FOREIGN INVESTMENT IN PAKISTAN

Importance, Incentives and Initiatives

By Prof. Dr. Amanat Ali Jalbani
Sep 06, 1999

The developed world has transformed itself from the industrial age to the digital age; but even after 52 years of our independence, Pak economy continues to be primarily agricultural in nature, and even it has not reached to a self-sufficiency stage even.

A major and continuing source of the weakness of Pakistan's macro economic performance has been low rates of savings and investments. As far as the case of investment is concerned, it is sometimes argued that Foreign Investment is much cheaper for the recipients country because it entails no payment of principal or interest. But it is also argued that profit out flow may exceed the amount of repayment. Another argument put forward is that Foreign Investment brings technical know-how in the developing countries. But it is widely believed that the technical know-how can be purchased at cheaper rates on commercial basis. So Foreign Investment should be discouraged because it is no more beneficial for the developing countries.

Investment, as a percent of GNP, has remained stagnant for the past several years while the savings rate has declined significantly. As a result, savings - investment gap is widening over the years in Pakistan with a bearing on external debt problem. The level of investment in Pakistan is also depressed due to a number of problems.

 

2. Importance & Scope of foreign investors in Pakistan.

Pakistan is a country with 139 mn people, with growing markets and indications that their growth may accelerate. Pakistan offers an opportunity for low cost products particularly in labour intensive industries, from which regional export markets can be developed and supplied.

Moreover, the country is well situated for the trade with the Middle East, Central Asian States and China. The government's foreign policy is moderate and positive, and Pakistan continues to enjoy a privileged relationship with China.

Pakistan's economic potential lies in the expansion and diversification of its industrial base. Sufficient industrialization exists to allow rapid development in new areas of activity, serving both the home and export markets.

Foreign investment has a significant role in quickening and diversifying economic growth in developing countries. It not only supplements domestic savings and the country's foreign exchange earnings for achieving a higher rate of output growth but also facilitates the importation of new technology as well as modern management and marketing techniques. It helps in raising productivity and hence the real wages of local labour. If foreign investment is in export oriented industries, it leads to a strengthening of balance of payments; and if export industries are labour intensive, they also provide larger employment opportunities. Again, foreign investment places less of a burden on the balance of payments of a low-income country in the early stages of development insofar as the time lag between the starting of new projects and the reaping of benefits is considerable. Moreover, the profits are likely to be small in the earlier stages of production. Private foreign investment also brings revenue to the government of a less developed country when it taxes profits of foreign firms or gets royalties from concession agreements.

i. Foreign investment may follow different motives, which includes: supplying a growing industrial market with inputs and consumer goods;

ii. Exploiting natural resources that are abundant in the country;

iii. Taking advantage of particularly low wage costs for labour intensive manufacturing;

According to the United Nation's Centre on Transnational Corporations, the decade of the nineties promises to be one in which foreign direct investment will play a major role in shaping the world economic development and the structure of the international economy. With declining the debt inflows, FDI has become one of the major pillars of private financial flows to developing countries.

With complete deregulation of the economy and with no requirement for any sanction, the multinationals and other foreign investors would find Pakistan a real profitable place to bring in their investment. To make Pakistan a safe and profitable heaven for both local and foreign investors who wish to explore and optimise the potential of inexpensive labour force, real estate and vast consumer market, the government has offered an attractive package of incentives that compares quite favourably with that of the countries of the region. There is no need for the obtaining of NOC from the provincial governments for locating the project anywhere in the country except the areas, which are notified as negative areas.

Pakistan offers a bright scope of foreign investment. There is a wide field open for foreign investors and many areas to choose from. The areas in which foreign investors would find attractive opportunities include export-oriented, import substitution, agriculture-based, electronics, engineering, and high-tech industries. There is also an extensive network of medium and small engineering units spread all over the country, serving as vender units for heavy engineering.

The importance of the foreign investment can be determined as an example form one of the Multinational Corporations performing in Pakistan. For example Lever Brothers in Pakistan. Its growth is closely linked with the economic development of the country. This MNC. had its humble beginning in a small town of Pakistan. As far as its contribution is concerned, its edible oil business alone contributes about Rs. 700 million to the exchequer in the form of taxes and duties. And from the tea business alone Lever generates about Rs. 3000 million in taxes for the Government, which makes it the highest taxpayer in this sector. As the co closes half a century of operation in the country and steps into the new millennium, which stands out most is its contribution towards developing local business and its unflinching pledge to Pakistan.

Private foreign investment may be direct or indirect. Direct foreign investment may take many forms: the formation in the capital importing country of a subsidiary of the investing country; the formation of a concern in which the company of the investing country has a majority holding; the setting up of a corporation in the investing country for the specific purpose of operating in other concerns; or the creation of fixed assets in the other country by the nationals of the investing country. Such companies or concerns are known as transnational corporations (TNCs) or multinational corporations (MNCs). Indirect investment better known as portfolio investment consists mainly of the holdings of transferable securities (issued or guaranteed by the government of the capital importing country). Such holdings do not amount to a right to control the industry. The shareholders are entitled to the dividend only and the debenture holders to the stipulated fixed return.

 

3. Foreign investment incentives in Pakistan.

In Pakistan since independence, the thrust of of macro-economic policies has been towards promoting the stable and attractive milieu of foreign investors. With this end in view, Pakistan has provided a package of guarantees, assurances and incentives including commitment to adhere to the principles of free market economy, legal guarantees regarding freedom from nationalization, unfettered repatriation of capital and profit earnings, flexibility regarding the extent of capital participation, generous depreciation allowances, tax exemption for foreign technicians and tariff protection in appropriate cases. In sanctioning procedures and fiscal and monetary incentives, foreign investment is not given any discriminatory treatment.

