August 11, 2003	Monday	Jumadi-us-Sani 12, 1424

One question asked with increasing frequency in Pakistan today is why is domestic investment not coming up in seizable measure despite the steadily improving environment for it?

Foreigners are investing in modest measure in the lucrative oil and gas sector. And the textile magnates, who had earlier claimed to have invested one billion dollars on modernization and expansion of the textile industry now claim to have invested two billion dollars to face the challenges of a world without textile quotas from 2005 which will revolutionise the textile industry altogether.

Large segments of the Pakistan economy are looking brighter than before. Economic growth last year was 5.1 per cent against the targeted 4.5 per cent. And the projection for the current year is 5.5 per cent, leading to 6 per cent growth in the years to follow.

Pakistan’s economy is doing well despite the fact there is deflation in Japan, varying measure of recession in the US which has affected Europe as well. And the Asian tigers are no longer the bouncy things they were earlier.

Despite such global factors, Pakistan has been able to achieve exports last year of over $10 billion and the momentum is being kept up as indicated by the July export growth of 8.9 per cent. The foreign exchange reserve has soared to $11 billion, while the balance of payments shows a surplus of over $4 billion.

The Karachi Stock Exchange (KSE) Index has crossed 4,000 points while the earlier peak in 1994 was only 2616. The expectation’s the index would rise far above 4,000. It is now easy to raise capital from the public or through the KSE, unlike after 1994. And bank credit has become truly cheap, the cheapest ever in Pakistan, to supplement one’s own capital or bank loans or capital raised through the stock exchanges.

Export finance has hit an all time low of 3 per cent, giving a big spur to exports. Loan write-offs have also become systematised and not based on political preferences or official whims.

But the investors point out to the continuing political uncertainty or constitutional crisis even nine months after the general elections and the dominance of the military in public life.

They talk of the varying tensions with India and occasional talk of war, including a nuclear conflict. They talk of the law and order or lack of that, and the kidnapping of businessmen and their sons for large ransom which the enfeebled CPLC cannot reduce.

They also refer to the pervasive corruption which enhances the cost of doing any business in Pakistan. But these problems have been more or less there always, and yet businessmen had invested and proposed and helped to expand the economy.

But when it comes to actually investing they have been facing more or less three major problems. They include heavy and varied taxation, central, provincial and local, whose number had until recently totalled 102.

They face the power shortage along with the high cost of power and frequent water shortage unless they pay heavily for tankers. They also talk of inadequacy of skilled manpower and a lack of disciplined work force when you have to compete with countries like China. And they protest against too many holidays, some of them unexpected.

These concern of the businessmen or investors cannot be dismissed lightly. While we ask overseas investors to come here and invest. Many of them get robbed as they arrive at the Karachi airport. And drive home some of them by men wearing police uniform.

The only input in investment that has really come down is the cost of capital or bank credit. Industrialists with a good track record with banks can raise as much capital as they want, primarily as working capital, but not for long term investment. And the rate of interest for working capital could be as low as five or six per cent or even lower as the banks have too much money to hold on to.

The tax rates are also being reduced, like the 25 per cent cut in the excise duty on cement and the cut in duty on steel. Finance Minister Shaukat Aziz has promised more tax relief next year. Refund of taxes is also being made quicker and the country is moving towards doing away with import duty on raw materials and hence no need to refund the taxes.

As for electricity, industries are being encouraged to have their own units and sell the surplus power. What is certain is as we come nearer the year 2005 further concessions of diverse kinds will be made to render our goods cheaper and cost of production lower.

What that means is that of the three major production problems which the industrialists have been facing one problem is down, and the other two are on the way to steady improvement.

While many of the problems which the industry faces have been there more or less in the past as well, the real reasons why they are not investing are somewhat different. They can’t now just do business in the old way they had been doing and pocketing most of the profits and often the borrowed capital as well.

They are accustomed to taking large loans from banks and not repaying them. They had been getting large kickbacks, while importing the machinery. Both are too difficult now; the banks are vigilant and over-invoicing of machinery can be detected now, including by banks which lend the money for the machinery.

They used to pack the board of directors of the company with their family members, beginning with their wife. That is not easy under the new Securities and Exchange Commission rules. Nor can they employ too many of their sons and pay high salaries and perquisites.

The auditors, too, have become vigilant as their performance is reviewed by the SECP and their misconduct censored. The Karachi Stock Exchange has also become more vigilant, and raises several questions.

Hence many sponsors of companies have bought back their shares and become private limited companies, and feel safe from external probe.

Not all the investors who set up industries in the past defaulted on repaying banks loans or take to grabbing kickbacks. There had been some notable exceptions, but there are few in number compared to the large crowd which built up large banks loans or non-performing loans of Rs 250 billion.

Many of our investors are accustomed to doing business and making large profits when the import duties were heavy, and earlier when products of the kind they were making were banned for import by the government.

Now the new investors are having large new fears. Which can be both tough and costly. There are the social compliance clauses. of the WTO. There are the new labour laws which forbid employment of children and there are the environmental protection laws. The factories and their surroundings are subject to inspection. That means they can not do business in the old ways.

Hence many of them are going into trading more than before. They are becoming agents of Chinese exporters and some of them have already sold 70,000 Chinese motor cycles this year. It all began many years ago with Ahmad Dawood selling Dawlance Refrigerators along with his textiles and woollen clothes. Others have followed them since then lucratively. We may soon see more industrial houses selling the imported goods of other countries like China, and of India when that becomes possible.

Meanwhile, the government has to take positive steps to promote political stability, regional peace, improve the law and order situation, increase the output of electricity and availability of water and reduce the taxation to accelerate investment and reduce unemployment and the crimes it breeds.

When President Musharraf or Prime Minister Jamali talks of a business friendly environment that should be an environment accepted readily by businessmen and not by the officials in the secretariat or the generals in the barracks only.