Investment challenge

Published February 3, 2020

THE government appears too self-involved to care but Pakistan can’t afford to alienate the private sector. With the economy contracting at a steep pace and households in immense stress, it is whimsical to imagine a turnaround without fresh significant doses of investment.

Sadly, the rate of investment in the country has slumped further from an already low base. According to the Economic Survey 2018-19, private investment as a percentage of GDP dropped to 9.8 per cent from 10.3pc a year before while public investment also edged lower to 4pc from 4.8pc. This amounts to one third of average investment rates in India and Bangladesh.

The government appears to lack both capacity and capability to fund investment. The foreign investor does not lead but follow the local business, which is currently reluctant to commit resources. The biggest economic challenge, therefore, is to stimulate investment by taking whatever steps possible to restore the fast waning confidence of the private sector in the ongoing stabilisation phase and creating fiscal space to ramp up public investment.

Despite flaws and limitations, the private sector of Pakistan has grown over the past few decades to dominate the new total investment in both real and service sectors.

Dr Hafiz Pasha, a former commerce minister, highlighted this aspect in his recent book Growth and Inequality in Pakistan: “Private investment now accounts for over 70pc of total investment. As such, the overall level of investment is influenced more by the behaviour of the private investor. …almost the entire investment in six sectors, viz. agriculture, housing, wholesale and retail trade, private services, manufacturing and construction is by the private sector. Over 80pc investment in the transport and communications sector is also by the private sector.”

Currently, however, unsustainable inventories amid falling consumer demand and a rising cost of input and credit are sapping the animal spirit of Pakistani entrepreneurs to spring into action for securing their share in the market.

There are three more obvious factors that suppressed private investment and combined to push businesses to the sidelines: a high interest rate of 13.25pc, a massive currency devaluation (since the PTI government took charge in October 2018) jacking up the cost of the import component in inputs and machinery, and the crowding out of businesses in advances because of banks’ preference to opt for secure, high-return government bonds.

The contraction in industry can’t be dismissed as a politically motivated perception. The actual rate of decline in investment in the 2019-20 fiscal year from an already low base will only be available in the next Economic Survey, but last week State Bank of Pakistan (SBP) Governor Dr Reza Baqir made some interesting observation announcing the monetary policy. He conceded that the underperformance of agriculture and industry could drag the GDP growth rate below the projected level of 3.5pc.

Sadly, the head of a supposedly autonomous institution sounded more like a PTI leader as he tried to give a positive spin to disturbing signals. At a time when even a cautious big business platform like the Pakistan Business Council has added its voice to the growing critical calls by businessmen, the SBP governor saw business confidence improving.

He cited positive business outlook, a reduction in the current account deficit and a stable exchange rate as three positive changes over the past two months since the last monetary policy announcement in November.

He also shared his assessment of the trend in the current large-scale manufacturing data. Dr Baqir observed a strengthening of activity in export-oriented and import-competing industries but a slowdown in inward-oriented industries. He noted gains in textiles, leather, engineering, rubber, cement and fertiliser, and declines in auto, electronics, food, chemicals and petroleum.

Mian Anjum Nisar, president of the Federation of Pakistan Chambers of Commerce and Industry, had to make an effort not to sound cynical when he is watching an economic tragedy in the making. “There are companies failing left, right and centre. No one is thinking investment. The focus is on salvaging whatever is left of our businesses,” he said when asked about investment prospects.

“At the current rates of utility charges and credit, business is simply not viable. How can anyone compete in the local or overseas market when major cost components in Pakistan are double and triple of our equals in the region,” he said, comparing interest rates, per-unit electricity rates, etc. with India, Bangladesh, Sri Lanka and others.

He warned that many big and medium units are on the verge of collapse: “The government needs to act now. Even the best restoration efforts later won’t save half of these business units from closing down. I can see light flickering at the end of the tunnel, but it will die if the government fails to empathise with the private sector and take a more holistic view of stakes and stakeholders.”

Majyd Aziz, president of the Employers’ Federation of Pakistan, also sounded bitter. He was critical of the federal agency responsible to facilitate and mobilise local and foreign investors.

Omer Rasool, secretary of the Board of Investment (BoI), was confident that the federal agency is actively pursuing its mandate of creating the conducive environment for investment in the country by improving the ease of doing business and putting in place the right regulatory framework.

When Mr Rasool’s attention was drawn to the Investment Promotion Strategy 2020-24, which projected a target of $1.5bn investment in the current fiscal year, he dismissed the document as a mere draft. “It has not yet been approved by the government. So, technically, BoI has not adopted it for implementation,” he told Dawn by phone.

In an emailed response to a question on the target, BoI stated that “in the first six months of FY2020, Pakistan has received FDI of $1.34 billion, which is 68pc higher than the corresponding period of FY2019.”

“The drafting of investment law is still in the works, but BoI is pursuing reforms including ease of doing business and hopes to achieve all targets while diligently following up on the industrialisation policy,” the email said. “Local investors are active in auto, textiles, agriculture/food sectors, as well as other export-oriented industries, as Pakistan looks towards new markets.”

According to the World Bank Overview of Pakistan’s economy (updated in October 2019), private consumption growth decelerated from 6.8pc in the 2017-18 fiscal year to 4.1pc in 2018-19 while investment contracted by 8.9pc as a result of stabilisation policies.

On the supply side, the industrial sector growth slowed to 1.4pc in 2018-19 compared to 4.9pc a year ago. The service sector grew by 4.7pc, 1.5 percentage points lower than in 2017-18.

Published in Dawn, The Business and Finance Weekly, February 3rd, 2020

Opinion

Editorial

‘Source of terror’
Updated 29 Mar, 2024

‘Source of terror’

It is clear that going after militant groups inside Afghanistan unilaterally presents its own set of difficulties.
Chipping in
29 Mar, 2024

Chipping in

FEDERAL infrastructure development schemes are located in the provinces. Most such projects — for instance,...
Toxic emitters
29 Mar, 2024

Toxic emitters

IT is concerning to note that dozens of industries have been violating environmental laws in and around Islamabad....
Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...