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INVESTMENT
CLIMATE IN PAKISTAN |
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Pakistan's
Investment Policy has been formulated to create an investor-friendly
environment
By
AMANULLAH BASHAR
Apr 29 - May 05, 2002
Despite the enormous potential and attractive
business opportunities exist in Pakistan, the potential investors did
not come out with money at the desired level due to various reasons
especially the unpredictable policies and attitude of the past
governments in this country. As the trade rule says, "investment
in any business, any area and any country calls for careful
judgment".
Recently, the size of the Foreign Direct Investment
(FDI) has however inched up slightly as compared to the previous
couple of years as the expected size of the FDI at the end of the
current financial year was estimated at around $500 million. This
amount of FDI however does not reflect the actual depth the economy of
this country has. In the year 1998-1999 the size of the FDI was
estimated at $472 million, 1999-2000 $472 million, and 2000-2001 $322
million.
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FACTS
SHEET OF PAKISTAN |
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AREA 796,095
sq.km
Population 144 million
GDP $66 billion
Inflation 3 per cent
Foreign Exchange Reserves over $5.6 billion
Exports around $9 billion
Imports over $10 billion
Rural/ urban ratio 71 : 29
Registered Companies 40,000
Foreign Firms 657
Listed Companies on Stock Market 761 |
The overseas investors doing business in Pakistan
view of business environment in Pakistan from various angles. Their
major concern seems to be frequent change in policies, lack of follow
up for effective implementation of the good decisions, unfriendly
attitude of government officials, corruption, international political
situation and above all the law and order situation.
The business community, local and foreign
investors, is however pinning hopes for stability in the situation
that seems in the offing due to repeated assurance held out by the
present government for continuation of the policies, level playing
field for local and foreign investors and strong signals for
improvement at macro-economic level.
Energy sector in Pakistan has been the focal point
of the investors since last many years and evens in the current
scenario the major part of the foreign investment is coming in this
sector.
Sources in business circles are attaching great
importance to the current scenario of economic activity including
Chinese investment in the deep-sea Gwadar port, power generating units
at Lakhra and Thar coal fields, and political stability in
neighbouring Afghanistan as these two factors have every potential to
create infinite economic activity not only for Pakistan but in the
entire region.
The Asian Development Bank (ADB) while commenting
on the state of economy has observed that Pakistan's economy seems to
have weathered the effects of the post-September developments and
global recession well, and agriculture sector has also adjusted to
continuing conditions of drought. Price stability observed during the
current fiscal year is also likely to continue, and the current fiscal
year is expected to end with an annual inflation of about 3 per cent
which is substantially below from last year.
The downward trends in exports, particularly in
terms of value, observed during the current fiscal of 2001-2002 are
likely to continue in the final quarter as well. But the trend should
be turning around soon, as increased access to the European Union
markets results in higher exports, and the impact of growth in the
economics of Pakistan's major trading partners feeds through. The
imports may pick up in the remaining part of the current year due to
higher petroleum prices, some increase in investment and higher
consumer spending. As a result of increasing trend in international
oil prices, the improvement seem in the first nine months of the year
is unlikely to continue in coming months.
The trade deficit is expected to be around $1.3
billion for the year as a whole. The improvement in the current
account balance in the first half of the current year was partly due
to exceptional inflows like grant assistance from the USA. Therefore
the further improvement in the overall balance of payment is not
likely in the second half of the year but the year can end with a
current account surplus of about $800 million.
The fiscal balance, which has worsened in the first
half of the current financial year is likely to further deteriorate in
the second of the year, as expenditure on mobilization of troops on
the eastern border with India since December 2001 is reflected in the
budget.
Tax collection may improve due to increase in
imports and revival of economic activity, but that will only partially
offset the impact of higher defense budget. The overall fiscal deficit
to exceed 5.5 per cent of the GDP.
The output in the manufacturing sector has not been
significantly affected by global recession, and the farming sector
also adjusted to continuing conditions of drought, so, the overall
economic growth for the year is likely to be 3.5 per cent.
The medium term prospects for Pakistan economy have
improved recently and the investor confidence has been restored by
number of post-September developments.
Increased access to European Union markets and
rescheduling of debt are likely to have the greatest medium and
long-term benefits for the economy.
Besides modernization of textile industry under way
for the last couple of years has started showing results in the form
of substantial increase in the industry's output and in the export
volumes despite global recession.
If the government continues to pursue sound
macro-economic policies and to implement the planned economic and
governance reforms, it could fairly quickly achieve rapid and
sustainable economic growth and poverty reduction. The growth target
of 5.2 per cent set for the fiscal year now looks achievable, even a
higher growth rate of 5.5 per cent seems possible.
