms, but it also has increased trade cost for products/commodities going from Pakistan.
Tenth, though the trade and transport infrastructure has shown improvement with CPEC, as far as borders and ports are concerned, Pakistan is way behind. Due to lack of quality infrastructure in terms of transport and warehousing, there is not only increase in border costs but due to the type of goods which Pakistan trades also has a high probability of getting spoiled.
Besides these challenges, there are also challenges related to 1) role of government; 2) Willingness to connect within the region; and 3) Political disconnect between governments and regional dynamics, due to which Pakistan has weak investment outlook.
If Pakistan has to work on its investment outlook, it needs to work and put its own house in order. First, there is a need to have increased and improved coordination between different decision-making bodies. To work on this coordination, investment policy framework should be made primarily part of the board of investment whereas Ministry of Finance, SBP and FBR should come and have a supportive and advisory role in this framework.
This coordination will further help in improved administrative structure within the boundaries, thus giving investor confidence and direction while working with the government.
Second, the role of the Board of Investment can be strengthened at the federation level in terms of its working relations with provincial boards. Though provinces should be encouraged to come up with their own investment policy,but with a clear role for BOI at a federation level as the single point of contact with more capacity at its end.
Third, the mandate of Board of Investment alongside with formulating investment policy framework should also be to improve connectivity globally. Before connecting to any country for investment-related activities, the board should have its say and capacity to liaison with the respective board of that country. With this connectivity, any investor will have facilitation point through which they will not only become familiar with the FDI related regulations of the particular country but will also help in ease of doing business.
Fourth, in order to improve product diversification and have a comparative advantage, the current and upcoming governments need to focus on finished goods and promote branding while strengthening institutes like Intellectual Property Organization (IPO). Besides branding, the focus should also be on the areas where each of the provinces has its own expertise.
Fifth, to further strengthen and ease business activities, there is a need to expedite and operationalise National Single Window (NSW) to facilitate investor and business community.
Sixth, though Pakistan is investing in infrastructure, there is need to have more facilities for storage and warehousing at ports and borders when it comes to trade-related investment which includes perishable items.
Seventh, for smooth implementation of policies such as trade policy (STPF 2018-23 and beyond) each concerned ministry should have its role. For example, in this case, the Ministry of Commerce should be on the front playing the major role in effective implementation with the supporting role of Ministry of Finance, SBP, FBR, Customs and other regulators.
Though these are tiny steps in improving investment outlay, but with improved connectivity and one single point of policy implementation, Pakistan’s willingness to connect politically and from a business perspective can take in more investment. To take in more investment, it needs to open up and shed protectionist policies which will not only improve competition but will also enhance the capacity of the local investors.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.