KARACHI, Dec 22: The enabling environment for investment has improved but irritants are still lingering on.
This is how the local business has reacted to the strengthening of the external sector by liberal foreign assistance, debt relief by Paris Club, withdrawal of economic sanctions and opening up of EU markets specially for textiles.
To quote a leading industrialist the investment policy lacks a sense of direction where assembly takes precedence over manufacturing and imports are encouraged at the cost of the local industrial and farm production.
Welcoming the improvement in the external sector he describes withdrawal of sanctions as “very good”, rescheduling of debts as “excellent” and sharp increase in remittances as “superb”.
With the threat of default in payment of external debt disappearing, business confidence is picking up. The multinationals operating in Pakistan will be “looking for opportunities”, says Zahid Zaheer, secretary general of Overseas Chamber of Commerce and Industry but adds “investment would follow government spending.”
The pace of investment is also linked to the business that can be secured by local companies in the reconstruction of Afghanistan in building of bridges, roads, airports, power plants telecommunication and other infrastructure facilities.
Unless the situation in Afghanistan stabilizes, fresh foreign investment, apart from the existing MNCs operating locally, is very unlikely to come. Though scores of foreigners have returned to resume their assignments, the Americans and British are still very cautious. The governments of the US and the UK have advised their citizens to avoid Pakistan. The key personnel, who are back from these two countries, have come without their families.
Finance Minister Shaukat Aziz says that it is the local private sector that should take the initiative to attract foreign investment. Currently, the investors in the Middle East are nervous about their investments in Europe and the United States. It could turn out to be a good opportunity for seeking joint ventures. Officials say that a Pakistani mission is already in the Gulf exploring the investment possibility.
Many local businessmen believe that “economic growth will come from government spending”. And they want irritants to go. These hassles include harassment by CBR and NAB officials, high interest rates and inconsistency in policies. They say that utility prices should not be increased and the government should consider that tariff reduction does not make local industry sick. Political stability is no less important in creating business confidence.
And there is no rule of law. It is reckoned that car thefts account for loss of Rs10 billion annually. Without rule of law, foreign investment cannot be encouraged.
The CEO RafhanMaize, in his company’s annual performance report, says that the economic policies of the government have made some impressive advances in producing stability, but, in the process, the economy has gone into recession.
CEO Rashid Ali says that continued increase in cost of inputs and the economic slowdown made it difficult to adjust prices; thus shrinking margins made it all the more challenging to maintain profitability.
In view of the business environment after September 11 and higher finished goods inventories, the company’s investment on Corville Plant located near Jaranwala was put on hold. The construction of the plant will start as soon as business environment improves.
A former President of the Karachi Stock Exchange Bashir Janmohammad believes that initially the reversal of flight of capital would lead to investment by locals. They are unlikely to put their money in banks. The funds would go into investments. He says that some bankers reckon that at least $400 million dollars, if not more, have been remitted by Pakistanis in the past two months or so, that could come in the category of reversal of flight of capital.
Remittances have jumped to well over $250 million in November against the monthly average of $70-80 million. If the trend of remittances continues, businessmen forecast that the inflows would touch $5 billion per annum. These would include both workers remittances and reverse flight of capital. And this would send the economy booming.
Private investment from other sources would not come immediately. A former head of a multinational company says that debt relief provided by Paris Club would help Islamabad manage the current account deficit but it would not have a “dramatic effect” on the economic situation.
The fiscal space provided by the donors would start impacting in the next fiscal year that too, if the government spending is focused on productive schemes and projects and not on grandiose ventures with very little impact on economic growth. Incidentally, the Public Sector Development Programme (PSDP) is now being reviewed jointly by the World Bank and the government.
Currently, the investors, both local and foreign, are trying to digest what has come by way of improvement of the external sector. There would be a time lag of about 6-12 months before investment starts picking up, says Zahid Zaheer.
The Investment Finance Corporation (IFC), an affiliate of the World Bank, says an IMF report, is considering several new investments in the financial and gas sector where foreign investment is needed to help with the development of gas reserves. The report adds that the IFC is “ready to support the privatization process through advisory and investment work.”
Asked to elaborate, an IFC representative in Islamabad told Dawn that “we are looking at options” but added “we only move when the private sector asks for our assistance.”
Officials believe that it is a defining moment or a turning point and the private sector should seize the opportunity to step up investment. And they promise to work with the trade and industry to remove irritants.