Economic growth must be driven by private investment to be stable and sustainable. Little wonder Pakistan has never been able to institute sustained growth due to insufficient investments.
In order to make up for lower investments, successive civil and military governments have pursued policies that encourage consumption, mostly imported consumption due to lower domestic productivity, through large public investments to pull off higher growth rates as part of their political strategy.
It, therefore, is not surprising to see each short period of a so-called consumption-driven’ economic boom’ followed by a longer period of ‘economic bust’ with high fiscal and current account deficits.
In recent years, the frequency of such boom-and-bust cycles has significantly increased. This explains the reason why Pakistan has sought 23 International Monetary Fund (IMF) bailouts since 1958 and 14 since 1988, which always provide temporary relief and are discarded midway as soon as the faltering economy shows some signs of stabilisation, enough to allow the rulers some space to return to their consumption based illusion of prosperity. The ongoing IMF funding programme approved last month after months of discussion is the sixth since 2000.
‘In the absence of a legitimate government, it is unlikely that required reforms can be pushed through, which is a difficult undertaking even with all the political pieces in place’
The rate of total investment, private and public, decreased from 15.6 per cent of GDP in FY22 to 13.6pc last fiscal year. Thus, the rate of investment in Pakistan is one of the lowest in the world, with the country ranking 133 among 151 nations around the globe. Even Bangladesh has a rate of investment of 30.5pc.
In Pakistan, the rate of investment has declined from 18.7pc in the 1990s to 17.7pc in the 2000s and 15.5pc in the 2010s. It remains stagnant at the average of 15.6pc in FY16-22.
Suffice to say that Pakistan cannot absorb the addition to the working population without sustainably growing the economy by 7-8pc. This compares to 0.3pc growth in GDP last year. That kind of growth requires sustained investments of at least 20pc of GDP a year to increase domestic productivity cut imports, and boost exports.
The PDM coalition, in its last couple of months, has taken a few initiatives to boost private domestic and foreign investment, but the new measures are seen to have made the playing field even more uneven.
It has recently passed a bill to amend the Board of Investment law to give legal cover to the newly formed, army-managed Special Investment Facilitation Council (SIFC) to create a one-window operation for the investors and ensure policy predictability and continuity, as well as create ease of doing business by bringing the two tiers of government and the relevant ministries and departments at one platform.
At the same time, a sovereign wealth fund (SWF) was created, and assets worth $8 billion were transferred to it for their sale, mainly to the Gulf companies. Indeed, the initiatives have been taken to allay the concerns of the Gulf countries — Saudi Arabia, the UAE and Qatar — that have promised nearly $28bn in investment on behalf of their companies in Pakistan to help support its flagging economy.
With the foreign investment declined to just a couple of hundred million dollars, the country has little choice but to agree to the terms dictated by the prospective Saudi, Emirati and Qatari investors according to the understanding reached with their governments.
The reported approval of a commercial agreement by the Shahbaz Sharif government last week, a deal to hand over two more seaport terminals to the United Arab Emirates for a 25-year period on the same terms that its cabinet committee had described as ‘below par’ two days before shows that the Gulf investors are going to get large discounts and attractive incentives for bringing their petrodollars.
If the promised investments mature as the government and the army leadership hope, the country may see an inflow of $35bn in the next three years. This will take off a lot of burden on the country’s fragile balance of payments position and provide the ruling classes space to ditch the IMF discipline and revert to their consumption-based growth model to produce the feel-good sentiment that has been missing for quite a few years.
The question is: will this strategy actually succeed this time? Few, if any, see foreign or local investors invest their capital in the economy in spite of the SIFC and the IMF funding programme, at least in the short- to medium-term.
Ahmed Jamal Pirzada, a Bristol University economist, agrees that the short-term $3bn Stand-by Arrangement (SBA) with the IMF, together with inflows from the ‘friendly’ countries, does help stem the liquidation of investments by foreign investors and, as a result, stabilise foreign currency market in the short-run.
However, he emphasises the investment climate over the medium-to-long term continues to remain hostage to the debt trap the country currently finds itself stuck in.
“Pakistan’s external debt servicing burden as a percentage of its dollar income is one of the highest in the world. The inherent economic uncertainty faced by investors due to both irresponsible macroeconomic policies and political risk also means that Pakistan will continue to remain a consumption-led economy with limited incentives to invest,” he argues.
In this context, he notes, the discretionary powers given to the SIFC to exempt any specific investment project from following relevant laws or provide arbitrary incentives contribute to a further deterioration of the investment climate.
“With the SIFC having powers to summon and direct the regulatory institutions, the credibility of the contracting institutions in Pakistan stands significantly eroded. This is not a good news for those planning to invest here,” says Mr Pirzada.
Aftab Ahmed Chaudhry, the chief executive officer of the Digital Custodian company who has previously served as Lahore Stock Exchange chief, says that, after the IMF deal, the market confidence has improved. “But the micro and macro challenges facing our economy have remained unchanged.”
“That said, it must be pointed out that the IMF deal seems to have triggered the investment interest in our country’s critical resource assets like Reqo Dik, corporate agricultural/farming and blue chip companies. The earliest conclusion of such investment treaties may provide some fiscal space besides boosting confidence in the management of our economy.
“However, without any meaningful drop in the run-away inflation, the easing of interest rates may not happen. Similarly, the foreign exchange pressures would also likely continue unless some new sectors of the economy, like IT and other knowledge-based industries, don’t start contributing to the country’s exportable portfolio. Hence, the condition of our economy in the coming year or so shall remain challenging,” he argues.
An Economic Advisory Group (EAG) member Samir Ahmed insists that investors need some degree of political certainty. As of now, it doesn’t look like this is going to happen.
EAG is an independent platform formed under the auspices of the Islamabad-based economic think-tank PRIME Institute. It draws individuals from economics, policy and the private sector to deliberate on Pakistan’s economic policies regularly and shares its views with the public and government.
“The IMF, by its nature and mandate, is a short-term lending/support institution. The current arrangement will run out within months. For any degree of continuity, the reforms promised to the IMF need to be put in place. In the absence of a legitimate government with a proper public mandate, it is unlikely that required reforms can be pushed through, which is a difficult undertaking even with all the political pieces in place,” he contends.
“I don’t foresee high levels of investor confidence either from domestic or overseas investors. The only foreseeable investment is through the SIFC SWF route. The government-to-government transactions seem to be the current buzzword.
“It is probable that some large transactions will go through and carry us for another couple of years. Then what? We must realise what we have put in the SWF — OGDC, PPL, Mari petroleum, NBP, Govt Holdings etc. Literally, the crown jewels. These are the largest public sector companies that have been built up over decades. There is literally nothing else left,” he argues.
Published in Dawn, The Business and Finance Weekly, August 14th, 2023