The investment scenario

Local investors should come forward to activate the foreign investors

From Shamim Ahmed Rizvi,
Islamabad
Aug 13 - 19, 2001

From economic point of view Pakistan is faced with a dilemma. On the external front the proverbial hostile international donors like World Bank and the IMF etc. are all praise for the economic reforms carried out by the present government and are making generous offers of economic assistance for future. The local investors, however, are not coming forward despite all assurance and incentives offered by the present rulers. This apathy of the local investors is also hampering the inflow of foreign investment resulting in a serious state of economic stagnation.

The World Bank in its Country Assistance Strategy (CAS) report released recently has praised Pakistan's economic reforms programme and acknowledged that reform agenda is "getting strength and creditability". The World Bank report noted with appreciation that Gen. Musharraf Government has made a significant progress in implementing the reform programme particularly on macro economic stabilization, governance and devolution which is "sufficient to place Pakistan in the high base case lending scenario". The IMF has released the third tranche of loan under standby arrangement which is a history in case of Pakistan signifying a certificate of satisfaction on Pakistan economic policies. 'The economist,' London in its latest issue has certified that the present Pakistan government has established creditability with the international creditors by introducing firm economic reforms which successive government in the past had failed to achieve.

According to World Bank Mission chief in Pakistan, Mr. Jhan Wall, the agenda is on the right track. The only requirement is restoration of investment climate and reduction in interest rates. Investment and investor confidence are still not coming despite measures and gestures over the months from the President and his Finance Minister. However, interest rates have not come down substantially for borrowers, though depositors are getting a pittance on their savings. The domestic investors, business and industry have to be wooed to invest. Foreign investment, be it from overseas Pakistanis or Foreign Direct Investments, will follow. This has happened in many countries. It should happen here too.

The hope of economic revival and improvement in living standards is gradually fading. The growth rate that was quite respectable until 1995-96 has, more or less, stagnated since then and averaged only slightly more than the population growth. The present government set an ambitious target of 5 per cent growth in the beginning of 2000-01 but later revised it downward to 4.5 per cent in order to conform to the IMF projections. But actually we ended with 2.8 per cent. As is well known, the prospects for 2001-02 are also not any better. Simply put, the evolving situation is, to say the least a very ominous precursor of the difficult times lying ahead. The assertion by various government functionaries that shortage of irrigation water is responsible for the dismal growth is only partly true.

Resort to the printing press beyond a certain limit would be highly inflationary and destabilizing.

The realization by the Finance Minister about the crucial role of local investment, particularly at this juncture, is very timely. Progress in the desired direction is probably the only way to revive growth impulses in the economy. However, the government needs to adopt a multi-pronged strategy on an urgent basis. It appears that certain measures are going to be implemented soon. Wealth tax was withdrawn last year and, according to the Finance Minister, the statute would now be rescinded. Also, a law would be promulgated in the coming days, ensuring that no questions are asked at any time about the remittances or investments coming from abroad through proper banking channels.

However, a lot of ground has still to be covered in order to allay the fears of entrepreneurs and stimulate local investment. Government statements almost on a daily basis show that the situation on the borders is explosive. Within the country, the law and order situation has deteriorated to an extent that safety of life and property cannot be guaranteed. Low level government functionaries harass the investors as a matter of routine. NAB, notwithstanding its declared intention of nabbing the compute elements of society, has frightened the business community. No wonder that in this kind of environment entrepreneurs are looking for greener pastures abroad and the pious pronouncements of the Finance Minister generally prove to be a cry in the wilderness.

The Policy Framework, to a certain extent, is also not conducive to savings and investment. Cost of financial intermediation remains high due to increasing amount of non-performing loans and over-employment in the banking industry with the result that the real rate of return to depositors is depressed and investors have to pay higher interest rates. The rate of profit on government saving schemes has been reduced considerably. Obviously, the incentive to save is diminished if households and other entities are not adequately compensated for their preference to hold financial assets. Although the government has clarified a number of times that continuity in policies would be ensured, people in general and the moneyed class in particular are apprehensive. Therefore on balance, while the emphasis of the Finance Minister on attracting local investors is in keeping with the exigency of the situation, the ground realities do not inspire much confidence unless that have in-built mechanism that accord protection against revision of immunities and abuse of estoppels.