PAKISTAN has struggled for long to attract higher volumes of foreign direct investment (FDI) to expand and modernise its rather stagnant economic base. Pakistan’s investment level is almost half the volume of investment attracted by growing economies like Vietnam, India, Bangladesh and Sri-Lanka. In order to accommodate two million young Pakistanis entering the labour market every year, Pakistan needs to double its investment to GDP ratio.
Business leaders blame Pakistan for lack of policy consistency, repressive taxation, high utility costs, cumbersome procedures, weak contract enforcement and dispute resolution capacity. One is then not surprised to see Pakistan’s current ranking of 136 out of 190 on the Ease of Doing Business Index.
The good news, however, is that Prime Minister Imran Khan made it his priority to improve ease of doing business. As a result of the coordinated efforts led by the Board of Investment, Pakistan has been acknowledged by the World Bank among the top 20 global reformers this year. Pakistan is expected to improve its ranking by 25 places in the report to be launched on Oct 24 (today). This will be the highest-ever upward shift in a year shown by the country and perhaps the only significant home-grown economic reform of which the PTI government can genuinely take credit for.
Pakistan has been acknowledged as one of the top 20 global reformers this year.
The other top reformers include China, India, Bangladesh, Qatar and Central Asian countries. It is also important to take stock of the reasons for slipping down on the Global Competitiveness Index where the responsibility mainly lies with the commerce and industry ministries.
According to the World Bank, Pakistan improved in six areas which included starting a business, dealing with construction permits, getting electricity, registering property, paying taxes and trading across borders. Pakistan made starting a business easier by expanding procedures available through the online one-stop shop. In addition to improvements in property registration, obtaining a construction permit became easier.
The launching of online portals for new commercial connections made getting electricity easier, and tariff changes are announced in advance. Moreover, tax compliance became easier through online payment modules for value-added tax and corporate income tax. Pakistan made trading across borders easier by enhancing the integration of various agencies into an electronic system and by improving coordination of joint physical inspections at the port.
Apart from looking good, what does the improved ranking actually mean for Pakistan and will it lead to higher business confidence and desired investment flows are the fundamental questions that serious economic policymakers should ponder about. As chairman, Board of Investment, I had committed to the prime minister that in two years-time, Pakistan would be among top 100 countries in Ease of Doing Business Index. The first lesson from this achievement is that difficult reforms are doable with visible political commitment, professional leadership and a good strategy that picks up on relevant global best practices. Effective use of technology was the single most powerful variable in improving business processes. The second lesson is that unless ownership of reform is with indigenous institutions, it will neither take place nor will it sustain. Pakistan needs to review the role of international financial institutions (IFIs) who are keen to take a seat at the policy table with little understanding of political economy and the reforms process. The progressive economies have used IFIs and donors for financing needs and knowledge sharing only. It is Pakistan’s policymakers who have given highest level of access to low level officials of IFIs to cover up for their own lethargy and incompetency. The third and most important lesson is that any good reform will not work unless the lead agency develops a relationship of mutual respect with implementing institutions. In this case, the Board of Investment team kept a regular engagement with 36 federal and provincial institutions to find practical solutions to facilitate businesses.
It is critical for the government to understand that no single reform will yield the desired outcomes in a policy vacuum, weak implementation capacity and an anti-business mindset. Doing business reforms are a small part of the overall investment climate picture where structural shift is needed to demonstrate the government’s commitment towards improving the investment climate, which includes supporting physical and regulatory infrastructure, lowering cost of doing business, world-class growth policy, fast tracking of business transactions and resolving commercial disputes.
If we take a look at major investment transactions of the past several years, most suffered from these structural weaknesses. While Pakistan is trying to recover from macroeconomic deficits perhaps the most striking is the trust deficit and a disconnect between economic managers and businessmen. Investors have appreciated the good intentions of the prime minister, but they see a fragmented second tier and no positive change in the delivery infrastructure.
China tops the FDI list in Asia with $136 billion, followed by Hong Kong ($104bn), India ($40bn), Indonesia ($23bn), Vietnam ($14bn) and Malaysia ($10bn). According to the United Nations Conference on Trade and Development, liberalisation of investment policies and investment incentives account for more than 50 per cent of reforms that attract investment. The key lesson for Pakistan is to properly sequence investment climate reforms and come up with a world-class industrial policy and incentives. Investment facilitation and ease of doing business will then help fast-track transactions.
To begin with, the prime minister needs a strong professional setup comprising a team of well-qualified trade and development economists to come up with an economic growth roadmap. This team should be empowered to challenge the existing old school. Pakistan continues to bank on the generalists occupying key policy posts and handing over policy work to average consultants.
A strong positive signal will go if Pakistan replaces old colonial government offices with modern technology-based corporate structures on the lines of the Dubai International Financial Centre or Qatar Financial Centre. Such structures will not only provide one-stop corporate hubs with independent regulations; huge cost savings will also be achieved by closing down multiple overlapping bodies that currently exist. Investors are looking for a visible change in the way Pakistan does business.
The writer is an economic policy expert who till recently was minister of state and chairman, Board of Investment in Pakistan.
Published in Dawn, October 24th, 2019