Investment Climate of Pakistan

Pakistans Investment Climate

Pakistan, located in a region which is currently experiencing a high rate of
growth and investments. Looking at Pakistans neighbors India, China,
Srilanka Bangladesh we almost have the same attributes, a large population
base, vast untapped resources, an agricultural economy, and a large middle
class.
The investments consist of two parts domestic and foreign, and each
segment has different views towards committing their capital to a new
avenue. If we analyze the domestic segment of investments savings ratio as
percent of GDP net of foreign payments, China stands at 45%, India at 35%
while Pakistan manages to be around 12% only, the lowest in all the
developing countries. The answer to this anomaly lies to the domestic
savings rate of respective countries. Its savings that connect dots between
the past and future economic growth as a result of local investments. A
better rate of savings is very much key to having better economic growth
and development in the future. Economic growth funded by domestic savings
is always more sustained than by foreign direct inflows.
In case of Pakistan, the trend has more been towards consumption by
ordinary people; out of each 100 Rs. earned Pakistani household has put 97
Rs. towards consumption and only 3 Rs. towards savings. They affluent who
best mange to save only end up parking there earnings in real estate sector
which contributes very little in the form of continuous economic growth and
value addition. There has been no concentrated policy in the development of
local equity market for the masses by institutions/ government. The result is
equity market has very little contribution towards starting of new larger
ventures in the country and the small business which were leading the
domestic investments on the other hand have been most hit by lack of
infrastructure like energy shortages, corrupt taxation system etc. and cannot

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Investment Climate of Pakistan

give a sustained domestic investments growth which as a result has

declined.
With domestic source of funding untapped / underdeveloped for generating
investments, Our governments policy like other 3 rd world developing
economies focuses on direct foreign investment inflows to fill in the gap.
Before we go on to analyze Pakistans performance let us have a look around
the region we are situated. During the last 4 years starting 2010 China, India,
Srilanka, have managed to maintain their foreign direct investments levels
coming each year or increased considerably into the country. Our distant
neighbor Bangladesh has managed to double the attracted investments to
the country over the last four years. For Pakistan its the other way around,
net inflows have declined.
Question is why has Pakistan not being able to get on the bandwagon of
tremendous economic growth which this region is experiencing and is not on
the radar of people coming and setting up business in this region.
If we compete with others we lead on having an inefficient market economy,
Pakistan scores better in region in term of ease of procedures required to
setup new business in the region, has a better overall infrastructure index, a
higher labor productivity rate, our private sector is not overstaffed as it is in
the case of China and India. Pakistan provides almost equal opportunity to
foreign investors for investments as it does to its own citizens, full
repatriation of profits is allowed. Importantly the geographic location of
Pakistan makes it more desirable nation for investment than any of the
regional peers as it provides an easy access to neighboring markets.

All

foreign companies listed on KSE browsers have reaped huge profits in last
decade, all these are positives that should bring in windfall investments into
Pakistan yet we are unable to attract new investments and other has been.
Why?

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Investment Climate of Pakistan

The answers lies in the following four factors largely which are analyzed
below:
Macro Economic Stability: Any new company committing resources to
develop a business would be looking towards macroeconomic stability, if we
look even at the history of Pakistan, it has attracted large sum of investment
when there was stability on both socio and economic front. During the last
decade and especially during last 4 years Pakistan has stumbled on every
path. The ruling govt. and power centers within the governance structure
have locked horns into each other. There has been a cat and mouse game
played between judiciary, govt. and law enforcement agencies that have
kept the political scene as unstable as it could get. Same has casted doubts
on any perspective investor willing to come in for new ventures.
Law and Order: Pakistan over the past decade has been battling a low
intensity conflict that has seen thousands perish and foreigners have been
targeted in particular who are working in Pakistan for different companies
has been the major backdrop of anyone looking to make safe cash.
Quality of Governance: Pakistan lacks well behind other countries with
respect to the quality of governance issues, institutions have not been
allowed to develop over the years by successive governments. Policies
formulation has largely stayed individual focused; there has not been a
continuity of any government policy over a sustained period. With a history
of

constant

policy

change

with

each

successive

government,

non

commitment to promises made by earlier companies for their investment

made into Pakistan, examples like of Al-Tawarqi Steel mill project who
decided to pull out in January 2015 after trying to complete the project in last
8 years due to lack of commitment by new governments of agreements
signed during the past tenure has shaken overseas investors confidence in
Pakistan.

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Investment Climate of Pakistan

Presence of Independent Regulatory and Business Law Enforcement

bodies: If the quality of governance is not good the role of independent
regulatory bodies becomes even more important is getting business quick
solutions. Pakistan has established the independent law enforcement and
regulatory bodies in all sectors of economy to control that companys
practice competitive business behavior external to government decision
making machinery. Unfortunately, they have failed to function independently
and deliver to proper business functionings.
Looking forward, Pakistan with a population base of 200 million has a
huge lucrative business proposition. Only if the policy formulators can
address the uncertainties that investors face in terms of macroeconomic
stability, quality of governance, policy continuation, and regulatory frame
works Pakistan share can increases manifold in amount of foreign direct
investment it receives each year.
Trend of domestic savings needs to be promoted as robust levels of 7% to
8% growth can only be sustained if domestic savings are funding larger part
of investments in spurring that growth such growth. This can only be made
possible through efficient use of banking systems that should generate
profits through diversified business rather than just keeping high interest
rate spread at the cost of small depositors.

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