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What Can Pakistan Do to Attract More Investment?

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The Pulse

What Can Pakistan Do to Attract More Investment?

Pakistan’s next government must keep domestic investors spending in Pakistan and bring in investment from abroad.

What Can Pakistan Do to Attract More Investment?
Credit: Pixabay

On the one hand, Pakistan has failed to attract significant international investment other than from China, while on the other hand, indigenous investors are scared of the country’s selective justice system, lack of friendly business environment, and poor law and order conditions. Due to this environment, a substantial amount of money is being annually sent out of the country at an alarming rate. Experts believe that this predicament, if not addressed, can cause a severe downturn in the country’s already unstable economy.

Recently, a suo motu case “related to retrieving the suspected fraudulent money from foreign accounts” revealed that Pakistani citizens had transferred abroad an astounding $15.253 billion during the financial year 2016-17 through normal banking channels. After the assets outflow came to light, Chief Justice of Pakistan Mian Saqib Nisar, who was heading a three-judge bench, constituted a committee of experts to trace and retrieve the transferred pecuniary held abroad.

Undoubtedly, this substantial drain of assets can depress the country’s currency exchange rates, as the U.S. dollar is already hitting a record high against the Pakistani rupee, and can severely impact the stability of the country’s foreign exchange reserves. Moreover, such a tremendous outflow of money can leave the national economy in a lurch, making it vulnerable to endless strain exerted by foreign currency obligations. Subsequently, the economy can suffer excessive and troublesome inflation, ultimately depleting the national bursary of significant amounts of tax revenue because of escaped income and wealth.

Efforts to trace, recover, and tax the transferred money may not be successful because investors can always explore other options, such as obtaining nationality or residency in foreign countries, to preserve their money, making it difficult for Pakistani authorities to take action.

Thus, the court must fathom the country’s fiscal plight before issuing a verdict and be pragmatic in its approach. Any serious step taken to hold the owners accountable might engender fury among both domestic and international stakeholders. This situation, in turn, can have further ramifications as a significant setback to the country’s economy.

Therefore, before accosting the holders, the committee must investigate the reasons behind the transfer of this staggering amount of money abroad and why indigenous investors, let alone foreign stakeholders, are demoralized and losing interest in investing inside Pakistan itself.

Despite being rich in natural resources, Pakistan has failed to achieve adequate economic growth due to a lingering energy crisis, the war on terror, political instability, lack of quality education, the nonexistence of a knowledge-driven economy, wealth aggregation, corruption, poor taxation structure, and lack of sound governance.

The country has also failed to attract any significant foreign investment, in recent years, other than from China which is now investing billions of dollars for the development of the China-Pakistan Economic Corridor (CPEC). CPEC is a regional connectivity framework aiming to benefit the South and Central Asian region by improving road, rail, and air transportation systems.

Foreign investors are reluctant to invest in Pakistan due to a dystopian global image. Out of 190 globally competitive markets, Pakistan ranked 147th in World Bank’s 2018 Doing Business Report. Also, a challenging security environment, long-standing electricity shortage, a troublesome investment climate hinder foreign investments.

Foreign investment is inextricably linked with the economic growth of any country. The more significant the foreign investment inflows a state receives, the greater sustainable economic growth a state experiences. International investment provides nations with economic globalization, finance needed to improve domestic economic growth, means to expand in both home and export markets, as well as access to the investors’ expertise, experience, and networks. It also brings jobs and builds value chains stretching across the horizons of the nation.

Despite these difficulties, Pakistan has the potential to grow as a competitive market in the region after India. The energy, construction, and oil and gas sectors continue to be the primary recipients of foreign direct investment (FDI) in Pakistan. Moreover, the government-led FDI attraction policy (which includes privatization, equal treatment between foreign and local investors, tax incentives, etc) and efforts being made regarding economic reform can serve as pillars of the country’s economic development. Net FDI to Pakistan recorded a 15.6 percent increase in 2017-18 (July-February), reaching $1.9 billion.

Ground statistics reveals that Pakistan’s poverty level has decreased in recent years, which suggests a higher purchasing power. GDP growth is ahead of the curve at 5.3 percent in 2017, which was the highest growth rate in the previous 10 years, and has elicited the expansion of the country’s industrial and service sectors. Development spending is increasing, including a 50 percent budget allocation for development.

Amid the present election season, both domestic and international stakeholders are on hold — watching for the results of the election. The future government has a serious task ahead of it. Authorities must heed and address the concerns of the business community. Although it will be challenging, the future government must assess the current economic plight and orchestrate a campaign to reverse counterproductive policies. Authorities must convince native stakeholders to keep their investments inside the country and ensure them potential avenues to attract more investment.

The next government needs to take drastic steps ensuring sociopolitical stability and creating a fair and attractive business atmosphere for both domestic and international investors. This will include improving the legal framework for protecting the legitimate rights and benefits of investors and refining institutions related to business and investment.

Pakistan is gifted with an ideal geopolitical location, and with a mega infrastructure project in progress, the onus is on the next administration to craft policies and consider opening its routes to other neighboring nations besides China. Pakistan can generate a substantial amount of income while providing trade routes to India, Afghanistan, and Iran. This cooperation will also be helpful for stability in the region and will lead toward greater reconciliation between angry neighbors.

The recent census revealed that the country has a significant young working-age population. Educating and training this cohort must be a priority, to build a quality workforce for the future.

It’s also time for Pakistan to seriously invest in the research and development (R&D) sector, the backbone of a globally competitive, knowledge-driven economy. Investment in the R&D sector can lead to the development of new products and services driving growth, creating jobs, and improving national welfare.

In short, Pakistan’s future government must take steps to retain and attract more investment in order to generate the conditions for economic stability.

Muhammad Mohsin Raza is a Fulbright scholar and a Ph.D. candidate at Iowa State University. He tweets @mohsin1570