INVESTMENT CLIMATE IN PAKISTAN
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.
FACTS SHEET OF PAKISTAN
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.
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 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.
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.
--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.
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 Projects, including the development of Industrial Zones.
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.
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.
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
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.
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.
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.