Some good news at last

September 09, 2019

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The last week of August brought a spate of good news to cheer up potential investors. The various moves and initiatives emanating from different quarters, however, may take time to materialise and converge at some point of time to make actual investment attractive for both foreign and domestic investors.

These developments include the PTI government’s efforts to find the space for stimulating capital spending while retaining its primary focus on the overriding stability programme.

To shore up shrinking foreign direct investment, the government took an unprecedented decision in the fag-end of last month. It cleared five international companies to set up a terminal for processing imported liquefied natural gas (LNG) without any official permission or involvement. The terminal operators will only need site allocation from the port authorities. They will import LNG and supply it to their own private customers.

While providing ease of doing business, the government has however done away with the earlier practice of sovereign guarantees, capacity charges and off-take commitments.

Many outdated laws, regulations, approvals, rules and procedures, which create hurdles in the energy sector business, have also been identified. These will be repealed or amended after necessary approvals at various stages. It would take a couple of months.

A Reuters’ survey indicates that most central banks have cut interest rates to shore up their economies in the wake of an impending global financial crisis. Pakistan is one of the exceptions

Similarly, the Securities Exchange Commission of Pakistan announced on August 31 that it has finalised the reforms agenda, taking into account demands of stakeholders, to revitalise capital market development and restore business confidence.

The announcement came on the day the KSE-100 benchmark index had closed negative for the seventh consecutive months. During August, the index lost 6.8 per cent (points?) which was stated to be the heaviest monthly decline this year.

To ease business conditions, adviser on commerce Abdul Razak Dawood told the visiting International Finance Commission (IFC) team that under a programme titled Regulatory Guillotine, 2-3 decisions on regulations will be announced every month. The mission responded by reiterating that the IFC was ready to provide technical and advisory advice to local and foreign companies to venture in priority sectors of manufacturing and agribusiness.

Efforts have also been mounted to revive the process of privatisation, suspended for the past decade or so. The Privatisation Commission has announced the divestment of 7pc stakes in Oil and Gas Development Company and 10pc shares of Pakistan Petroleum Company Ltd. The offer is for institutional buyers. The sale of smaller lots of company shares is easier in the case of performing enterprises as opposed to difficult strategic privatisation deals where the transfer of management is involved.

Officials claim that 80pc work on the strategic sale of two previously approved LNG plants has been completed. The plants are to be sold to foreign buyers. Financial advisors are being appointed for the strategic sale of 10-12 state units. Investors often prefer to buy running businesses to avoid facing hassles involved in setting up greenfield projects.

The plummeting domestic and foreign investment has emerged as one of the most critical issues in revitalising the economy. A report by rating agency Standard and Poor’s (S&P) on Pakistan issued in the last week of August shows that real investment contracted sharply by 8.9pc in the fiscal year ending June 2019, the worst performance since 2011. “Pakistan faces a muted economic outlook… economic growth suffers from a paucity of growth drivers,” says the study.

In the view of the high cost of credit and slack in business activities, chairman Nishat Group Mian Mohammad Mansha fears a spike in bank loan defaults. Owing to loan difficulties, some factories have already closed down.

Unlike many countries, major borrowers in Pakistan are the industrial sector and the government. Dr Hafeez Pasha says they, along with investment, are negatively impacted by the hike in the central bank policy rate. He points out that the discount rate is 3pc higher than what it should be if determined by core inflation reported in June at 7.6pc.

Similarly, looking at the State Bank data, he observes that the rupee is undervalued by 10pc. Prime Minister Imran Khan has reportedly advised his financial team to review the central bank’s policy rate.

A Reuters survey found that since April, all central banks around the world except four have cut interest rates to shore up their economies in the wake of the impending global financial crisis. Pakistan is one of the exceptions.

The government is finding some bilateral and multilateral support in its efforts to revive a sinking economy. Asia Development Bank (ADB) Vice-President Shixin Chen, who met the prime minister on August 29, reaffirmed that under its Business Plan 2020-2022, the ADB is committed to develop key infrastructure, attract investments and promote industry and the private sector. He also reiterated that the bank plans to provide $7bn for various development projects and policy-based programme over the next three years.

Chinese consul general in Karachi Wang Yu said in the last week of August that 27 new China Pakistan Economic Corridor projects are expected to start by the end of the year.

Finally, on August 29, the Economic Coordination Committee of the Cabinet decided to provide exemptions of income tax, sales tax and customs duties to Gwadar Port and Free Zone until 2039. But the government faces difficult legal issues. The Committee has asked the Ministry of Law to find a way out, possibly a presidential ordinance or a bill as the Federal Board of Revenue has expressed its inability to issue a statutory regulatory order on the matter.

Project and policy implementation is a serious problematic area with needs to be aggressively addressed by the PTI government.

Published in Dawn, The Business and Finance Weekly, September 9th, 2019