Economy on its knees

The initial euphoria of tens of billions of dollars investment by friendly countries is slowly fading away. The anxiety amongst the business community is becoming visible. The reality is that the political instability and economic shocks of the last 18 – 24 months have dampened the investor sentiment, and it may not prove easy to hit the restart button.

Massive currency depreciation, record inflation and woeful economic slowdown have inflicted a big dent on investment and capital formation. It’s not easy to expand exports.

Previously, competitive textile players, who historically remained bullish on Pakistan, are becoming negative. It’s hard to attract new buyers, given the default mongering and political haze. The point is that it is hard for many to believe that the Gulf states would be willing to invest tens of billions of dollars in Pakistan as a good gesture or to tap the unleashed potential. They usually invest in the US and other developed economies in low-risk instruments and ventures.

They are not keen on investing in developing economies. For example, Saudi’s total investment in India is $3.5 billion in the last twenty-odd years.

The investment in countries such as Pakistan comes from within and by its diaspora. That is the story of India as well. And the private sector brings foreign partners. There are examples of big investments in collaboration with private players in Pakistan, such as the way Abu Dhabi Group came in with the Bestway Group to invest in a big bank. Mobilink was started by a local player who also brought money from outside Pakistan, and then later attracted a foreign investor.

In the KE turnaround story, the catalyst was investment from Abraaj, which used to be headed by an expat. There was a case of the UAE public company buying the largest telecom in Pakistan in early 2000s, and that company has only deteriorated after the acquisition.

The model that can work in the country is restoring the confidence of the domestic and expat private investors. However, what is happening is the exact opposite.

One expat group in a big bank has a clear strategy of monetizing its assets, and not reinvesting by issuing large dividends. The buzz is that the investor wants an exit. The sentiments of many local groups are similar. Large sums of wealth have been shifted out of Pakistan over the last eighteen months, and many still desire to do so.

Moreover, fresh investment has completely dried up. There is no big ticker FDI. Then the small investment by expats is drying out, which normally comes in real estate and small businesses (mainly family run). This is evident by the significant decline in the home remittances.

Economic revival hinges upon reviving confidence of local and expat players. The formation of special frameworks or special treatment has its limits.

Over the last decade or two, Pakistan has exhausted the limits of issuing sovereign guarantees to preferred investors. Now the fear of sovereign default has rendered this policy instrument unattractive, and the IMF (International Monetary Fund) isn’t in favor of it either. Giving it another layer may not work.

There are no doubts about the intentions of the authorities regarding economic revival and attracting investment. However, relying on public investment from friends may not be the best strategy. And if it must be, the pumping of dollars must begin. There are no signs of it, and it is building anxiety.

The key is to accelerate the reform process and usher in political stability in the country. There are some steps taken in the right direction such as plugging the energy circular debt growth, and crackdown on smuggling and reforms in the exchange companies. Much more is needed for reducing the fiscal deficit, and foreign capital is needed to plug the external gaps.

It is imperative for reforms to be instituted; a government with a clear political mandate from the people is handed over the reins.

The kind of mandate that Margaret Thatcher had to bring about whole-scale structural reforms to do away with the sclerosis that had brought Britain’s economy to its knees. Pakistan’s economy is on its knees too. To rise again, it needs governance that has the backing of the people. That can only come about through free and fair elections.

Copyright Business Recorder, 2023