On December 13, 2001, Pakistan signed the third
debt restructuring agreement with the Paris Club, interest rates to be
applied to restructured loans, are to be negotiated between the
government of Pakistan and each creditor country. Interest rate on ODA
loans will be a below market rate and not higher than the interest of
the original credit. Non-ODA loans will be rescheduled at a market
interest rate determined on the basis of risk free rates for the
concerned currency, plus a management margin.
Depending on what the finally agreed rates are,
Pakistan will get a saving of $2.7 billion to $3 billion in the three
year PRFG period and $8.5 billion to $11.1 billion over the grace
period. Expected reduction in the net present value ranges from 27 per
cent to 43 per cent.
PRIVATIZATION
Government's policy of privatization of public
sector entities again being taken as one of the most important factor
which is to attract foreign investment at a massive scale in Pakistan.
Following are the upcoming transactions through
privatization prior to June 2003:
Banking and Finance Sector: Government's shares
in Muslim Commercial Bank, Habib Bank Ltd, United Bank, NIT/ ICP and
10 per cent more shares of the National Bank.
Oil and Gas: Pakistan Oilfields Ltd, Oil and
Gas Development Corporation, Pakistan Petroleum Ltd, Attock Refinery
Ltd, Pakistan State Oil, Sui Northern and Sui Southern gas companies,
National Refinery and 18 oil and gas fields.
Insurance: State Life Insurance Corporation and
other insurance companies.
Power: Karachi Electric Supply Corporation and
other distribution and generation companies.
Pakistan Telecommunications and PIA etc.
these are huge projects and have every reason to bring the investors
at a massive scale in Pakistan.
TOURISM
Tourism is another area which has been suffering
from negligence since long. In order to inject life in this sector,
the government has declared it as an industry and as such hotels great
promise for prospective investors to explore true potential from
snowcapped mountains in the North with vast fertile plains of Punjab.
In Pakistan tourism has a huge growth potential
with high returns and revenue for the investors. Hotels and other
tourism projects hold great promise and rewards for the investors:
Following projects have also been placed on board
for sale through privatization:
These are Motel at Astak in Skardu, Motel at
Birmoglasht, Chitral, Motel at Chaman (Pak-Afghan Border in
Balochistan, Motel at Chattar Plain Mansehra, Motel at Hawk's Bay
Karachi, Motel at Katas Chakwal, Motel at Mankial Sawat, Motel at
Moenjoadaro Sindh, Motel at Satpara Lake Skardu, Motel at Torkham
Pak-Afghan Border, Daman-e-Koh Restaurant, and Jaltarang Restaurant
Islamabad, Restaurant at Chakdara Malakand Division, Land at Bhambore
Thatta Sindh, Land at Benjosa Azad Jammu and Kashmir, Land at Gadani
Beach Sindh, Land at Garam Chashma Chitral, land at Hyderabad and
Mansehra, Flatti's Hotel Lahore, Flashman's hotel Rawalpindi and Malam
Jabba Resort.
POLICY
Pakistan's Investment Policy has been formulated to
create an investor-friendly environment, with a focus on further
opening up the economy and marketing the potential for direct foreign
investment. The essence of the policy is to strengthen Pakistan's
competitiveness by improving the policy regime, offering fiscal and
tariff relief and providing comprehensive facilitation services.
Previously, only the manufacturing sector was open
to foreign investment. Now, the policy regime is much more liberal
with most other economic sectors open for foreign investment and with
significant efforts at mobilizing domestic financial resources towards
long term investment.
MANUFACTURING/ INDUSTRIAL SECTOR
Foreign investors are permitted to hold 100 per
cent of the equity of industrial projects without any permission of
Government.
No government sanction is required for setting up
any industry, in terms of field of activity, location and size, except
for the following:
--Arms and Ammunitions.
--High Explosives.
--Radioactive Substances.
--Security Printing, Currency and Mint.
No new unit for the manufacture of alcoholic
beverages or liquors will be allowed.
There is no requirement for obtaining NOC from the
provincial governments for locating the project anywhere in the
country except in areas that are notified as negative areas.
Tourism has been given the status of Industry in
accordance with the Ministry of Industries and Production. It has been
placed under priority Industries in the policy.
HOUSING AND CONSTRUCTION
The Housing and Construction sector has also been
declared as an Industry. It has also been placed under priority
industries of the investment policy.
Local and foreign companies involved in real estate
projects will not market these projects unless the title of the
property is transferred in the name of a locally incorporated company
and the "Commencement of Business" is issued by the
Securities and Exchange Commission of Pakistan to the firm.
Under the policy, foreign investment on a
repatriable basis is now allowed in the Service, Infrastructure,
Social and Agriculture Sectors subject to the conditions indicated
against each. They will have to simply register their company with
Securities and Exchange Commission of Pakistan under the Companies
Ordinance 1984 and to inform the State Bank of Pakistan provided the
relevant conditions are fulfilled.
