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Investing in Pakistan

November 25, 2018


The writer is a former Pakistan ambassador to the UN.
The writer is a former Pakistan ambassador to the UN.

NOW that the financial emergency is over (with Saudi and Chinese financial support), and hopefully an IMF programme will be in place soon, the government must turn to adopting the trade, industry and investment policies required to accelerate growth, generate jobs, restrain imports and expand exports on a sustained basis.

As an initial step, the sectors and products which have the greatest potential for export growth should be identified and promoted.

Textiles is Pakistan’s prime export sector. It has been stagnant for several years due to low investment in modern machinery, energy shortages, an artificially strong rupee and inadequate efforts to integrate into global supply and retail networks. Both the government and industry appear ready to redress these deficits.

Sectors and products with the greatest potential for export growth should be identified and promoted.

Agriculture also has bright prospects. Pakistan is food self-sufficient. Yet, its agricultural yields are comparatively low. A considerable agricultural surplus can be generated through the application of new technologies and techniques; improved seeds, planting and harvesting methods; efficient irrigation and fertiliser use; better storage facilities, access to markets, packaging and branding.

Pakistan’s manufacturing sector is minuscule — one fourth the size of the services sector. But, with its high propensity for consumption, Pakistan imports all kinds of manufactured goods. Low industrialisation is a consequence of the folly of past unthinking trade liberalisation. No one will manufacture an item in Pakistan if it can be more cheaply imported into the country. Pakistan can industrialise only if the government acts decisively to protect and promote its infant industries until they are in a position to compete with regional and global producers.

Since a number of Chinese manufacturing industries are becoming less competitive and/ or facing high US and European tariffs, there is a significant opportunity to work with Chinese partners to transfer such industries to Pakistan, and use it as an export platform. Such targeted transfers should be a special focus of CPEC’s Special Economic Zones.

Affordable and indigenous energy will be key to sustained growth. Renewable energy must be the clear preference. Despite high capital outlays, hydropower costs three cents per kilowatt hour. And solar power at four to five cents and wind at seven to eight cents are cheaper than imported fossil fuels and can serve off-grid areas. Approvals for the pending 2,500 MW solar and wind projects mentioned by the Sindh energy minister should be speedily issued. The installation of one or more solar panel production plants in Pakistan would be a profitable venture.

Pakistan may have delayed exploiting Thar coal far too long. Reportedly, electricity from the Thar coal power plants will cost eight cents per kilowatt hour. The environmental impact of coal power plants will be enormous. Future financing for coal-fired plants may not be available, unless new technologies can offer solutions. The Sindh government, for example, has been introduced to a technology which claims to capture waste coal flue gases and transform them into profitable products — ammonia, water or methanol — thus resolving both the environmental and economic problems encountered by coal.

Natural gas will need to be part of Pakistan’s energy mix, given its extensive gas distribution system and the dependence of households and industry on natural gas. Pipeline gas would be cheaper than LNG imports; but the Turkmenistan pipeline must await peace in Afghanistan, and the Iran pipeline will evoke US ‘secondary’ sanctions. Consequently, in the short term, there is no alternative to additional LNG terminals/ imports.

Gwadar’s full potential should be tapped. It was conceived not only as a transshipment port but also as a petrochemical centre. The planned Saudi refinery is a first step towards that vision. Crude and white oil pipelines from Gwadar upcountry and to China should be the next objectives.

An upgrade of Pakistan’s rail system is overdue. China is providing the heavy financing required. It may be wiser to ‘leapfrog’ to instal the most modern Chinese high-speed rail system rather than one which is already behind the times.

A considerable part of government revenues and most foreign ‘assistance’ will have to be deployed to realise the PTI’s social objectives:

— Education, where Pakistan must play ‘catch up’ through massive literacy and vocational training programmes.

— Healthcare, where the government’s idea of providing a health card is a good concept; but faces the problem of the virtual absence of the required health services. Health facilities need to be built up, including through public-private partnerships.

— Social infrastructure, ie clean drinking water, waste management, urban and rural transport and affordable housing, is essential to improve people’s quality of life and can be built also through public-private ventures.

— Policy support, where i1nstitutions like Pakistan Industrial Development Corporation and Pakistan Industrial Credit and Investment Corporation, need to be revived and professionally staffed to guide efficient implementation of various development programmes.

The finance minister’s concept of a sovereign wealth fund has not been fully elaborated. Adequate financing and expertise will have to be mobilised, domestically and internationally, to restructure and revive the myriad public corporations.

Pakistan’s private capital will be fully deployed if assured of policy clarity and consistency, official integrity, fair dispute resolution and reasonable returns. Close interaction between the government, the Pakistan Business Council and the various chambers is essential.

Pakistan’s capital market can be a growing source of investment finance through enhanced project financing, public listings and corporate bond issues.

Externally, China can be expected to maintain and enlarge its commitments under CPEC, especially if projects are efficiently executed. Chinese companies could be encouraged to take larger equity stakes in commercial projects.

Given the positive Saudi and UAE positions, considerable investment can be mobilised from the numerous sovereign wealth funds, pension funds, private equity funds, banks and family offices in the GCC. The government should encourage the creation of Pakistan-focused private equity funds to enlarge its financing sources and options.

Western companies may remain reluctant to enlarge their participation in the Pakistani economy unless the US reverses its negative posture and includes Pakistan in the Asian economic initiative it is launching to compete against China’s Belt and Road Initiative.

Although Pakistan offers attractive investment opportunities, financing these will require a well-considered and executed plan including a marketing campaign to ‘sell’ these opportunities sector by sector and project by project. The government must gird up for this vital task.

The writer is a former Pakistan ambassador to the UN.

Published in Dawn, November 25th, 2018