THE ECONOMIST ROUNDTABLE ON PAKISTAN
Fascinating rate of return eye-catching for foreign investors
BY AMANULLAH BASHAR, FROM LONDON
Mar 06 - 12, 2006
The fascinating profit earnings track records presented by some leading private and foreign investors like International Power, Seimens Pakistan Engineering, JP Morgan Pakistan, Standard Chartered and Habib Bank proved a testimonial for doing business with Pakistan at "The Economist Roundtable on Pakistan" held in London last week.
In fact, doing business with Pakistan was a strategic roundtable for business leaders and policy makers, which was aimed at showcasing Pakistan as a potential market and a place for investment especially on the back of an aggressive privatization of the public sector entities in Pakistan.
The international event organized by The Economist London was supported by the British High Commission in Pakistan, which facilitated the Pakistan delegation for that matter. Hamish Daniel, Director of Trade and Investment remained with the Pakistan delegation throughout the event.
Addressing elite of the economic and financial world, Vince Harris of International Power, said that Pakistan offers investment opportunities at a massive scale in the energy sector where huge investment worth $37 billion is needed.
Vince gave a break up of investment in different segments of the energy sector in Pakistan, which he estimated at $37 billion.
These projects call for at least $3 billion investment in LNG supply chain and $7 billion in Iran-Pakistan-India gas pipeline. An investment worth $5 billion was required in Turkmenistan-Pakistan-India gas pipeline, $8 billion in Qatar-Pakistan-India gas pipeline, $8 billion in Hydel Projects with a potential to generate 32,500mw of power, coal projects $1 billion and Thermal Power projects worth $5 billion.
In the backdrop of close association with the power sector in Pakistan for being the chief of Hub Power Company, he observed that this sector needed approximately $1.5 billion new investment per annum on the back of high electricity demand growth of 8 percent and high GDP growth rate of 5 percent. Besides constantly growing demand for power, Pakistan offers great opportunities in this sector in the backdrop of a large segment of the population yet to receive electricity.
Outlining performance of his company in Pakistan, he said Hubco having a power generating capacity of 1290mw has 16.6 percent shares with Karachi Stock Exchange, while KAPCO (1600 mw) has 36 percent joint venture with WAPDA. He also mentioned the recent acquisition of 40% stake in Uch power project and 586mw with long term power purchase agreement with WAPDA. He strongly recorded that payment record up to date was strong with dividend stream.
Commenting on a question regarding the performance of HUBCO located in the politically disturbed Balochistan, Vince offset the adverse impression of law and order with his remarks: "it is a tussle between the local population and the government", and the investors having nothing to do with that strained situation. However, one has to take care even in the normal conditions. For example the recent killing of three Chinese engineers was due to their carelessness and uncalled for exposure in the local community.
He however pointed out areas like political stability, domestic security and reputation of judiciary where reforms are highly desirable.
Another important witness to the business opportunities in Pakistan was Sohail Wajahat, the Chief Executive Officer of Siemens Pakistan Engineering.
Wajahat, while recalling the journey of Siemens in the subcontinent, observed his company started operations in1879 from Calcutta by constructing first telegraph line from London to Calcutta. Siemens Pakistan Engineering Company Limited was founded as a private company after 6 years of partition. Since the start of its operations it never looked back and was on top among the best 25 companies listed with Karachi Stock Exchange.
Wajahat expressed his confidence with his remarks that economy in Pakistan enjoying fruits of rapid growth and stability; exchange reserves increased 10 fold since 1999. Public debt, interest on which ate up to 85 percent of the public revenues five years ago, is reduced to 68 percent of the GDP. One of the most attractive features is the high rate of return to the level of 30 percent on equity in corporate sector, he observed. Privatization of telecom sector and its robust growth in Pakistan was especially mentioned by Wajahat.
He was of the view that five year span between 2000-2005 proved a milestone for the banking system in Pakistan on the back of surging profits, improving asset quality and solvency. It sounded unimaginable when he referred sky high profits of the shareholding value from Rs60 a share jumping to an unbelievable height of Rs1100 per share - a magical growth of 1700 percent.
Pakistan's envoy to Britain Dr. Maleeha Lodhi, while elaborating the point to invest in her country, asserted that the economic and political stability attained by Pakistan is not adequately reflected in the general image of the country overseas.
She pointed in a firm tone to the need to align image with reality, describing this as a strategic necessity for both Pakistan and the international community.
