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Destination Pakistan: FDI prospects and constraints

As compared to the fellow South Asian countries, Pakistan has a relatively friendly policy for the Foreign Direct Investment (FDI) making the country as one of the next best alternatives for the international investors who wish to invest in the industrial and manufacturing sector. While the investment outlook has improved, particularly with the improvement in law and order, however, corruption remains a major hurdle to foreign investment. Also, presently, FDI is coming from a handful of countries, which indicates that a lot needs to be done to make the country attractive for international investors.

After being the frontline state in War on Terror for last 15 years, Pakistan has faced a myriad of challenges in the form of political instability, rising security concerns and stagnant economy. Luckily, things are changing now due to the geostrategic advantage of the country’s global positioning. Pakistan is situated at the crossroads of South Asia with an easier access route to the Central Asian Republics (CARs) and China through the western border. Increased Chinese investment in Pakistan has been a confidence booster for the European and other western countries wishing to invest in Pakistan who were previously uncertain regarding the future stability.

There is no doubt that the country’s potential is under-utilized at the moment and in the near future, through devising right policies, Pakistan can emerge as one of the fastest growing countries in the region. Currently, Pakistan is at 65th place with respect to the FDI received at the global level. It must shift its focus from aid and loan reliance to economic investment packages for the foreign investors in the form of repatriation of profits, dividends and capital gains.

While China appears to dominate foreign investment due to CPEC, Netherlands, Norway, Turkey, Hong Kong and Italy are some of the countries that have recently shown interest in oil and gas, energy, beverages and telecommunication sectors of Pakistan. Surprisingly, the US, Saudi Arabia and Germany are the major contributors in FDI outflows from the sectors of petro chemicals and metal products.

Pakistan is home to a skilled human capital comprising a larger proportion of youth and a fair knowledge in the technical arena with outstanding expertise in the Information Communication and Technology (ICT). Pakistani youth has showed particular interest in the software development and services sector. Apart from this, our business community possess the right business acumen and international exposure and are well-aware of the global requirements and standards which need to be fulfilled.

Pakistan has the potential and need for FDI but it is not without the several constraints which are still persisting and hindering the development aspects. One of the main reasons for lackluster economic performance is poor policy framework. Due to shift in global economic dynamics, Pakistan has stepped into an era of opportunities and economic progression. Following corrective measures must be taken to eliminate the persistent constraints:

  1. Pakistan should initiate and encourage co-production programs where foreign company partners with the local company having the same specialization to manufacture goods. This extends confidence to investors and safeguards their investment whereas it strengthens and encourages employment and business prospects within the country. Whereas, if a company wants to enter the market with 100% equity, it should not be discouraged either.
  2. Pakistan must lower its tax brackets as it diminishes the profit margins, which makes the market unattractive for FDI.
  3. As compared to the fast-paced Western life, bureaucratic process in Pakistan are time consuming, which becomes worrisome for the investors. One window operation and simpler processes must be introduced to encourage the foreign investors belonging to the public and private sector.
  4. Various schemes pertaining to the ‘first mover advantage’ must be introduced in the shape of special concessions.
  5. The government authorities must place greater emphasis on providing training and improving the quality of life so that the loopholes can be eliminated.
  6. Pakistan is an attractive hub for manufacturing sector; however, the investors should also be encouraged to invest in the services, infrastructural and social sectors.
  7. Pakistan’s image as an investment location should be enhanced through development of Special Economic Zones (SEZs).

The need of the hour is to reevaluate the investment strategies with specific emphasis on attracting FDI in export-oriented segments that will help in improving value-added exports and will pave way for export-led growth. Pakistan is lagging behind in technology and value-added products due to inflow of FDI in a handful of sectors. The government should guarantee that inward Foreign Direct Investment (FDI) should play an important role in enabling technology transfer to the country, access to innovative and larger foreign markets, capital growth, modernization and human resource progress, instead of concentrating on FDI in certain profitable sectors only.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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