THE ECONOMY NEEDS AN INVESTMENT MOVEMENT
The proposal for investment push needs to be undertaken like a dedicated and vigorous operation
By M. TARIQ WASEEM
Apr 29 - May 05, 2002
Pakistan's economic growth performance during the recent years is a matter of grave concern. As against the average growth rate of 6.1% in the 1980's, the real GDP growth rate slowed to an average of 4.9 % in the 1st half and 4.0% in the 2nd half of 1990's. The major factor responsible for the declaration process was the decline in the manufacturing and services sectors during 1990's.
Considerable evidence is available which suggests that investment is the most significant determinant of long term growth of an economy. Public sector investrnent does not only promote growth but also provides a lead as well as conducive environment for private investors to come forward and invest. However, the majar micro economic instability factors like high rate of inflation, budgetry deficit, continuous depreciation of Rupee, economic sanctions, etc. could not help the investment process. Such an environment cannot be conducive to investment and sustained growth.
As against the fixed investment constituted 16.8% of GDP in 1980's, it increased to 18% in the first half of 90's and then declined to 15.2 % of GDP in the second half of l990's.
The following Table shows total fixed Investment as % of GDP and private investment at constant prices. According to the data, gross fixed investment has declined from 19.0% in 1990-91 to 14.7% in 2000-2001.
TOTAL INVESTMENT - GDP FIXED RATIO
(RS. in million)
Source: Economic Survey 2000-2001
There is a net decline of investment - GDP ratio of 4.3% which is a highly significant deterioration. A 1.00 decline in investment meant reduction in GDP by about Rs. 33000 million last year.
The gross total investment in Pakistan is quite low at average of 14-15% of GDP. It is lower as compared ever with the developing countries as given in the table below:
Source: World Bank, "World Development Report, 2000-2001".
Pakistan stands at 18th out of 132 countries with the lowest gross domestic ratio to GDP 18 countries with lower investntmt GDP ratio than Pakistan are Central Africa Republic, Congo, Gorgea, Haiti, lndonesia, Kuwait, Kyrgyz, Madagascar, Myanmar, Niger, Nigeria, Russia, Rawanda, Sierrra Leone, Sweden, Togo, Uruguay, and Uganda.
It has been estimated at constant prices the per capita fixed investment has declined from Rs. 766 In 1990-91 to Rs. 698 in 2000-2001, or decrease of Rs. 71 per capita or 15%. In the year 1995-96 investment of Rs. 847 was the highest. At current prices, the per capita investment has increased from Rs. 2008 in 1991-92 to Rs. 3258 in 2000-2001, an increase of 62%.
The total private investment has gone up from an average of about Rs. 440 billion in early 1990's to about Rs.540 billion during the last 3 years at constant prices. The major contributing factor was the investment in power projects.
The manufacturing sector investment was Rs.12.2 bilion in 1990-91 which rose during the next three years but then declined. The last two years estimate the investment in the manufacturing sector at about Rs.12.4 billion. On per capita basis, the manufacturing sector investment has declined from Rs.152 in 1990-91 to Rs. 89 in 2000-2001. The country is investing much less on the manufacturing sector in the recent years.
Private investment constitute about 55% of the total investment with the balance share of public sector. Roughly about 25% of the private sector investment is in the manufacturing sector. The share of ownership of dwellings is a little more, with agriculture sector contribution to private sector investment of nearly 10-12%. However, despite direct share of the manufacturing sector is not very significant but as a commodity producing sector, creating permanent employment, opportunities contribution to producing exportable goods, reducing demand of imported goods and thus saving foreign exchange, and source of producing goods for local consumption, it has a strategic importance.
The last year's 2000-2001 level of gross fixed public and private sector investment was Rs. 453 billion at current prices, with per capita investment working out to be Rs. 3257. The question is how much the country faced shortfall in investment at current price on per capita basis in 2000-2001 as against 1990-91 per capita investment at constant prices of 1980-81. In other words what should have been the total investment based on population and current prices in 2000-2001 keeping in view the per capita level of investment of 1990-91 of Rs. 768 at constant prices of 1980-81. It is estimated that the country faced an investment deficit of Rs. 46 billion (or about $750 million) with actual investment of Rs. 453 billion on per capita basis at current prices the 1990-91 level of investment. Or Pakistan's per capita investment at current prices should have been Rs. 3588 in 2000-2001 as against the estimate of Rs. 3257 just to maintain the level existing in 1990-91, without referring to the efficiency of capital-output ratio which has also declined.