"Usually perceptions abroad are based either on stereotypes or images that do not fully reflect the entire picture, shapes opinion and serve as inputs into the policy responses of the international community and the West towards Pakistan.
Distorted images, unbalanced perceptions or inadequate understanding of complex dynamics can therefore produce a flawed strategy. And this can actually undercut and adversely affect reform efforts in Pakistan itself, she pointed out.
That is why the issue of image and reality is not academic or simply one of fairness for Pakistan. It is much more fundamental, with implications for the international community as well as Pakistan.
In her presentation at the Economist Conference on 'Image and Reality, post 9/11', High Commissioner Lodhi said that often media-induced images abroad have been based just on the challenges being faced rather than how these are being addressed. The template has usually had a disproportionate accent on the challenge, not the response. Sometimes, she said, negative images have been fuelled by stereotypes, which far from explaining or reflecting reality have presented them, at best, in a skewed fashion.
She said while Pakistanis needed to do a better job in communicating an accurate picture of the country, this did not mean there were not challenges that had to be addressed. Both image and reality needed to be worked on.
Nevertheless there was still a gap between image and reality. In part this was due to the fact that the lens or prism through which the country and its issues, problems and challenges, have been seen by the outside world has, in our opinion, been a narrow one, predicated only on what's important to the outside world. This has tended to produce a lack of balance in the perception and image generated in consequence.
In describing the "realities", Dr. Lodhi said that Pakistan's geostrategic location has over the past half century posed multiple and complex security challenges, but this positioning also now offers opportunities. She said this location has meant that Pakistan, as a "crossroads state" has both been influenced by this location, as well as impacted on the regions it straddles. She said the context, in terms of the confluence of geography and history, must be kept in view of any discussion of image and reality.
Dr. Lodhi said 9/11 thrust Pakistan into a frontline role in the global anti-terrorism campaign. It also brought Pakistan into the frontline of global attention, in fact making Pakistan among the most over scrutinized countries in the world.
This intense attention however did not always yield images that adequately reflected Pakistan's complex reality.
Turning to the actual record, Pakistan's High Commissioner said for Pakistan 1999 was the watershed year, when far reaching reforms were set in motion to deal with the interconnected challenges faced on the economic, political, social and institutional fronts. 9/11 enabled Pakistan to accelerate the pace of these reforms, and with valuable international support.
As a result of these broad-based reforms, she argued, Pakistan has turned the corner in a strategic transition.
This strategic transition has two mutually reinforcing tracks or dimensions: political and economic.
Outlining the political and economic reforms, she said, this has been possible because of the overriding and mutually dependent objectives that President Musharraf set and which continue to determine and define our policies:
1. Ensuring the success and sustainability of the democratic transition.
2. Economic revival through reforms and progress.
3. Countering extremism by implementing a policy of Enlightened Moderation, and
4. Promoting peace within and peace on our frontiers.
Pakistan continues to make strides in all these policy areas. This process which is in progress has yet to be adequately reflected in the general images of the country abroad. The on going process is prone to place emphasis simplistically and exclusively on sources of instability rather than on factors that have engendered growing stability, nor do they capture the dynamism and confidence unleashed by the country's economic turnaround.
Dr Salman Shah, Chief Economic Advisor to the Prime Minister and one of the key architects of Pakistan's economic renaissance, in his well prepared speech, outlined various aspects of the economy including transparent and predictable policies, institutionalization of reforms to ensure continuity and a strong follow up. As a result of these policy fiscal and current account deficits were contained while domestic and external debt burden was also declining. The major economic reforms, he mentioned, in the areas of fiscal responsibility and debt limitation law, capital market reforms, privatization, and agriculture and tax reforms besides introducing deregulation in key areas. As a result of these efforts robust economic growth is translated in GDP growth which risen from 4.2 percent in 1999 to 7.5 percent in 2005-06. Similarly, the large-scale manufacturing witnessed an outstanding growth from 3.6 percent in 1999 to 14.5 percent in 2005-06. Growth in agriculture is also not lagging behind and portraying a growth of 4.2 percent in the current financial as compared to merely 1.0 in 1999. As a result the per capita income in Pakistan is also taking its position from $526 to $736 in 2004-05, while revenues to the government were impressive from Rs469 billion in 1999 to Rs902 billion in 2004-05. On the export front, Pakistan gained handsomely during last five years, which took a quantum jump from $7.5 billion to $16.9 billion in 2005-06(projected). On the import side the increase from $9.6 billion in 1998-99 to $23.6 billion in 2005-06 speaks itself about economic movement in Pakistan, Dr. Salman Shah said with a sense of achievement.
