FRAGILE FOREIGN INVESTMENT CONDITIONS

KANWAL SALEEM
(feedback@pgeconomist.com)

Dec 19 - 25, 20
11

Aggravating situations of power, infrastructure, governance, and politics and high cost of doing business are contributing to the decline in economic activity and investment in Pakistan.

The country witnessed a sharp fall of 61 per cent in the foreign private investments during the first four months of fiscal 2011-12.

As per the statistics made available to PAGE, the foreign private investment fell to $239.4 million during July-October of 2011-12 against $610 million inflows noted during the same period last year, a decline of 60.8 per cent. Similarly, the foreign direct investment (FDI) fell to just $340 million, a decline of 27.7 per cent while comparing with the same period of last year.

A World Bank's report on foreign investment states that foreign investment in Pakistan declined 60 per cent against just two per cent decline in India and 20 per cent in Sri-Lanka; while, China, Indonesia and Bangladesh have achieved phenomenal economic growth by attracting foreign investment.

Financial analysts believe that current investment trends must be a cause for concern for our policymakers and especially the economic managers as FDI has become a key in the growth of many developing countries like China, India, Brazil, Argentina, Indonesia and Thailand but Pakistan has been facing shrinking FDI inflows mainly due to security situation.

The negligible investment the country has attracted is also focused on sectors like oil exploration, telecommunication, and energy. Major portion of investment in energy sector is from China.

Apart from foreign investment, local investment too is shrinking and there are reports of even shifting of industries to countries like Bangladesh.

No doubt, security and law and order situation are major hurdles in the way of investment as capital goes to only safer places but safety doesn't mean physical security alone.

In many countries, investors are offered lucrative incentives, and all barriers in the way of investment are removed and one window operation is done to expedite the entire process of approval, supply of services and clearances of all sorts.

Despite security concerns, investors from countries UAE, Saudi Arabia, China, and Malaysia still prefer to invest in Pakistan but they are fully exploited by our bureaucratic system and ultimately they turn their faces to other directions. Similarly, embassies and especially commercial attaches of other countries remain in intensive interaction with the business community of the host countries with a view to attracting investment for their countries.

Business leaders including Muhammad Pervaiz Malik MNA said the government needs to take aggressive measures on priority basis to improve the fragile foreign investment condition and to put the country on track of economic growth and development. He said negative growth in foreign investment would adversely affect the country's economic growth.

He was of the view that economic managers should device and implement growth oriented strategies to attract foreign investors for bringing the country out of the current serious economic turmoil. He said government could better cope up with the problems of poverty, unemployment, fiscal deficits, and slow pace of development, by attracting investment.

According to him, more FDI would create jobs, improve productivity, promote businesses, push up forex reserves, and ultimately strengthen economy.

Government should maintain continuity of policies like other countries in the region, and also develop a close liaison with businesses, industries and chambers within the country to increase investment opportunities.

In order to attract foreign investment, the government must address key issues including power shortage, poor infrastructure, lack of planning and deteriorating law and order situation on priority basis.

The PML-N secretary information Senator Mushahid Ullah said investment in the country has halted mainly due to rampant corruption and flawed policies of the government.

"Now local investors are making investment in economically stable countries like Bangladesh, Sri Lanka and other countries instead of investing in the country," he said.

According to him, multinational companies have started transferring their capital from the country, which is very dangerous trend. In the face of declining investment and transfer of capital, there would be surge in unemployment, which should be a matter of concern, he added.

Senator Mushahid Ullah said the government needs to introduce self-accountability system in state run institutions so that corruption could be checked.

He added that corruption and gas load shedding are not only causing decline in GDP but also leading to unemployment apart from badly effecting country's export.

Had the government implemented 10-point agenda given by PML-N president Muhammad Nawaz Sharif, the state of country's economy improved apart from resolving public issues, he said.

The Lahore chamber of commerce and industry (LCCI) President Irfan Qaiser Sheikh said the federal board of revenue (FBR) must evolve a mechanism to tax the untaxed sectors as the fast widening imbalance between the potential and the actual growth rate is the real threat to the economy.

According to him, it was very unfortunate the FBR people, unmindful of the dangerous consequences of widening macroeconomic imbalances, keep on issuing statutory regulatory orders (SROs) without due consultations of the chambers and sector-specific associations.

The business community is very disturbed and confused due to issuance and withdrawal of various SROs related to five zero rated sectors. After withdrawal of exemptions provided in SRO 549 of 2008 and 575 of 2006, SRO 283 was issued to regulate the export oriented sectors.

Later, it was replaced by SRO 1012. The same was withdrawn immediately. Such a rapid amendments and changes in tax system have created sheer uncertainty in the business community. Such fast changes leave no time for the businesspersons to understand and implement the changes. This leads to commission of mistakes in costing and tax calculations.

Irfan Qaiser Sheikh said that the SRO 821 of 2011 of sales tax, which required stating of identity card or tax numbers on all invoices, has also added fuel to the fire. This is a very irrational and impracticable provision, as it is not possible to mention or to ask for identity card or tax numbers of all the buyers therefore, the business community strongly urges the FBR to withdraw this SRO permanently. .

The LCCI President said that the rate of turnover tax is too high and should be rationalized to 0.5 per cent. He also demanded that refund of income tax and input of sales tax should be allowed without any undue hindrance.

President LCCI said that there should be consistency in policies like tax returns shall remain the same, each year new tax return is introduced which makes it difficult for the taxpayer to file his return according to new format.

He said that presently, there are no incentives for the people who regularly pay their taxes; in order to encourage more people to join the tax net, special incentives should be provided to the scrupulous taxpayers. In this regard, tax cards, which promise some benefits to the taxpayers, could be issued to distinguish between the taxpayers and the non-taxpayers, as the undocumented economy is a very serious threat to the economy.