Foreign Direct Investment (FDI) in Services Sector
is allowed in any activity subject to condition that services which
require prior permission/ NOC or licence from the concerned agencies
will continue to get the same treatment until and unless de-regulated
by such agencies and will be subject to provisions of respective
sectoral policies.
CONDITIONS
The amount of foreign equity investment in the
company/project shall be at least $0.3 million.
Foreign investors are allowed to hold 100 per cent
of the equity subject to the condition that the repatriation of
profits will be restricted to a maximum of 60 per cent of total equity
or profits and that a minimum of 40 per cent of the equity is held by
Pakistani investors (including sale of shares in stock exchange)
within five years.
INFRASTRUCTURE SECTOR
Infrastructure Projects, including the development
of Industrial Zones.
CONDITIONS
The amount of foreign equity investment in the
company shall be at least $0.3 million. 100 per cent foreign equity is
allowed on a repatriable basis.
SOCIAL SECTOR
Education, Technical/ Vocational Training. Human
Resource Development (HRD). Hospitals, Medical and Diagnostic
Services.
CORPORATE AGRICULTURE FARMING
Land development/ reclamation of Barren Land,
Desert and Hilly areas for agriculture Projects and Crop Farming,
Reclamation of Water Front Areas/ Creeks, Crops, fruits, Vegetables,
Flowers, Farming/ Integrated Agriculture (Cultivation and Processing
of Crops), Modernization and Development of Irrigation Facilities and
Water Management, Plantation/ Forestry, Horticulture, Dairy, Small
Ruminants (Sheep and goats) and all other Livestock Farming and
Breeding.
The corporate agriculture farming has been declared
as an Industry with 100 per cent foreign equity allowed, no minimum
foreign investment is required while remittance of capital, profits,
dividends allowed.
INCENTIVES
To keep Pakistan competitive in international
markets and support the viability of investments in the country,
following incentives are available to both foreign and local
investors:
Priority manufacturing/ Industrial activities have
been designated as follows:
Category A: Value Added or Export Industries.
Category B:Hi-Tech Industries
Category C: Priority Industries
Category D: Agro-based Industries
TAX RELIEF
For new investments, a First Year Allowance (FYA)
on investment in plant, machinery and equipment (PME) is available.
The FYA can be set off against statutory income in the year of
assessment. Any unutilized allowance can be carried forward to
subsequent years until the whole amount is used up. The FYA is
available at the following rates:
Categories A and B: at the rate of 90 per cent
of the cost of Plant, Machinery and Equipment.
Categories C and D: at the rate of 75 per cent
of the cost of Plant, Machinery and Equipment
Other Industries: at the rate of 50 per cent of
the Cost of Plant, machinery and Equipment.
Infrastructure and Agriculture: at the rate of
75 per cent of the cost of Plant, Machinery and Equipment.
Service and Social: at the rate of 50 per cent
of the cost of Plant, machinery and Equipment.
PROTECTION
The economic policies and the existing legal cover
for foreign and Pakistani investment will be extended to new areas and
sectors. The benefits and incentives for investment provided by the
government shall continue in force and will not be reduced or altered
to the disadvantage of investors. The Foreign Private Investment
(Promotion and Protection) Act. 1976 and the Furtherance and
Protection of Economic Reforms Act 1992.
Pakistan is holding a two-day International Forum
focusing on government's development policy, priorities and investment
opportunities at the World Bank's European office in Paris from April
29-30. Finance Minister Shaukat Aziz will chair the Forum.
During the investment forum the initiatives taken
by the government would be highlighted regarding deregulation and
privatization besides economic reform programme in Pakistan.
The Chairman of Board of Investment Pakistan will
be presenting his paper on the subject. Statements by the World Bank
Group on the Country assistance Strategy, development prospects,
including investment climate issue will be made on the occasion. IFC
will also make its presentation on overall business climate in
Pakistan. Some leading multinational companies engaged in Pakistan
will made presentation on Industrial and Banking sectors in Pakistan.
NON-RESIDENT PAKISTANIS
There are over 3.5 million Pakistani expatriates
living and working in countries spread across the globe. Despite all
sorts of odds they have to face, at the hands of the government
officials supposed to be the public servants, whenever these
Pakistanis visit the motherland, yet the love of the soil never dies.
A quantum jump in the home remittances from less than one billion
dollar last year to over 2 billion dollar this year indicates their
strong passion and love for the country after the events of September
11. These Pakistanis can be a real source of attracting investment in
Pakistan. Major reason for investing in Pakistan for any overseas
Pakistani should that it is the market they known best. They are also
equipped to manage the human resources available in this country
because their social and cultural understanding of Pakistan. The only
thing required is to check the corrupt and greedy officials operating
with the tactics to extort money by hook or crook from the visiting
Pakistanis on one pretext or the other. These non-resident Pakistanis
deserve special treatment as an individual they are projecting the
image of Pakistan and remitting their hard earned money to Pakistan.
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