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Bullish on Pakistan


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ALTHOUGH the Karachi Stock Exchange has risen over 50pc over the last year, financial analysts have not rushed to declare Pakistan a ‘bull market’.

The reasons for their caution are obvious: terrorist attacks, a continuing conflict next door in Afghanistan, a roller-coaster relationship with the US, outstanding disputes and rivalry with India and an economy that could collapse without emergency treatment.

It will take years to eliminate extremist violence completely. Meanwhile, terrorism can be contained through smart security and political strategies. Afghanistan can be helped to achieve relative if not complete peace. Relations with a disengaging yet domineering America and an ambitious yet anxious India can be managed by clear-headed diplomacy.

But Pakistan’s economy cannot be saved from meltdown by half measures and patchwork solutions. If reforms are avoided because they are politically difficult, Pakistan’s economy may limp along for a while on life support, but it will eventually collapse under the burdens that a rapacious elite has imposed on it.

The irony is that, unlike the security issues, the solutions to the current economic challenges are fairly clear and require only political courage to be implemented.

Continued deficit spending will lead to hyperinflation and economic meltdown. A tax regime which generates only 10pc of GDP as revenues cannot provide for the infrastructure, social services, security and defence needs of the country. It must be made comprehensive, fair and efficient.

Doubling tax revenues to 20pc of GDP — the norm in most dynamic economies — within three years is not an unrealistic expectation. Similarly, the haemorrhaging of public money through the loss-making ‘autonomous’ corporations — Steel Mills, PIA, Railways — can be stopped through structural rationalisation and privatisation, as was successfully achieved in the banking sector over a decade ago.

Moreover, at present these solutions can be achieved domestically without external involvement. The incoming government has the parliamentary majority and public support to implement such economic reforms. And without the fiscal restructuring other declared aims, such as overcoming the energy crisis, cannot be achieved.

If these reform measures are delayed, for example by securing a credit line from Saudi Arabia, the financial reckoning may be postponed. But if the breathing space is not used to bring public spending and revenues into balance, the threat of economic collapse will catch up with the country sooner rather than later.

Then, the solutions for the stabilisation of the economy will be imposed externally by the IMF and its masters. The economic and political pain will be much greater. Not only will the government suffer economic humiliation, its ability to conduct independent and nationally oriented security and foreign policies will also be compromised.

Perhaps the most compelling reason for implementing these reforms is that they will unlock Pakistan’s immense economic potential. It may still be a secret, but Pakistan is one of the most attractive destinations for private equity investment. Here’s why:

— Pakistan, the world’s sixth most populous country (over 180 million), is a huge market;

— Its middle class (63 million) is a higher proportion of its population (35pc) than other South Asian states (India 25pc, Bangladesh 20pc);

— Domestic demand in Pakistan is a higher percentage of GDP (84pc) than other Asian and emerging markets;

— At an average age of 22, Pakistan’s population is younger than other emerging markets, providing both a labour pool and the future demand to fuel growth.

Investment opportunities in Pakistan can be identified in a number of sectors: power generation, consumer goods, food and agriculture, housing, healthcare, education, financial services, information technology, transport, oil and gas and infrastructure. These investment opportunities are generated by several factors.

First, the economy has been starved of investment for almost a decade. There is a huge accumulation of unmet demand in almost every sector. This is magnified by the rapid rise in disposable income.

Second, there is a very low degree of value addition in Pakistan of raw materials and exports, opening prospects for the expansion of manufacturing (and employment generation) in sectors such as textiles, food processing and electronics.

Third, Pakistan’s massive infrastructure needs cannot all be met by government-financed projects; there is a very large space for private-sector investment and public-private partnerships to build infrastructure.

Thus, from an investment perspective, Pakistan is a ‘target-rich’ environment.

Apart from the global private equity investors, there are strategic players — China, Saudi Arabia and other Islamic countries — which are prepared to invest very large amounts in Pakistan if they are convinced of the country’s economic stability and an end to the rampant corruption of the recent past.

It would be much wiser for the new leadership to focus on generating such strategic investments in Pakistan rather than asking for handouts and financial favours from friends.

Fiscal reform and a wider tax net will, no doubt, impose some pain and evoke political protests from those affected. The reforms can be structured to ameliorate the impact on the rural and urban poor. Moreover, if the reforms are going to provoke some protest, it is better for the government to face this now, early in its tenure, rather than after some years when another election may be in the offing.

If reforms are introduced now, their positive impact — stabilising the economy and generating large investments, growth and employment — will become evident in a couple of years and assist the government’s future electoral prospects.

The stakes are high in the decisions to be taken by the government on fiscal and tax reform. It should not only consider the impact of the anticipated opposition, mostly from vested interests, it should also weigh the long-term costs and benefits of these decisions for itself and for Pakistan.

The writer is a former Pakistan ambassador to the UN.

