FDI INFLOWS FUELING EXPANSION
Growth in certain sectors is exceptional
By SHABBIR H. KAZMI
Aug 14 - 20, 2006
Pakistan, a developing country, is the sixth most populous in the world and is faced with a number of challenges on the political and economic fronts. Pakistan was a very poor and predominantly agricultural country at the time of its independence in 1947 from British South Asia. Current GDP per capita grew 112% in the sixties and 81% in the seventies but this proved unsustainable and growth fell sharply to 22% in the eighties and 18% in the nineties. Lately, the Pakistani government has instituted wide-ranging reforms, which has accelerated economic growth. Pakistan's economic outlook looks bright and its manufacturing and financial services sectors are experiencing rapid expansion. There has been substantial improvement in its foreign exchange position leading to exchange rate stability.
According to various reports prepared by donors and international financial institutions, Pakistan has achieved significant macroeconomic stability and medium-term prospects for job creation and poverty reduction are at satisfactory levels. This has enabled the government to raise allocations for developmental projects, a necessary step towards achieving across the board development in social sectors. Reduced tensions with India and the ongoing peace process raise new hopes for a prosperous and stable South Asia.
Pakistan's economy, once thought to be highly vulnerable to external and internal shocks, was unexpectedly resilient in the face of adverse events such as the Asian financial crisis, global recession, drought, the post-9/11 military action in Afghanistan, and military tensions with India. Pakistan's economy has also been somewhat resilient over the long term, and overall economic output has grown every year since 1951 recession.
Pakistan's manufacturing sector has experienced significant growth in recent years, with large-scale manufacturing growing by 18% in 2003. A reduction in the fiscal deficit has resulted in less government borrowing in the domestic money market, lower interest rates, and an expansion in private sector lending to businesses and consumers. Foreign exchange reserves continue to hover around US$ 13 billion despite rise in oil import bills and import of machinery and raw materials. This has been made possible by foreign direct investment, exceeding US$ 3 billion and around the same quantum of remittances.
The Government of Pakistan has, over the last few years, granted numerous incentives to technology companies wishing to commence business in Pakistan. A combination of tax holiday, zero rated duties on computer imports, incentives for venture capital and a variety of programs for subsidizing technical education, have lent great impetus to the fledgling Information Technology industry. Many of Pakistan's technology companies supply software and services to the world's largest corporations.
Pakistan has extensive energy resources, including fairly sizable proven oil and gas reserves natural gas reserves. It also has world's fourth-largest coal reserves and a large hydropower potential. However, the exploitation of energy resources has been slow due to a shortage of capital and political constraints. Domestic petroleum production totals only about half the country's oil needs, and the need to import oil has contributed to Pakistan's trade deficit. The current government has announced that privatization in the oil and gas sector is a priority, as is the substitution of indigenous gas for imported oil, especially in the production of power. Pakistan is a world leader in the use of compressed natural gas (CNG) for automobiles used for personal use.
Lately, telecommunication sector has attracted a lot of local and foreign investment. Teledensity has improved a lot but remained confined mostly to urban areas. The prospects for growth are phenomenal. Growth in cellular market clearly shows that future growth would be led by wireless technology, particularly due to enormous opportunities in the rural areas. In one of its report Merrill Lynch has expressed a selectively positive stance on Pakistan's telecommunication sector. However, lack of listed companies and price distortion due to mergers and acquisition (M&A) stories offer limited opportunities for the investors in general and foreign investors in particular. Cellular market exhibits the extreme case with none of the six operators listed at the local stock exchanges.
Process of modernization of the banking system is well underway as there is no scope for complacency in Pakistan after the tremors and economic losses caused by the Asian financial crises in 1997/98. It has to be recognized that Pakistan's banking system has witnessed exceptional changes. In terms of size, structure and ownership, the banking assets doubled over five years touching Rs 3,649 billion (over $62 billion) by end 2005. Around two thirds of the banking system is with local private banks and 9% with foreign banks. The share of public banks has been scaled down from 50% to 20 during this period. Interestingly, while foreign banks have a low deposit base, foreign shareholding of banks is quite significant, spread across 8 banks that account for 42% of the deposit base. Large foreign presence would facilitate adoption of international norms and practices.
Though, FDI inflow in financial sector owes a lot to privatization of United Bank and Habib Bank, history was created this month. Standard Chartered Bank entered into agreements to acquire 80.88% shares of Union Bank for a cash consideration of US$ 413 million. It will also make a mandatory public offer for the remaining shares of Union Bank. The tender offer was expected to commence on/or about 12th August. Standard Chartered enjoys a unique position, being the oldest and largest foreign bank operating in Pakistan. The merged entity would become the sixth largest commercial bank of Pakistan. Union bank will be de-listed and shares of new entity would be offered to general public in due course of time.