Asian Development Bank has observed that macroeconomic stability, achieved in recent years, has failed to restore private sectors confidence and catalysing greater foreign and domestic private investment. But in 2008 financial year, the macroeconomic situation deteriorated significantly because of the impact of higher oil and food prices and delayed policy response by the Pakistan government, it said.
The ADB observed that the difficult political conditions and the transition to a new government had affected the reforms in the country. In a report on "Private sector assessment of Pakistan", the ADB experts stated that the result had been burgeoning trade, current account and fiscal deficits, a high rate of inflation, massive devaluation of rupee, major drawdown of foreign reserves to finance the deficits in an environment of weak capital inflows, and a rising level of domestic and foreign debt.
The experts are of the view that macroeconomic fundamentals needed to be protected and economic stability restored to ensure the continuity of the present growth momentum based on sustained levels of private sector activity and investment. According to ADB report, private sector investment and growth in recent years has been mainly based in the services sector, especially telecommunications and financial sectors.
"Pakistans manufacturing base over the years has remained narrow with a concentration of investment in capacity enhancements and upgradation of facilities largely only in the traditional textile sector. "This sector accounts for 46 percent of the total industrial output and contributes 60 percent to Pakistans total exports.
"Such a high reliance on one single sub-sector to deliver on industrial development is of concern. The situation also raises the issue of whether Pakistan can sustain economic growth with a primarily services sector-oriented growth momentum without a corresponding deepening and broadening of its manufacturing and industrial base," the report said. It said: "A structural transformation of the economy that focuses on development of the commodity-based sectors, including industry and agriculture is needed to ensure long-term sustained economic growth."
The ADB report further said that the enabling environment for private sector development needed to be further strengthened with an improved policy and regulatory framework that consisted of a defined industrial policy, competitive policy, an investment policy, and stronger and capacitated regulatory institutions in key sectors of the economy.
"As one example of the latter, there is a need to strengthen the capacity of the Securities and Exchange Commission of Pakistan (SECP) with respect to regulating the non-bank financial sector, including the insurance sector," it opined. The ADB report pointed out that a key constraint to private sector growth was the critical infrastructure deficit, particularly in the power sector.
It said the demand-supply gap for power had increased substantially over the years without a corresponding increase in public and private investment in power generation and strengthening of transmission and distribution systems.
The report suggested that there was a need for accelerated investments in the sector alongside reforms and a strengthened regulatory and policy environment, leading to uninterrupted and sufficient availability of power for industrial, commercial, and domestic use. "The private sector is being considered by the government as an increasingly significant partner in the financing and delivery of infrastructure in the power and other sectors.
"However, policy, legal and structural frameworks, allowing public-private partnerships needed to be developed and strengthened in many key sectors, including, power, transport and water to encourage private sector participation in infrastructure provision," the reports said. The ADB report disclosed that Pakistan provided good protection to investors, but lacked efficient contract enforcement structures, which complicated and increased the cost of doing business.
"Together with ineffective property rights regulations, low effectiveness of public sector agencies, weak regulatory mechanisms, and overall security situation, these governance-related bottlenecks retard Pakistans international competitiveness," it said.
In addition, the ADB report stated, inefficiencies and rigidities in the land and labour markets remained major constraints for greater growth and dynamism of the private sector. "Lack of human resource development and availability of educated, healthy and skilled labour are big issues in the competitiveness and growth of Pakistans private sector.
This results in distortions in terms of factor utilisation by sectors, contributes to unemployment and lowers factor productivity. "Despite some financial deepening, Pakistans capital markets still lack financial instruments and institutions specialising in long-term debt, project and infrastructure finance. This constraint has far reaching impacts for private sector participation in infrastructure development and is one of the key reasons for slow industrial growth and a narrow industrial base," report added.
Commenting over the Pakistan governments policy and planning framework, the ADB report mentioned that the government policies and mechanisms to promote private sector development had since the early 1990s focused on privatisation, deregulation and liberalisation as the cornerstones of its policy to achieve sustained growth and structural transformation of the economy. The 1992 Economic Reforms Act was a major milestone as it gave full legal protection to investors as well as to the privatisation process.
"Subsequently, the 2000 Privatisation Act and creation of a number of new regulatory agencies like the Securities and Exchange Commission Pakistan (SECP), Pakistan Telecommunication Authority (PTA), National Electric Power Regulatory Authority (Nepra), Oil and Gas Regulatory Authority (Ogra), Pakistan Electronic Media Regulatory Authority (Pemra) and Private Power and Infrastructure Board (PPIB) to act as focal points to attract foreign and domestic private investment underline the importance of private sector development within the governments policy and planning framework," the report said.
According to the ADB report, the privatisation process has had a major impact on private sector development as it not only transferred ownership to the private sector, but also helped create appropriate regulatory and governance structures for the sectors that were being privatised.
During the period from November 1999 to December 2006, a total of 49 transactions, assets worth Rs 418.6 billion were privatised. Prominent among them were Pakistan Telecommunications Company Limited (PTCL), Habib Bank Limited (HBL), United Bank Limited (UBL), Karachi Electricity Supply Company (KESC), National Refinery Limited (NRL) and a number of fertiliser and cement companies.
"Today, the telecommunications sector and the commercial banking sector are in private sector hands and over 50 percent of the industrial sector has been successfully privatised. The gas distribution system is also being prepared for privatisation," it said.
The report said that privatisation programme, however, suffered a setback in early 2007 when the Pakistan Steel Mills privatisation was struck down by the Supreme Court of Pakistan. Following this decision, the government had focused on floating its shares in public entities in domestic and foreign capital markets via global depository receipts (GDRs), such as the shares floated for the United Bank Limited and the Oil and Gas Development Corporation on the London Stock Exchange.
The impact of such privatisation on the economy, which, in essence, generated portfolio investment, needed to be, however, reviewed carefully given the volatility attached to such foreign inflows, especially with a potentially weakening rupee.
"The experience in 2008 financial year in which portfolio investment witnessed a net inflow of only 41 million dollars relative to a net inflow of 3.3 billion dollars in 2007 financial year is a manifestation of the unsustainability of portfolio investment inflows," the report observed.
It said that Pakistans liberal investment policy remained one of the most attractive in South Asia, allowing 100 percent ownership to foreign investors in a vast number of sectors and allowing remittance of capital, profits and dividends etc without any regulatory approvals. This had been key in attracting both foreign direct investment (FDI) as well as portfolio investment. This could be, however, further improved by creating a level playing field between domestic and foreign investors and allowing domestic investors to tap international capital markets directly through, for example, utilising currency swaps and hedging mechanisms.
"The Medium Term Development Framework (MTDF:2005-2010) of the government places a special emphasis on private sector development as a key element of the strategy to achieve sustained growth.
"Under the MTDF, private sector development is being supported through improving the business climate to catalyse the private sector, strengthening the knowledge base and competitiveness of the economy through investments in human resources and in skills and vocational training, strengthening product quality controls and enforcement of international standards, fostering public-private partnerships and vitalising Pakistans capital markets.
"Likewise, Pakistans Vision 2030 incorporates private sector development as a "key element" of the governments long-term thinking on sustainable development in the country and notes the need to reduce the cost of doing business to promote private sector activity in the country," the ADB report concluded.
Comments
Comments are closed.