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Cautious business optimism

April 04, 2016


Special Adviser for Revenue to the Prime Minister Haroon Akhtar at the Overseas Investors Chamber of Commerce and Industry office.
Special Adviser for Revenue to the Prime Minister Haroon Akhtar at the Overseas Investors Chamber of Commerce and Industry office.

Many businessmen agree that there have been incremental improvements on both the economic and security fronts in the last couple of years. Interest rates are at their historic low, inflation remains subdued, cost of doing business is down on low oil prices and energy availability too has improved a great deal.

In short, the major risks to business and investment have mitigated to a large extent.

Still, a majority of both local and foreign businesspeople remains wary of investing money and creating jobs because they are unsure of the sustainability of this progress. Pakistan, unfortunately, continues to suffer in spite of its economic and business potential.

“The major risks to business and investment have mitigated to a large extent... The government needs to work hard to convince the businesspersons that the recent economic gains are not momentary.”

“We are having a hangover from the past at the moment...,” says Lahore-based business analyst Ali Khizar.

“The government needs to work hard to convince the businesspersons that the recent economic gains are not momentary.”

In a recent meeting with economic journalists in Lahore, officials of Overseas Investors Chamber of Commerce and Industry (OICCI) said overall business confidence had significantly improved in the recent months on improvements in security conditions and macroeconomic stability. “But this confidence hasn’t translated into increase in foreign direct investment (FDI) and jobs,” OICCI president Shahab Rizvi said.

To executives of existing foreign companies, the case for investing in Pakistan is clear. Kimihide Ando, chief executive of Mitsubishi Corporation in Pakistan, says the country offers enormous business potential to foreign investors as it has a large market of an estimated 70m middle class consumers.

OICCI is of the view that the full potential of doing business in Pakistan has not yet been truly unlocked despite the fact that foreign investors, already operating here for decades, have by and large reaped good returns. Ando says Pakistan’s country perception in the world is the biggest hurdle in the way of FDI.

However, Shahab said, the country perception, gaps in policy implementation, transfer of tax burden onto the documented businesses, and governance issues were some major roadblocks to new investment in the economy.

In answer to a question by Dawn, he said foreign investors preferred to invest in India not only because of larger size of its market, but also because of its positive perception around the world, policy transparency and implementation. “Although our (OICCI members) tax refunds of Rs30bn form only a tiny part of total taxes of Rs900bn we pay each year, for example, the delays in release of these claims sends a negative signal to the foreign investors about weak business and tax policy implementation, preventing them from investing in Pakistan.”

Indus Motor Company, which makes Toyota cars, had exported 100 units to Sri Lanka last year. But it had to discontinue further exports because of non-payment of its export refunds.

OICCI believes that “with an ongoing state owned enterprises privatisation programme, opportunities for large infrastructure-related investment projects under the China-Pakistan Economic Corridor, growth in local consumption and a largely untapped export potential, Pakistan has considerable need for capital investment in several sectors with potentially high returns. With political stability, insulation from external factors and the right macro-economic environment, Pakistan can register a prolonged period of domestically driven growth.”

Shahab was of the opinion that the government must take advantage of improved business confidence and use foreign investors already operating in the country as its ambassador for attracting fresh FDI.

Indeed, the local investors share concerns expressed by foreign companies. Improvement in the business climate in the country notwithstanding, the problems like long delays in the release of export refund claims and huge tax burden on exports and power tariffs continue to deter businessmen, especially the large-scale textile industry, from investing.

“Energy shortages and higher-than-the-regional average energy prices, myriad of taxes on exports, and unchecked smuggling from India have severely damaged the industry and made us uncompetitive over the years,” argued Aptma leader Gohar Ejaz.

He said the government, for example, charges Rs3.64 per unit in the name of tariff rationalisation from consumers using above 300 units in order to recover the losses on account of electricity theft and waste. Similarly, distribution companies get Rs3.63 per unit from consumers as fixed and distribution cost. “What’s the justification of imposing this additional charge of Rs7.27 per unit on the consumers who pay their bills regularly and honestly?,” he asked.

He said the consumers were forced to pay around an additional amount of Rs550bn excluding sales tax on their electricity consumption on every unit that cost the power producers an average of Rs2.90 per unit according to the recent Nepra determination for February. “The government is not paying any attention to the industry’s demand to cut its manufacturing cost to the regional level by removing what is practically theft recovery (tariff rationalisation) charge on their bills and let our exporters compete in the world. Who will invest in these conditions?.”

A senior executive of a major business group that has interests in different sectors including textile, retail, cement, etc said most businessmen were watching the developments on the economic front with caution. “The energy supplies have improved and cost of doing business has come down a bit. But this is not the result of any policy action by the government.

“The improvement is largely a consequence of falling global oil prices. We are yet not sure if these improvements sustainable. Unless the government comes up with a clear-cut policy assuring investors that their cost of investment and doing business will be kept low to make their production competitive in the world markets no one will make new investment,” he said on condition of anonymity.”

Published in Dawn, Business & Finance weekly, April 4th, 2016