INVESTMENT is growing at a moderate pace to expand industry and other sectors, pushed by rising domestic and export demand. But whether it is manufacturing or construction, services or farming the full potential has yet to be realized. It comes on the back of growing demand, higher export potential, a slight cut in taxes, liberalization, higher profits and improved dividends. This can be deduced from a maze of statistics, some just raw, incomplete or even exaggerated, as senior officials admit.
To top it all, one gets the impression that the real investment and industrial growth may even be higher than reflected in official statistics, because a large number of our domestic investors have a knack to hide their business volumes to evade taxes and duties.
But the fact is that things are moving up, as a five year analysis— covering fiscal 2001 to 2005 —indicates. The statistics for 2005 are provisional. The gross fixed capital formation (GFCF) in private, public and general government sectors totalled Rs4 trillion, according to Ministry of Finance (M0F), at current market prices (cmp).
It includes Rs2.75 trillion in the private, Rs671 billion in public and Rs559 billion in the general sector. The average increase compared to 2001 was 3.2 per cent in 2002, 8.22 per cent in 2003, 17.5 per cent in 2004, and 15.5 pc in 2005. One has to adjust it to inflation rate of the period that ranged from four to eight per cent to roughly get some idea of gross fixed investment (GFCF) in real terms. GFCF in dollars terms, MoF estimates, was $ 39.9 billion. MoF also indicates, separately, the five year GFCF in agriculture was Rs377 billion.
Where was the GFCF headed to ? Large-scale manufacturing (LSM) emerges the biggest sector with Rs735 billion, while in four years, up to fiscal 2004 Rs115 billion, went into small and medium industries (SMEs). Transport & communications was Rs568 billion, ownership of dwellings Rs493 billion, services Rs332 billion, electricity & gas Rs270 billion, finance & insurance business Rs92 billion, wholesale & retail trade Rs65 billion, construction Rs62 billion, and general government sector Rs144 billion.
The investment was funded out of domestic resources, including private funds of the business. A growing amount of bank credit was used as the central bank’s easy money policy led to historically lowest lending rates.
The bank credit during all these years overshot the targets set by the State bank of Pakistan (SBP) in the annual credit plan, reaching Rs400 billion in 2005.
All of it, however, did not go into hard core investment or industries. Domestic and foreign trade financing and other forms of loans, including personal, consumer, housing and other credits are included in this overall amount. However, a substantial amount continued to go into manufacturing and other real sectors.
Foreign direct investment (FDI) regularly moved up over this period as foreign investors discovered Pakistan to be a reasonably profitable market. The dividends ranged between 20 to 60 percent, depending on specific businesses or products. The demand-led market also expanded, as personal incomes started moving up.
FDI inflows in 2002 were $484.7 million—50 per cent higher than 2001,says Board of Investment (BoI). The inflow rose further to $ 798 million in 2003, $ 949.4 million in 2004, and $1.524 million in 2005, according to SBP.
“The increase has varied from 50 to 61 pc over these four years, Mr. Waseem Haqqie, BoI Chairman says. But, the government has been clubbing together the FDI inflows and investment in new industry and businesses, with the proceeds received from privatization of state owned enterprises (SOEs).
The inflow into new investment comes down when the privatization proceeds are deducted from the overall amounts. It is more realistic to split FDI inflows into new investment and privatization proceeds to get an idea how we fair in attracting DFI compared to other countries in the region.
Mr Haqqie told Dawn that in 2005 the total inflow was $1,524 million, of which provincial proceeds were $363 million. How does he see the projected inflow of $3.0 billion in 2006? This is important because of the expected payment by Etisalaat of UAE for its purchase of part of the shares of PTCL.
“Out of $ 3.0 billion the privatization proceeds in 2006 are expected to be 60 pc, while 40 pc will be new FDI investment,” he estimates. “Or, if the inflow into new investment rises, the share of the two can be 50:50,” he says. The overall FDI inflows during the last five years, SBP says, was $3.755 billion. It included receipts of $821 million on account of sale of SOEs, and $2.934 billion as new investment. In the longer-term perspective, total FDI inflow between fiscal 1990 and 2005 was $9.425 billion.
There were two high peak years in these 15 fifteen years—1996 when the amount was $1.110.7 billion, and 2002 when it was $1.524 billion. The amount went up in these two years, as a result of sale of SOEs, and in one year due to investment by private power companies.
