INVESTING IN PAKISTAN
The country needs US$ 10 billion investment annually, at least, to attain above 5% GDP growth rates
By SYED M. ASLAM
Feb 24 - Mar 02, 2003
Many analysts believe that despite the significant improvement in economic indicators the benefit has not started trickling down to masses. Those who still have some apprehensions need to look at the global downturn and compare it with performance of Pakistan's economy in the post 9/11 era. The positive point is that the widespread pessimism seems to be on the decline but the cynics keep on making the lives of masses miserable by negating the fact that despite global downturn Pakistan's economy has shown greater resilience.
The critics must accept a fact that Pakistan has successfully completed the two phases of revival of economy, i.e. bringing the economy back on track and achieving higher capacity utilization of the installed capacity in various sectors. The local industries are now poised to undertake balancing, modernization and replacement (BMR) and fresh investment. This is a very crucial phase demanding better vision and prudent decision making. The country enjoys a very large domestic market and the potential to enhance exports, both in quantity and value. The investors have to explore the comparative advantage enjoyed by the country and exploit the prevailing industrial infrastructure to go forward.
The investors should not look at Pakistan in isolation because of the on going process of globalization, emerging regional trade blocks and signing of preferential trade agreements among the members of various regional blocks. It is an irony that Pakistan is not a member of ASEAN. Pakistan is a member of two important regional blocks, SAARC and ECO, and also the OIC. The fact is that so far Pakistan has not gained much being a member of the above-mentioned organizations. This failure may be attributed, to some extent, to the lack of complete understanding among the members. However, some analysts believe that the successive government never realized the importance of regional cooperation treaties.
Some analysts strongly believe that the policies of successive government have been responsible for the dismal growth of the economy of Pakistan. Most of the policies lacked vision and wisdom. The policy planners were not convinced whether the agriculture or manufacturing has the potential to lead the economic growth. Then came the policy of import substitution. After separation of East Pakistan, nationalization was considered the saviour of Pakistan. In the late seventies SROs, tax exemptions and concessional financing drove most of the investment. In the late eighties, policy planners were charmed by the privatization jargon of the west. However, the fact is that the philosophy of comparative advantage was ignored most of the time. On to of every thing, protection to local industries promoted inefficiencies and wastage.
There is no fun in crying on spilt milk and we must learn from our past mistakes. We cannot change the history but certainly identify our destination and work to achieve the targets fixed, keeping the fast changing global scenario. The deteriorating external environment, weakening growth prospects and excess capacities across sectors pose major challenges for the policy makers. Pakistan needs to respond to these changes by closely monitoring the changing economic situation to initiate appropriate policy response.
According to Aqib Elahi Mehboob, Head of Research, AKD Securities, "To get ready to face the emerging challenges, maintaining the competitiveness of locally produced goods should be the top item on agenda." With the rupee gaining strength against dollar, the export proceeds received in local currency will not be enough to cover the costs. Therefore, the production and productivity of local industries should be improved. However, the million-dollar question is, how production and productivity of manufacturing sector can be improved in Pakistan?
Before trying to find the ways and means to achieve the twin targets, one should not ignore an apprehension expressed in the latest quarterly report of State Bank of Pakistan. The report fears that accurate data is not available about the performance of manufacturing sector. This fear was based on the fact that while exports and domestic consumption of various products improved, the data about manufacturing sector depicted contrary trends.
It may not be out of context to mention that only one third of country's economy is documented. Therefore, most of the data is understated. One tends to support this belief, particularly after the 9/11 event. While most of the developed economies felt the brunt after 9/11 hardly any sign of distress was witnessed in Pakistan, only because of the strength and depth of the undocumented economy. Many economists insist that this is not the 'black economy' and the appropriate term is undocumented economy. But, why such a big segment has remained undocumented?
The inadequacies in reporting prompted Ahsan Iqbal, (Pakistan 2010 vision fame) to say, "There is negative growth in per capita income with shrinking economy, a serious threat for national development and security." Many analysts believe, "Ahsan, being a politician belonging to opposition, has tried to exploit the faulty data. His prime objective was to undermine the achievements made in last three years. However, one cannot abstain himself from saying that the credit of these achievements goes to circumstances that suddenly became too favourable for Pakistan."