The outstanding growth in foreign exchange reserves from scratching $1.7 billion to $14.8 billion is a testimony of the fiscal policies of the present team of economic managers in Pakistan.
Farooq Sumar, a leading textile industrialist and CEO Mohammad Farooq Textile Mills observed on the occasion that the future of Pakistan's textile exports to the European Union lies in the hands of three major players, namely the present and future governments of Pakistan and their socio-political and economic policies.
These trade policies impinge on the competitiveness of the Pakistani industry. Textile plays a dominant role in the economy-62 percent of total exports, 46 percent share of manufacturing, 38 percent of all employment and 8.5 percent of GDP. Although efforts are being made to diversify but with little success, Pakistan's economy will remain dependent on its textile and clothing sector in the near future. Increasing the need therefore to deal with and focus on areas that hold back its development in the value added sector, and its ability to compete in a free trade environment.
Pakistan's textile and clothing exports have risen from $6.2 billion in 2000-2001 to$9.03 billion in 2004-05, a growth rate of over 10 percent per annum. Exports to the European Union have gone up from $1.5 billion to $2.58 billion during the same period, achieving a growth rate of around 16 percent per annum. At present textile and cloth exports to the European Union form 28.5 percent of total textile exports, making the E.U. the second largest textile buyer after the US.
The significance of the European Union to Pakistan textile trade is quite evident. He pointed out that four items of textile products - cotton fabrics $448million, ready made garments $475million, bed linen$572 and knitwear $542million - constitute 79 percent of the total exports during 2004-05.
Against this it is noteworthy that the EU's total textile imports amounted to Euros 69.7 billion in 2004, while Pakistan's share of Euros 2.5 billion accounted for a mere 3.61 percent, hardly of any significance. Seeing these figures one may wonder at some of trade policies of the EU towards Pakistan.
Historically the focus of Pakistan textile and cotton sector has been on early stages of processing i.e. ginning, spinning and weaving, due to the domestic availability of cotton. One in eight bales of the global cotton production are harvested in Pakistan. It is becoming the third largest cotton consumer worldwide (ICAC 2006). For many years, Pakistani cotton and yarn exporters remained competitive due to the availability of cotton and very low labor costs for the handpicked cotton. Pakistan's share of world trade in cotton yarn and cloth is about 30 and 8 percent, respectively. However, during the past 10 years the production and export of higher value-added items such as made-ups and knitwear has picked up. In fiscal year 2004-05, bed linen and hosiery alone accounted for 22 percent and 21 percent of Pakistan's exports to EU, respectively. During the past years, a major effort has been undertaken to modernize the textile sub-sector in particular. The impressive amount of $5billion has been investeed in the textile and cotton industry from 1999 to 2004. Almost half of the investment went into spinning, a fourth in weaving and a meager 8 percent in made-ups.
The woven and knit garment sectors represent the weaker side of the industry, whereas large units and high capital intensity characterize the textile sector, cloth production takes place in smaller establishments, roughly 80 percent of them in the informal sector. Labor-intensity and the employment of women workers are high, standards regarding working conditions poorer than in the textile sector. Of the investment volume quoted above, it obtained less than 5 percent of the total i.e. about one third of the investment targeted in the Textile Vision 2005.
The textile Vision 2005, a strategy paper for the Pakistan textile and clothing sector developed in 2000 by the Small and Medium Enterprise Development Authority (SMEDA), identified amongst other things the following weaknesses of the sector.
A narrow export product base, with a focus on low value added yarns and fabrics rather than made-ups and garments, and a lack of focus on a trained workforce in high value added industries, such as clothing. Increased attention for garments and made up articles as well as improved quality throughout the textile chain was advocated as a response to these challenges. This implied technology upgrading at all stages of textile process, human resources development, and improved marketing. A lack of qualified workforce becomes apparent in both sub-sectors.
Major reasons for Pakistan's poor economic performance as compared to most other Asian economies have been its socio-political culture, which drags its feet on critical issues such as education. Budgetary allocation was just 1.5 percent of public expenditures during current year. With archaic feudal philosophies in vogue, human development empowerment becomes secondary issues. This government has shown a will to tackle various internal and external issues very strongly, but has not really focused on socio-political reforms to which is closely linked also the fate of education and health care.
