PERHAPS the most important message conveyed by the prime minister in his speech to the United States Institute of Peace was that today Pakistan is well placed to achieve rapid investment-led economic growth. This is a message the government and all its relevant organisations should be propagating in all the world’s major economic and financial centres.
The case for investing in Pakistan is clear.
With 200 million people and 60 million middle-class consumers, Pakistan is a rapidly growing emerging market. A large trainable workforce, coupled with favourable demographics and rising domestic consumption, provide a range of compelling infrastructure and corporate opportunities in Pakistan. But the growth and return potential in Pakistan has yet to be unlocked by domestic and international investors.
Pakistan has considerable need for capital investment, given its tremendous infrastructure requirements and unexploited potential in virtually every major sector. Provided political stability, insulation from external turbulence and the right macro-economic environment, Pakistan can register a prolonged period of domestically driven growth.
Capital investing in Pakistan can enter a sustained and rewarding phase.
Pakistan’s regulatory environment is among the most investor-friendly in the world. There are no restrictions on foreign ownership (unlike India and most other emerging markets); foreign exchange conversion, repatriation of profits or hiring of expatriates. Pakistan offers low corporate tax rates and tax incentives for strategic investments. Historically, foreign investment returns in Pakistan have been high.
Today, in Pakistan, there are substantial opportunities in undervalued assets and companies, an active privatisation initiative, large infrastructure-related investment projects (especially under the China-Pakistan Economic Corridor), growth in local consumption and a largely untapped export potential. With a massive diaspora of highly qualified Pakistani executives and a large reserve of domestic talent, capital investing in Pakistan can enter a sustained and rewarding phase.
It is not difficult to identify some of the major opportunities as well as the impediments to investment. Among these, the most visible opportunities are the major road and rail and pipeline projects under CPEC. These will be implemented at the government-to-government level. However, these projects will yield ancillary economic activity and additional investment opportunities for the private sector.
The 10 power projects included under the CPEC umbrella are essential and urgent to meet the country’s power needs. There are some questions, however, whether these projects have been well prepared and planned by the private parties who have won their development rights. Some may face financing and implementation difficulties as a result. There should be mechanism to review and replace deficient parties where needed.
Given the slow exploitation of Thar coal, possible difficulties in financing coal-based power plants, and the time-lag in laying the Iran-Pakistan gas pipeline, the decision to allow the private sector to establish LNG import terminals is sensible. It is concerning, however, that the very first terminal has become the subject of controversy. Such controversies are a major discouragement to investment. It seems essential to create an impartial mechanism to address and resolve complaints quickly, transparently and fairly.
With the decline in oil and gas prices, wind and solar energy may require larger subsidies at present. However, over the longer term, the cost of solar power is likely to decline further, especially for household use. Solar power must become a growing part of the national energy matrix.
Consumer goods production is also a potentially large-growth sector that is being held back due to the paucity of local financing for the small and medium enterprises which are the main investors in this space. A financing facility and some form of investment insurance may provide a solution. A review of tariff protection and control of smuggling are other essential components of a solution.
Food processing is another underutilised investment sector. A large percentage of fruit, vegetables and fish production is wasted in Pakistan due to inadequate storage and processing facilities. Here too, access to financing and latest technologies is the major obstacle.
With appropriate management and financing, Pakistan’s agricultural production can expand exponentially. Large, industrial-size farming may make sense in some sparsely populated areas. But the highest growth can come from providing adequate credit, technologies and insurance coverage to small- and medium-sized farming and elimination of exploitative middlemen from the market.
Housing needs are huge and growing rapidly due to population growth and urbanisation. Real estate developments have so far focused on the high end of the market. The middle- and low-income housing market is potentially much larger and can yield attractive returns if the government creates a widely available mortgage finance system.
Investment in education is already proved lucrative for schools and colleges for higher income groups. There is still space to enlarge such investment. It can be extended, with innovations, to the lower-income groups, especially in partnership with the government and not-for-profit sources of capital. Health has also proved profitable for perceptive investors and operators. But to provide health coverage to the masses, a partnership will be required between the government and private investors, including health insurance coverage at affordable rates.
The IT sector in Pakistan has developed virtually without official support. There is vast, untapped talent in Pakistan which requires financial, organisational and marketing support which can be provided by venture capital from within and outside the country. Growth in textiles has been stunted by the monopoly of spinners and yarn makers who have impeded value addition. This challenge requires a bold political solution.
Pakistan’s entire manufacturing sector has been impaired because, under external pressure, Pakistan has virtually dismantled the tariff and non-tariff protections which are essential to enabling nascent national industries to achieve competitive status. The government must review and restore such trade protections to encourage investment and expansion in manufacturing for the domestic and export market.
There are, of course, several other major policy issues which the government must address in order to unlock Pakistan’s economic and investment potential. First to finance development programmes, tax revenues need to be doubled from the present 9pc of GDP. Second, the endemic corruption in officialdom must be ruthlessly eliminated. Ending crony capitalism has to be part of this campaign. Last, Pakistan needs to create a much larger capital market, through such measures as the ‘financilisation’ of mortgages and insurance and creation of debt instruments, to generate adequate and broad-based investment and wealth creation.
The writer is a former Pakistan ambassador to the UN.
Published in Dawn, November 1st, 2015