As pointed out earlier by Aqib, the first priority of the GoP should be to protect the competitiveness of the local manufacturers. In this regard, two issues should be addressed immediately, i.e. uninterrupted supply of electricity at affordable price and ample availability of water for textile processing mills. The next item on agenda should to improve the prevailing infrastructure of the existing industrial sites.
With the introduction of deregulation policy, private sector of Pakistan as well as the financial institutions face a serious dilemma about the demand and supply situation for various industries. The worst scenario being for the textile industry, the main foreign exchange earning industry of Pakistan. Lately, some massive investment has been made in the industry but bulk of this has once again gone into spinning sector, already facing glut of supply. Whereas the quantum of investment in other key sub-sectors, particularly processing and garment manufacturing is still below the required level.
Another industry being the victim of the GoP policy is sugar industry. The capacity utilization of this industry has been hovered around 50% for last many years, only due to inadequate supply of sugarcane. The key dispute between the growers and the mills has been sugarcane price. The other problem facing the industry is sugar export policy. This depicts typical egg or hen first situation. The government says unless there is exportable surplus, permission to export sugar cannot be granted. Whereas the mills say that unless the government allow export of sugar, mills cannot ensure improved availability sugarcane.
Fertilizer manufacturing industry is the most recent victim of GoP policy. The country needed addition of at least 2 million tonnes capacity. One of the key incentives demanded by the industry was ensuring availability of gas (feedstock) at rates prevalent in the Middle East. The refusal of this incentive has put a cap on addition of capacity. One of the local manufacturers has signed a MoU for the establishment of urea plant in the Middle East. This would, on the one hand, result in flight of capital, and on the other hand, force the country to become a net importer of urea. The GoP must realize that feedstock is not being sold at subsidized rate it is sale of low quality gas at discounted price.
There are certain sectors where investment must be made on priority. Two of the most important areas are, as stated earlier, electricity and water. As regards electricity massive investment is required to enhance power generation capacity and revamp transmission and distribution networks. Due to the Power Policy and privatization programme of power sector of the GoP hardly any increase in thermal power generation capacity has been made. The existing dependable power generation capacity is going down with the passage of time. Unless new capacity is added, the country could not be saved from extensive load shedding that would seriously impair the performance of manufacturing sector and the GDP growth rate.
Lately Pakistan has experienced a near-drought situation. The country faced shortage of water and the problem was further aggravated due to poor water management system. In this area the key problems identified are: inadequate water storage facilities, seepage and Katcha water courses incapable of ensuring water supply to all the cultivable land. Therefore, the first priority is to build new water reservoirs. A lot of time and money has been spent on controversial Kalabagh Dam. It this dam cannot be built due to political reasons some solution must be found without further delay. Simultaneously, seepage should be contained by lining the existing watercourses. To ensure water supply to all the cultivable land concrete and properly insulated watercourses should be constructed on war footings.
The present Petroleum policy offers much incentive to the exploration and production companies. However, the country has not been able to overcome the required supply of indigenous crude oil. The recent trouble in Balochistan demands further improvement in security measures for the safety of assets as well as people engaged in oil and gas exploration. The country has attained self-sufficiency in production of some POL products. However, most of these products are lower end products. Local refineries are still incapable of producing higher value-added products.
Almost the total quantity of naptha produced in the country has to be exported due to absence of naptha cracker unit in Pakistan. Negotiations for establishing this unit have been going on for the last 30 years. No one can undermine the importance of this unit. Therefore, conducive environment should be created to facilitate establishment of this unit without further delay.
Globally capital market, both debt and equities, is the main source for resource mobilization. However, if one looks at the number of fresh listing at local stock exchanges, the number has remained dismally low over the last ten years. One of the reasons for the lack of investors' interest in equities market was the poor payout by a large number of listed companies. Though, the regulators have been trying very hard to ensure following of code of good governance by the listed companies but a lot more has to be done to boost the confidence of investors in equities market.