As far as the textile and cloth trade between Pakistan and the EU is concerned the official figures revealed that during the past ten years Pakistani made-ups and knitwear exports play an increasingly important role in textile and cotton sales to the European Union, whereas less processed cotton products, such as yarn and fabrics, fetch less and a declining share of export income from the EU. The bed linen is the most important component of made-up exports.
Pakistan's export of bed linen to the world market came a close second to China. The EU decision to grant Pakistani textile products duty free access to its market under the GSP in 2001 facilitated growth in the made ups sector. The imposition of 12 percent import duty on all Pakistani textile exports and the further levy of punitive anti-dumping duties imposed in March 2004 on bed linen led to a reduction of around 7 percent in its exports during 2005. However, this catalyzed the increase in China and turkeys market share in the European Union. One fails to understand how European industry gained by insisting on imposing duties on Pakistani exports of bed linen, when it was other countries who gained market share, a fact which was brought o the EU Commissions notice during negotiations.
The rise in international textile and cloth trade after the expiry of the quota system in January 2005 has not provided a push to Pakistani exports to the European Union. Official statistics show that overall; exports have increased slightly after the quota expiry. Textile exports July to March 2004-05 were 2.1 percent higher than in the previous financial year. Made-ups sustained their strong growth performance. In second half of the year both woven and knit apparel sales displays a downward trend. In terms of economic policies and their transparent implementation is concerned the present government has a good record. The privatization process, particularly of the banking sector and restoration of credibility has had their positive impact on the textile industry. This can be seen from the textile exports between 1995-96 when exports amounted to $6.19 billion and fell to $5.92 billion in 1999-2000. While during the present regime they jumped from $6.2 billion to $9 billion last year, an overall increase of 45 percent in five years. These impressive gains have brought Pakistani textiles to the value-added map but can this be sustained? Given with structural weaknesses of the industry in terms of adequate investment in high value added sub-sectors as well as in skilled and qualified personnel, maintaining present growth rate in value addition is going to be difficult.
Since the alternative of remaining a major yarn and cloth producer has a very high cost in terms of industrial and social development of the country. It is imperative that the industry climbs up the value-added chain and further shift its export composition towards made ups and especially garments. The garment sub-sector not only fetches higher value addition but also is that part of the global textiles and clothing market that grows more rapidly and thus provides prospect for expansion. Moreover being labor and female intensive, it provides employment and guarantees trickle down effect to a larger share of the population and contribute to women's economic empowerment.
While it is important to pinpoint the weaknesses in the garment sector but it is also equally important to emphasize the value addition taking place in the other strong sectors of textiles. In the last five years the spinning and weaving sectors have demonstrated their ability to produce high count yarn using long staple US and Egyptian cottons and concerning these to sophisticated fabrics of much greater value, some of which are also being exported to the EU. The printing sub-sector has demonstrate4d a high degree of versatility and competitive ability. Its success has been the driving force behind the success of the bed linen industry in Pakistan.
In order to sustain the growth of value addition the government and industry must meet the challenge of promoting skill development. Here the European Unions assistance in setting up skill development centers must also be sought.
The EU development policy intended to flank its trade policy vis-a-vis development countries. Support for trade development linkages is one of the six core areas of the EUs development policy. This involves amongst others improved market access, removal of competitive constraints, enhanced cooperation in trade linked areas, technology transfers, private sector development. The EU intends to support reforms in developing countries trade policies of that also serve gender equality. This is an important point of the textile industry that is Pakistan's largest formal employer of women in an environment with strong cultural constrains to women's participation in the paid labor market. If these policies of the EU are put into practice in areas that Pakistan can benefit most-namely skill development centers operated jointly, one can imagine a positive impact would take place.
The future of Pakistan's textile export to the EU could be made brighter with the help of the community. The present rules of origin governing the trade are too stringent and not in keeping with the spirit of globalization. A certain amount of flexibility is required, such as within legitimate economic and political areas. For instance SAARC countries should all qualify under common origin therefore allowing intra regional trade of items to be finally exported to the EU in a transformed sate. The Union should review procedures for initiating anti dumping proceedings. The present procedures are too one sided where judge and jury are the same. The EU should assist Pakistan in developing skills of its middle management and operative levels.