Amongst the major reasons for reduced investment in the country are decline in the overall public sector investment to meet fiscal deficit ratio target set by IMF, reduction in foreign private investment from $600 million in 1997-98 to about $250 million in 2000-2001, steep depriciation and rapid fluctuations in the value of the Rupee, high interest rates, impact of economic sanctions imposed by the Western Government on account of nuclear explosion and also related to democracy, crumbling law and order situation, hanging of war clouds frorn time to time because state of tension with India as a result of turmoil in Kashmir, Tax Survey, and Accountability Drive creating real or imaginary fears in the minds of the investors, frequent changes and inconsistences in policies, and freezing of foreign currency accounts etc. All these factors have contributed to an overall state of mistrust, uncertainty and instability in the country which deter and harm and contiminate investment condition and climate. The country desperately requires initiation of the process of investment. This is the only way to unlock the jammed economy for reducing unemployment, increasing GDP growth rate, ellminating poverty, raising exports, stabilizing the value of Pak Rupee through diversion of resources from speculative buying to production investment, improving law and order and ultimately becoming self-reliant. Every effort and every possible way, big or small, must be used to make the local investors start investment. Only after the local investment starts, foreign investment could follow.
As seen from the above paragraphs, it is apparent that the economy needs an investment crusade for its revival. Following measures may be undertaken, on both long and short terms basis, by the government in collaboration, support, assistance and consultation with the private sector
1. Investment in the country is almost at a standstill. With rapid growth in investment hopes of self-reliance and overcoming debt trap can never be fullfilled. The Ministry of Investment needs to be revamped who can wage a war to break the investment deadlock in the country and inspire confidence in the investors through imaginative and innovation approach and policies. A highly committed and dynamic Ministry of Investment is the need of the hour. The Ministry must induct dedication professionals.
2. All the major issues confronting the country like trade and fiscal deficits, low GDP growth, unemployment, poverty, etc would be automatically addressed, taken care of and resolved to a large extent if investment is accelerated. The primary focus of the new economic strategy must attack investment sector with secondary attention to all other matters. Investment is the only panacea of multi kinds of monstrous economic evils confronting Pakistan. Meeting the IMF conditionalities may not be as important as in the past. The country has got the opportunity to implement its own economic agenda.
3. There is an imperative necessity for starting a massive "Investment Movement" in the country. We may organize "Investment Promotion Weeks" alongside Spring Festivals, Industrial Exhibitions, Investment Conferences, Food Mela, Cultural Programs, Basant and One Day Cricket Series on basis of rotation in all the four Provinces of the country. An awareness campaign may be launched in the media about the bright future of the economy, market opportunities, investment areas, incentives etc. The investment may be launched on the pattern of the Accountability Drive or the Tax Survey or even Freedom Movement. Feasibility studies and profitable investment opportunities may be identified, made available freely and provided to the Banks/ DFIs, Leasing Cos., Nazims' offices as well as to the Media for publication.
4. Kickstarting the economy is one of the key issues facing Pakistan. The available figures indicate that at constant prices the level of investment is stagnant and on per capita basis, it has declined over the past years. The role of the BOI in such a situation assumes still greater and crucial significance. A joint Committee may be formed consisting of the Federal Minister. for Investment with representatives of BOI, SMEDA, PSIC, FPCCI, Chambers, Associations, Major Commercial Banks/ DFls, Leasing and Modaraba Cos. etc. to suggest practicable Plan to make the wheels of the economy operational.
5. The foreign exchange reserves have crossed $4 billion mark after a long time. Measures may be taken to conserve these reserves and be utilized for investment, and not for consumption purpose.
6. It is true that the investors cannot be forced to invest but the government can induce, attract, guide and even request them to make investment and provide them environment which is investment friendly to the extent possible within the resource, law and order and political constraints.
7. There should be a revised complete package for each sector/ sub-sector of the economy and for every class/ kind of entrepreneurs, whether he is small or big businessman or industrial entrepreneur, and interested in setting up an export or import house, or building a plaza, or a house, or a manufacturing unit.
8. The commonly-held opinion of the private entrepreneurs is that economic revival is a major victim of accountability drive and tax survey. Whereas significance of both these objectives cannot be denied but if they start seriously hurting investment in a big way, the cycle of the economy gets locked and when investment is the only way left to lift the economy out of low growth phenomenon, it becomes important to reassess how far and strongly these matters be pursued.
