World Bank identifies hurdles to foreign investment

ISLAMABAD: Tax policies in Pakistan discourage investment in the tradable sector, and investment laws discriminate against foreign investors, says the World Bank.

The bank in its report, “South Asia Development Update Jobs for Resilience”, stated that sales and value-added tax systems can have limited revenue potential unless properly designed. These narrow base, multiple exemptions, and concessional rates in Pakistan’s current sales tax are estimated to cost the country 15 per cent of the tax’s potential revenue.

The report further noted that growth is expected to pick up further to 2.3 per cent in the fiscal year 2024-25. Inflation is expected to remain high, however, as reforms to lower energy subsidies drive up domestic energy prices and transportation costs.

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The projected recovery assumes that the International Monetary Fund (IMF) supported reform program and planned fiscal consolidation remain on track, boosting investor confidence and ensuring capital inflows are sufficient to finance fiscal and current account deficits.

The Bank stated that reducing subsidies or budgetary support to state-owned enterprises in Bhutan, Nepal, and Pakistan could allow greater private-sector participation, while also increasing the room in state budgets for other programs.

It further stated that in Pakistan, state-owned enterprises tend to have low investment rates, while consuming government resources equivalent to about 23 per cent of the fiscal deficit in fiscal year 2023. Better governance of state-owned enterprises and a more level playing field could improve the allocation of capital.

In Pakistan, the easing of exchange rate restrictions has helped reduce the premium between the informal market and official exchange rates.

In Pakistan, after a sharp tightening between late 2021 and mid-2023, the State Bank of Pakistan has held its policy rate steady at 22 per cent. Monetary policy transmission continues to be impeded by the central bank’s use of multiple financing facilities with substantially different interest rates, and the gap between the policy interest rate and the rates charged by two concessional financing facilities—the Export Finance Scheme and Long-Term Financing Facility—has been reduced from 500 to 300 basis points.

The gap between the open-market exchange rate and the administered exchange rate has meanwhile been narrowed. These measures have helped stabilize financial markets, improved stock market performance, and encouraged a modest appreciation of the currency following the substantial depreciation in 2023.

Pakistan’s high import duties—particularly on consumer goods, intermediate goods, and capital equipment—deter import competition, reduce productivity, and increase domestic profits of incumbent firms at the expense of growth.

The report stated that employment in the low-productivity garment sector expanded rapidly, but services sector employment was held back by low human capital and limited access to credit for the private sector.

South Asia’s employment ratios appear to be converging toward long-run levels below EMDE averages, with weakness primarily concentrated in non-agriculture.

Specifically, in India, Nepal, and Pakistan, long-run employment ratios in non-agriculture sectors are significantly lower than in the average EMDE, whereas agricultural employment ratios are broadly in line with the EMDE average and, in Nepal, above.

Regression analysis suggests that this shortfall has, in part, reflected a more challenging institutional and economic environment than elsewhere, which has stunted firms’ growth.

In India, Nepal, and Pakistan, employment ratios are estimated to be converging toward steady-state levels that are well below-average in non-agriculture—by 11 percentage points in India and 16 percentage points in Nepal and Pakistan— but near-average (India, Pakistan) or well above average (Nepal) in the agricultural sector.

South Asian countries scored poorly on several dimension of gender equality: Bangladesh, India, Pakistan, and Sri Lanka fell into the bottom quartile of EMDEs in terms of laws that promote women’s equal pay; Bangladesh, Nepal, and Pakistan fell in the bottom quartile for equal asset ownership; and the rest mostly fell short of the EMDE median.

Had these countries had more strongly and more comprehensively protected women’s rights—on a par with the quartile of EMDEs with the strongest legal protections— their long-run employment ratios for women might have been 1–14 percentage points higher, the report noted.

Copyright Business Recorder, 2024