Despite having good relations with all EU states, its trade relations leave much to be desired. Political support it provides and the front line position that Pakistan takes in the war of terror with these resultant costs should lead to preferential market access. Here we see the reverse happening. Trade access provided in 2001 is closed in 2004. Another instance is the levying anti dumping duties on bed linen on a flimsy complaint by Euro cot. This duty 0f 13.1 percent has been imposed two years ago, while review proceedings have been going on over a year and have not yet seen the light of day. How a developing country and an ally have its industry paralyzed by going from zero duty to 25.1 percent in a period of 9 months? Decisions need to be taken at the political level in the EU to induce policy changes regarding trade with the developing countries. Nitpicking on trade will not help the global economy. Eradication of poverty in the third world is in the direct interest of all nations-developed and developing, and the only way of achieving it is by promotion of trade.
RAVI Ravi Bhatia Editor/Economist South Asia in his remarks on Pakistan's business environment observed that it was no less than the second-fastest growing major economy in Asia last year.
The economy expanded at 8.4% in 2004/05 with GDP growth standing second only to China. Despite the adverse effects of a devastating earthquake in October 2005, it is already clear that Pakistan will post another year of strong economic growth in fiscal 2005/06.
The ability to grow strongly despite such a terrible natural disaster is a testament to the resilience of the Pakistani economy. Since 2002/03 Pakistan has sustained a sound average GDP growth rate of 6.5%.
All major sectors of the economy witnessed rapid expansion in the last fiscal year. A sharp pick-up in agriculture and robust performance in the service sector reinforced stellar growth in large-scale manufacturing.
Booming consumer market drove investment spending as well as an unprecedented increase in credit to the private sector. The growth pattern highlights the importance of an emerging middle class, as well as the growing strength of Pakistan's private sector.
Pakistan is increasingly becoming a diversified economy, with the twin engines of manufacturing and services driving broad-based growth. Rapid growth also led to a strong bull-run on Pakistan's key stock market indexes.
Nevertheless, in 2006 and 2007, Pakistan will have to face a tougher international economic environment. A heavy reliance on imported oil and surging global oil prices, against the backdrop of the domestic boom, adding fuel to inflation. Policymakers will have to rise to this challenge. The domestic growth story is the result of stable and sustained macroeconomic policy backed by bold structural reform efforts. An ambitious privatization program recently culminated in an aggressive bidding war for Pakistan Telecommunications Corporation.
The United Arab Emirate's Etisalat outbid China mobile for this prized asset and the deal is set to deliver Pakistan over dollars 2bn in foreign direct investment. Textiles, a sector in which Pakistan is a leader, is poised to benefit from the end of a restrictive global quota system. Sector after sector is opening up, providing foreign investors opportunities.
A stable political and international environment increasingly reinforces the stable economic policies. The government of Prime Minister Shaukat Aziz continues to ensure that economic stability remains the cornerstone of government policy on the domestic front. In the international arena, in 2004, Pakistan became a "major non-NATO ally" of the United States, thereby cementing a strong friendship that has spanned several decades.
Pakistan remains the US's most vital ally in its global war on terrorism and the US remains Pakistan's largest business partner. Close to home, relations with China remain very strong and relations with India also witnessing rapid improvement in recent years. A combination of talks, people to people contacts, the expansion of transport links and, of course, South Asia's favorite passion, cricket, have substantially improved relations. One can now envision the beginnings of an era of broad economic cooperation fuelling even stronger growth in the South Asian region. Pakistan also remains the gateway to the emerging but land-locked Central Asian region. With stability slowly returning to Afghanistan and Central Asia developing its vast gas reserves, Pakistan will play a crucial trading role in the region in years to come. A favorable geographic position, a growing population, as well as sustained strong growth will increasingly make the Pakistani economy a key player on the world stage in the 21st Century. Between 2005 and 2030 the Economist Intelligence Unit forecasts that on average Pakistan will be one of the fastest growing major economies in the world. As its population grows to over 230m in 2030 and GDP per capita rises, it is set to become a vital player in the global economy. As the balance of economic power in the 21st century begins to lean towards Asia, Pakistan will play an important role in what is already being referred to as "the Asian Century".
The entire hall of Hotel Radisson, the venue of the event, gave a thunderous applause when Ravi mentioned the outstanding cooperation and efforts of Babar Ayaz of Mediators in making the event a great success.