Over the same 15 years, U.S. investment totalled $3.295 billion, or 35 per cent of the entire inflow, followed by UK with $1.736 billion or 18.4 per cent. Japan figures with $ 435.4 million even though it has been investing more heavily, nearer home—in East Asia.
United Arab Emirates has recently shown up with $910.6 million, that includes $367.5 million in 2005 alone, mainly as a result of buying into banking, energy and telecom sector. Germany sent in $260 million, Saudi Arabia $205.8 million, and South Korea $ 199 million. Others with around $100 million or less, included the Netherlands, Hong Kong, and France, while Italy and Canada were $17.7 million each.
Where the FDI is going after 9/11? Is it flooding Pakistan, as the government’s economic managers dreamt? Certainly not. Are Muslim countries and Muslim investors of Middle East-Gulf are parking their funds in Pakistan? Certainly not, but for UAE that has primarily gone into buying shares in banking, or energy and investing in telecom. The European investment in US has slowed down significantly, but is that money coming to Pakistan? No.
FDI global inflows in 2004 were estimated in World Investment Report-2005 at $648,146 billion, out of which Pakistan’s share was just 0.15 pc, India 0.82 pc, Thailand 0.16 pc, Bangladesh 0.07 pc, and Sri Lanka 0.04 pc.
Looking at the size and the potential of the market this share is too small. The government, and Pakistani entrepreneurs with a capacity to attract and profitably utilise global-and Muslim— funds need to wake up and think hard as to what is wrong with? Why is Pakistani market is not attractive, in spite of substantial annual dividends and profits?
FDI has gone into nearly three dozen fields, topped by $517.6 million in communications, including telecom, IT, software and hardware development IT services, postal and courier services, an analysis of SBP statistics for 2005 shows.
It was followed by $269.4 million in financial services, inclusive of sale of state-owned banks. Besides these two sectors, the other eight that make the top-10 are: oil & gas exploration, thermal & hydel power, trade, chemicals, construction, textiles, pharmaceuticals, and transport equipment including motorcycles, car, buses and commercial vehicles.
The trend of import of non-electrical machinery reflects the direction of investment and industrialization. The imports in this group have been rising 15 to 17 per cent annually in recent years, in terms of current prices.
The import of machinery in 2004 was Rs140.9 billion, up from Rs119.25 billion in 2004. An uptrend is also reflected in all other imports ranging from industrial inputs, to transport equipment, chemicals, and food. The production capacity has gone up and continues to expand, both in terms of new units and up-gradation, modernization, and expansion of the existing industries.
The Ministry of Industries, Production and Special Initiatives (MoIPSI) puts the number of new units established between 2001 and 2004 at 1,101. They include 660 in Sindh, 358 in Punjab, 63 in NWFP and 20 in Baluchistan. Together they have created 31,844 new jobs. The ministry officials, however, put a caveat on these statistics, saying these may not be complete, because the old system of registering all new units with the provincial industries departments has been discarded.
One of the key reasons for a chaotic situation is lack of policy direction, partly because Ministry of Industries, Production & Special Initiatives has no say in all these matters, and partly because of the freeing of sector.
For the first time in 1964 that a “One Window” was to be created in the ministry. Forty-one years later, when, this week, I asked senior officials of the ministry where is “One Window,” their answer was “not here.”
Hafeez Sheikh last month told a seminar “we are now working on creation of an effective one-window service at BoI.” Actually, inspite of a staff of hundreds, Industries Ministry has hardly any work. The reasons: deregulation has made it redundant. “Production,” portfolio does not exist because most of the nationalised units stand privatized.
“Special Initiatives” are nearly non-existent, except for the proposal to establish, in private sector, a National Industrial Park at 1,000 acres of spare land belonging to the Steel Mills, at Karachi, and to establish a Technical Up-gradation and Skill Development Company, to be managed by private sector. Another one is to start a dairy project.
INVESTMENT is growing at a moderate pace to expand industry and other sectors, pushed by rising domestic and export demand. But whether it is manufacturing or construction, services or farming the full potential has yet to be realized. It comes on the back of growing demand, higher export potential, a slight cut in taxes, liberalization, higher profits and improved dividends. This can be deduced from a maze of statistics, some just raw, incomplete or even exaggerated, as senior officials admit.