Comments (16) Closed

Rashid Sultan Jun 09, 2013 07:22pm
The statement "China, Saudi Arabia and other Islamic countries
Realist Jun 09, 2013 07:20pm
Pakistan is by far the most under invested country even though it shares continguous borders with world's two fastest growing economies - who's to blame - other than us?
IJ Jun 10, 2013 02:08pm
There is no need for such a fine-grained technical analysis about why Pakistan was created. The simple fact is that Pakistan was created by opportunists, to benefit other such opportunists and is now ruled by another set of opportunists.
Jaweed Niaz Jun 10, 2013 01:38am
This is a very good summary of problems being faced and their possible resolution. A timely piece as now is the time to take on the issues.
Akram Jun 09, 2013 04:38pm
what is needed is creative thinking, and courage. Pakistan has for years been in trouble because successive governments don't want to be the ones to impose taxes on land. The landowner dominated main 2 parties, care little about Pakistan's situation as long as they themselves don't have to pay. However progress can only happen when such taxes fall in to the same ranges as other nations. This requires courage to broaden the tax net and take on vested interests. Nawaz Sharif had a majority in 1997 and did not do it then, is he likely to do it now? The fact they have made pledges to increase tax to GDP ratio is welcome, however such bland statements in Pakistan usually mean nothing, the actual move to increase the ratio is imperative for the future of the nation. Nawaz Sharif the ball is in your court are you going to be a tiger or a paper tiger?
RASTOGI Jun 09, 2013 12:36pm
I am a firm believer of development possibilities. However, our anti-India phobia has reduced our chance of utilizing our potential. Inspite of chronic border problems, India and China have around $100 billion dollar trade. Pakistan should also follow a similar economically beneficial policy and cut rhetoric. Though I am an Engineer, not an economist, yet I am sure that around 1% increase in GDP can be achieved by improving PR, PSM and PIA. India's track record in all these three sectors is worth emulating and we must welcome their finance and technology, as India, in writer's own word," is anxious and ambitious".
khanzada Jun 09, 2013 01:44pm
He is an economist now ?
Ahmer Jun 09, 2013 02:14pm
Good theory, straight from a book.
Talat Jun 09, 2013 08:01pm
This treatise will never be accepted by the hawks within the Establishment of Pakistan (that includes several within Nawaz Sharif's circle and beyond) -- after all, Pakistan was essentially created to represent "what India is not" -- and if that means not "prospering" like India (for the sake of preserving the country's principles of identity and ideology), then so be it. Economic "progress" or otherwise has its ups and downs. Today India may be "better" than Pakistan on some X or Y or Z economic indicators... but what of tomorrow? Anything can happen to any country in the future, good and/or bad. But PRINCIPLES are supreme! If Pakistan adopts the same principles and indeed the practices of India, then what is the difference between the two countries? Why did Pakistanis bother going through with the "pain" of Partition, not to mention the wars and other resistances over the years? If Pakistan cannot demonstrate the difference it has with India, then quite frankly (even as a Pakistani), I say that the country has no right to even think of existing! Munir Akram ought to have highlighted this point as he used to several times (directly and indirectly) when he was a diplomat. Otherwise, he might as well migrate to India and look for a job there...
TanzaK Jun 09, 2013 11:28pm
When an analysis like this leaves out basics such as energy, communications, education, agriculture/ textile (other than just one mention) and military, one has the question the depth of thinking.
TanzaK Jun 09, 2013 11:20pm
Actually 'politicianically' corrupt. As soon as the public elects the right (honest) leadership the country has 'humongous' potentail.
caz Jun 09, 2013 06:01am
Dream on ..... ! Pakistan is politically, economically and morally bankrupt.
Robert Jun 09, 2013 07:54am
Seems like Munir Akram is looking for new job in Sharif administration.
BRR Jun 09, 2013 03:11pm
Not the first article to enumerate a long list of potential advantages to investments - but not a lot of investors lining up yet. If there is upside to making changes, the downside to not making changes is rather dangerous. Munir Akram and his ilk had their chance and screwed up repeatedly - now he wants to sound like yet another savior with a plan - NZ had better be careful in seeking advisers - some like Akram come with a sad baggage.
Abdul Malik Jun 09, 2013 10:27pm
Sorry to puncture your balloon but your reasons for Pakistan as a huge market do not sound convincing. - Huge market right but what about the purchasing power ? - Middle class 35% looks good on paper but works out to around 6.5 crore people only. -Avg. age of 22 but 70% of them are illiterate and unemployable. - Investment opportunities. Who will invest in a country where there is no security and safety moreover there is no power to run any industry. There does not seem to be any change forseeable in near future. Power can not come because of heavy debt situation, outdated machinery and technology, power theft and hardly any attempt to go in for cheaper power generation such as hydro. The sectarian violence is fuelled by the mullahs who can not be reigned in due to religious reasons. The terrorists and taliban have to be maintained to trouble India, The PSOs can not be turned around because of political reasons such as overstaffing and posts for favours. Tax collections can not be increased because of opposition of the large landowners and business people in politics. Education can not be rationalised because of a mix of religion, politics and regionalism. I could go on but these seem to be the main reasons that there appears no hope in near and not so near future.
animesh Jun 09, 2013 03:05pm
Doubling of tax rates is not a viable recipe for success, but widening the tax net surely is. Just 4.8% of Pakistan's population is paying taxes. People need to be convinced that paying taxes is patriotic. The best way to do that is for Pakistan's government to become a judicious guardian of public money.