Private industrial investment is likely to remain low this year in Pakistan despite a significant reduction in interest rates. While a modest improvement over last year’s investment levels is possible, a substantial positive shift appears unlikely.

Bureaucratic hurdles, idle capacity, high energy costs, limited bank lending, insufficient export incentives and heightened political and security risks are key deterrents suppressing investment potential in the manufacturing sector.

Targeted measures are essential to channel cheaper credit into industrial investment. Potential strategies include offering incentives, implementing tax breaks for manufacturers adopting new technologies, and improving affordable credit access for small and medium enterprises in manufacturing. Additionally, creating a stable and supportive regulatory environment would encourage long-term industrial investment, vital for sustainable economic growth.

Industrial investment typically responds inversely to interest rate changes. In Pakistan, however, cheaper credit has historically fuelled investments in property, capital, and commodity trading rather than in manufacturing or agriculture — sectors critical for job creation and capital formation. The question is: will the outcome be any different this time?

After maintaining a high policy rate from June 2023 to May 2024 to curb hyperinflation, the State Bank of Pakistan has reduced the rate from 22.9 per cent in June 2023 to the current 15pc, in a span of five months.

Pakistan’s private investment rate remains among the lowest in the region and will continue to lag behind peer nations if business costs aren’t reduced

Some investors believe that rates must drop under 15pc and hold that level for at least six months to have a material impact.

Others think lower rates will offer some relief to the manufacturing sector, but the impact may be limited due to very high input costs, driven by high electricity and gas tariffs, elevated logistic charges and generally an environment perceived to be hostile towards long-term industrial investment.

Pakistan’s private investment rate is among the lowest in the region and lags behind that of its peer nations. According to the current Economic Survey, private and public investments in the country in FY24 grew by 15.8pc and 18.2pc respectively. In contrast, India’s public investment rate stood at 15pc, but its private investment rate more than doubled Pakistan’s, reaching over 32pc.

When asked for his views, Dr Nadeem ul Haque, former vice-chancellor of Pakistan Institute of Development Economics and ex-deputy chairman of the Planning Commission, responded with a counter-question, “Honestly, would you commit your capital to a long-term project here? If not, how can we expect serious investors, often at the mercy of inconsistent economic policies, to do so?”

He added further, “An interest rate reduction alone won’t be effective here. Our systems are broken, and the government has a penchant for economic missteps and excessive regulation. Poor governance carries a cost that the entire country bears.

“An interest rate reduction alone won’t be effective here. Our systems are broken, and the government has a penchant for economic missteps and excessive regulation. Poor governance carries a cost that the entire country bears.”

Musadaq Zulqarnain, Chairman of Interloop and a prominent business leader, termed the recent rate cuts ‘positive steps’ but highlighted the persistent challenges facing manufacturers. “The high cost of doing business, worsened by the ongoing energy crisis, continues to hinder industrial growth,” he noted.

Mr Zulqarnain stressed that to stimulate meaningful investment and revitalise the industrial sector, further interest rate reductions, resolving the energy crisis, and ensuring a stable political and economic environment are essential. “Without a sustainable economic policy framework and a unified political commitment to growth, achieved through a consensus-based minimum economic agenda, substantial industrial investment remains unlikely.”

Saqib H Shirazi, CEO of Atlas Honda, former president of the Pakistan Automotive Manufacturers Association and former chairman of the Pakistan Business Council, emphasised the importance of promoting industry, information technology and agriculture to drive self-reliance and job creation and reduce twin deficits.

“Exports are essential but cannot simply be commanded; they are driven by demand, rooted in an environment that fosters economies of scale, quality differentiation and cost competitiveness in production factors, ideally all at once,” he noted.

Muhammad Ali Tabba, CEO of Lucky Cement and Yunus Textile Mills, expressed scepticism about a near-term increase in the investment rate despite the falling policy rate. “In my view, private industrial investment may actually decline further this year,” he remarked, noting that idle capacity in the industrial sector awaits the demand growth typically driven by expansion in economic activity.

Mr Tabba cautioned against growth strategies that threaten economic stability by increasing current account and fiscal deficits. “Growth should be driven by higher productivity and exports, not by consumption-led demand that widens the current account deficit,” he emphasised.

Khurram Mukhtar, Patron-in-Chief, Pakistan Textile Exporters Association, stressed that investment naturally flows towards sectors with promising returns. He argued that lower interest rates alone are unlikely to redirect credit into manufacturing or agriculture without an improved business environment.

“Unless the industry offers competitive returns, capital will continue to flow elsewhere. Attracting investment in manufacturing requires more than just cheaper bank credit, it demands regulatory ease, supportive infrastructure, export incentives, and competitive energy tariffs,” he stated.

Published in Dawn, The Business and Finance Weekly, November 11th, 2024