Pakistan is currently providing a package of guarantees, assurances and incentives to foreign investors, which compare favourably as compared to those, offered by a vast majority of countries in the developing world.

Foreign investment has been fully protected and enjoyed high returns in Pakistan. The transitional companies (TNCs) experience in Pakistan has been a success in terms of their expansion and prosperity. The TNCs listed on Stock Exchanges are regarded as 'blue chips' and their yield is one of the highest in the world. Given the yield Pakistan would have attracted substantial foreign investment. There are many reasons but the most pronounced factor is the cumbersome procedural delays causing inconvenience and disenchantment for foreign investors. Attempts have been made to remove these impediments in the 'Investment Policy 1997'.

 

4. Flow of Foreign Investment in Pakistan

Foreign investment in Pakistan in the more recent years has taken the form of portfolio investment, apart from foreign direct investment. It is important to recognise the difference, as portfolio investment is not of a permanent nature; whereas, the foreign direct investment has more performance. In the last four years, significant amount of portfolio investment came into Pakistan. Foreign investment has increased from $237 million in 1990-91 to $ 1532 million in 1994-95. However, investment has decreased to $822 million in 1997-98.

In the above table, it is clear that the foreign investment during the year 1994-95 & 95-96 was much higher than the previous years and the latest years. In the latest years, the investment has declined to very low ebb. It seems that there is a much room for foreign investments in Pakistan, but may be due to the lack of inconsistency and the suitability of the policies, regional disturbances, law and order situations, and power project conflict etc. In the end, we can say that from the investment point of view, Pakistan does not occupy the position what it deserves.

 

5. Problems of Foreign Investment.

Theoretically, Pakistan places no restrictions on the percentage of foreign equity, and foreign companies may hold 100 percent. In practice, however, officials discourage majority foreign ownership and 100 percent foreign ownership.

The principal impediments to the large scale inflow of foreign investment in our country are inadequate and run down infrastructure, limited supply of educated, trained and productive labour force despite having vast resources of manpower, smuggling and the ready availability of illegal imports with their dampening impact on the profitability of foreign investment in the manufacturing sector, narrowness of the domestic capital market, narrow base of our exports and our low creditworthiness in international capital markets, political instability and unsatisfactory law and order situation.

The recent tussle between the Government & Independent Power Producers has also adversely affected the inflow of private investment.

It has also to be realised by the Government that frequent devaluation of the rupee, lack of continuity in taxation policies and a milieu characterised by economic uncertainty has a dampening impact on foreign investment.

Inconsistency of the policies is also the main hurdle in the foreign investment. The U.S Ambassador observed that inconsistency in Pakistan's policies was hindering US investment in Pakistan. A glaring example of inconsistency in our policies is the abrupt withdrawal of incentive package for special industrial zones which were announced with great fanfare at advertisement cost of Rs. 12 crore.

 

6. Future Hope.

It is, however, hoped that if the measures taken by the Government of Pakistan continued, it will greatly enhance the flow of private foreign investment in coming years.

Officials of the Government of Pakistan have started expressing doubts to have any meaningful foreign investment, keeping in view the heightening tension between India & Pakistan. "But if you talk about foreign investment, I am afraid it may not up to the expectations and reasons are obvious and before you", said a concerned official. He said without creating proper environment, it would be difficult to attract the foreign investors in Pakistan. Also it involved political questions and the interests of the Western & American Governments, who according to the officials, were not taking any interest in Pakistan to encourage their investors to go to this part of the world [Dawn, June 29-July 4, 1999]

To encourage the investment, the Board of Investment had made elaborate arrangements. It had recently held ten investment conferences in various Middle Eastern countries and is further planning to have similar conferences in Europe and the U.S. The investment conferences are claimed to have been highly productive in dispelling the distorted image of Pakistan as a crisis-risen economy.

In addition to that, the situation seems different than that of last year specially after the lifting of international sanctions against Pakistan. Today, the Government in the new investment policy announced by the Prime Minister has offered himself lots of fiscal and non-fiscal incentives himself. It envisaged liberal concessions, de-rgulation regime offering all sectors of the economy to foreign direct investment.

Foreign investment plays a crucial role in uplifting the economy of any country. It (foreign investment) has been fully protected and enjoys high return. Pakistan would have continuously attracted the substantial foreign investment, but along with other factors, the most important factor is cumbersome procedural delays causing inconvenience for the foreign investors.

Finally, we can conclude that in Pakistan, the Government has always given the top priority to the foreign investment. But, until and unless the political stability and the law and order situation along with other factors does not improve, Pakistan will not acquire the attractive location in Asia from investment point of view, as far as the industrial and business opportunities are concerned.

Foreign Investment in Pakistan.

Years.

Direct
Amount in

Portfolio
US $ million

Total

1990-91

-----

-----

237.0

1991-91

335.1

218.5

553.6

1992-93

306.4

136.8

443.2

1993-94

354.1

288.6

642.7

1994-95

442.4

1,089.9

1,532.3

1995-96

1,101.7

205.0

1,306.7

1996-97

682.1

267.7

949.5

1997-98

601.3

221.3

822.6

Source: - Economic Review [Monthly], September 1996, Vol. XXVII, no.9. - State Bank of Pakistan.