9. Negative impact of the Tax Survey on investment growth has been quite substantial and will continue to haunt investors for years to come. Long term economic fall out effect of the Tax Survey is probably only little less than that of the Afghan crisis. There is a great need to somehow neutralize the adverse effect of the tax survey on the investors through a new policy package and friendly tax policies etc.
10. Some kind of "investment obsession" is urgently required to be inculcated in the minds of the people of Pakistan. There is no substitute available to propel development except economic revival through private investment spree as the public sector, investment cannot be anyway pushed up. Sufficient funds may be placed at the disposal of the agencies/ organizations responsible for initiating the campaign and make it a success for other countries to emulate, but also banks and other institutions for providing quick disbursing loans at rates of interest which need to be reduced which is of crucial value.
11. The Government may also issue directions in order to improve the investment landscape favouring new entrepreneur when he visits Government offices like those of Patwari, Wapda, Sui Gas, Water, environmental agency, bank etc. for private disposal of his work.
12. Although the role of the Central Board of Revenue (CBR) is extremely important, yet it must always assess whether any of its policy decisions is going to help pollute the investment environment and deter the prospective investors. In its pursuit to achieve its revenue goals, it more often overlooks the fact that some decisions may enable the Board to achieve short term gains but the long- term harm to the economy is more serious with the consequent effect on revenue generation as well.
13. As the Government has recently diverted all its energies and attention towards making the Tax Survey successful, so in a similar manner, the Government may change the direction of its efforts towards investment restoration. That is and ought to be the single most important objective to be pursued during the next few years. The government must make people investment-oriented. The government must break their investment shyness through the district-level conferences, campaigns, and meetings at micro levels. An investment of a few millions is of no value as compared with the dividends the economy will receive once this inertia is overcome. The objective is worth going all out for on a war-footing basis. Regrettably, no such efforts have been undertaken so far and this is what the economy requires, otherwise things will go on as they are now.
14. Let us put most of our political, economic or social objectives to the backburner for sometime if any of our policy conflicts with this supreme objective of breaking the investment shackles and speeding its pace. Once the psychological barriers against investment are removed, it is expected that the process will continue and investment crusade gains momentum.
15. BOI, SMEDA and other agencies may be directed to identify and prepare a large number of pre-feasibility studies for guidance and assistance of prospective investors for different sectors of the economy as quickly as possible. They should play exclusively a promoting role for investrnent for small and medium entrepreneurs. These organizations may be directed to pay all their energies for achievement of the single objective, that is to help the process of investment promotion to start and attain a de~irable level.
16. Consistency in economic policies is major requirement for sustained investrnent flow. The Government can now provide firm assurances on the subject because of the less intensity or pressure for observing the tough conditions of the lending agencies which have inhibited investment.
17. It is of major importance that Pakistanis living abroad be attracted to make investment in Pakistan. A special package of incentives like special treatment at the Airports and government offices, free time on TV etc. may be prepared.
18. The private investors in the country need to be convinced that Pakistan faces bright future on account of removal of economic sanctions, generous flow of foreign grants and loans which will dampen the effect the fall out effect of the Afghan war, rising foreign exchange reserves and fresh investment will create markets for goods and services for each other through the operation of the multiplier effect. There is plenty of scope of investment in agriculture, industry, housing, construction, oil and gas and mining, transport and communication, tourism etc. which need to be exploited. The unknown fear and hesitation especially relating to the economic future of the country need to be addressed and the sword of tax men hanging over the heads of the people appropriately desharpened. Egyptian economy gained strength after the "Operation Desert Storm" so Pakistan will after the Operation Endurance Freedom.
The latest political developments after the Sept 11 crisis have provided both an opportunity and challenge to Pakistan to earn maximum gains. As the war is finally over, the investment climate will hopefully improve and be made further conducive through fiscal and monetary incentives and other investment facilities to the investors. For the reconstruction of Afghanistan the Western coalition is expected to provide $10 billion. Pakistan must try to get maximum share in this effort.
To sum up, revival of the economy through investment is not going to be an easy goal to achieve but it is certain that government determined single-minded and focused approach could definitely place the country on the fast lane of the investment motorway in a period of 2- 3 years. Whatever may be the outcome of such a drive, it is an objective worth pursuing and with relentless devotion on top priority and urgent basis. The proposal for investment push needs to be undertaken like a dedicated and vigorous operation.
The writer is Director, Planning, Government College Lahore. E-mail: email@example.com