THE WAY FORWARD
Power generation, transmission and distribution needs massive investment that has been deferred due to privatization of utilities. Privatization of KESC and corporatize entities of WAPDA must be completed without further delay or the GoP must decide that it does not wish to privatize KESC and WAPDA and wants to keep them under state control.
In Pakistan, privatization of state-owned enterprises was initiated due to the pressure of international financial institutions. This pressure was due to two factors: State-owned enterprises posting huge losses and the GoP facing very high budget deficit. In the post 9/11 era the GoP has been able to overcome the debt servicing and budget deficit problems to a large extent. The government also has been able to address problems responsible for losses to some of the public sector entities. Therefore, the donors/international financial institutions are not very assertive. The privatization has been left, more or less, at the discretion of the GoP.
Therefore, the GoP must revisit and redefine its whole privatization programme. There is a growing consensus among the economists that an entity should be privatized only if the sale to private sector can improve its franchise value and guarantees benefit to its customers. Privatization of some of the public sector has been delayed mainly due to lack of interest of foreign strategic investors. Some of the analysts question the rationale behind sale of strategically important and profit making entities. They say, why the local investors should be deprived.
Listing of National Bank of Pakistan at local stock exchanges and divestment of part of the GoP holding in the bank proved very fruitful. Therefore, an appropriate option, for reducing the GoP holdings in various public sector entities, is to list them on stock exchanges and sell 10 to 20 per cent shares through stock exchanges. Analysts suggest that entities like Habib Bank, Pakistan Petroleum and Oil and Gas Development Company should be listed immediately to facilitate sale of part of the government holding in these.
It is also suggested that United Bank, Allied Bank of Pakistan and Bank Alfalah should also be listed at the local stock exchanges to facilitate shareholding of general public in these entities. This demand is based on the GoP's policy decision that requires listing of commercial banks on local stock exchanges and offering of a specified percentage of shares for public subscription. Since the policy guidelines are there they must be followed.
Altaf Saleem the ex-Minister for Privatization had hinted towards this policy. However, he said that sale of shares of public companies through stock exchanges would be dependent on the market appetite. Analysts say that the market is ripe and it also has the appetite. Therefore, the policy should be implemented without any delay.
One may say, for the sake of argument, that the current bearish sentiment engulfing the equities market shows that neither it is an appropriate time nor the market has the appetite. The equities analysts do not subscribe to this myth. They say, over the last 15 months the market has been driven by the dividend yield phenomenon. If the yields are attractive investors are not willing to miss the opportunity. Most of the above mentioned public sector enterprises attractive dividend yields. Therefore, it is expected that all the public offers will be oversubscribed.
Since the other high yielding sources have dried up, bulk of the funds are moving towards equities market. Due to enhanced demand and limited supply of shares of good performing companies their prices have sky rocketed. The analysts say, "The biggest problem faced by real investors is that there are hardly two dozen listed companies having large market float. Therefore, with the enhanced demand, their values go up. If companies with large paid-up capital and sufficient market float are listed the share prices of currently most sought after companies would also be less susceptible to volatility."
Improving the prevailing industrial infrastructure in a boon or bust situation for the GoP and the local investors. If the right decisions are not made now it will be very difficult for the local industries to face the onslaught of process of globalization. The GoP's responsibility is to create the enabling environment for the fresh investment and remove all the irritants. This includes reducing the import duty on capital goods to the minimum, improve infrastructure at industrial sites and above all prove to the investors that Pakistan is an investor friendly country.
The GoP must also accept two ground realities that capital has no nationality and it only flows to those destinations offering attractive returns. All the efforts to convince foreign investors and expatriates will be futile unless the local investors are shy to invest. Most of the investors are shy due to poor perception about Pakistan. Therefore, concerted efforts should be made to let the investors know, by act, that the government is willing to listen and remove the impediments — only seeing is believing.
With the overflowing liquidity and reverse flight of capital investors are keen in investing in Pakistan. The GoP should not make any attempt to convince the investors that they should invest here and should not invest there. Let them know the opportunities and also make their own decision. The GoP should create the enabling environment rather than issuing sovereign guarantees to ensure rate of return on investment.