The long and winding road to revitalising investment

Pakistan’s investment-to-GDP ratio is at its lowest in fifty years, despite promises of tens of billions in foreign investments and support from the highest offices in the country.

The establishment of the Special Foreign Investment Council (SIFC) was meant to signal the state’s commitment to improving investment, but the results have been disappointing. Foreign Direct Investment (FDI) reached $1.5 billion in the first ten months of FY24.

However, this figure includes retained profits awaiting repatriation, meaning the actual FDI could be close to zero without these forced retentions.

The government is attempting to negotiate a $6-8 billion IMF programme to reduce the gross financing gap.

However, negotiating with the IMF is not the same as negotiating with private financial institutions. This approach is faltering, prompting high officials to make a fresh trip to the UAE for additional financing. This pattern of seeking incremental funds to survive has persisted over the last two years.

This strategy does not foster serious project-based investment or attract the private sector.

The government is primarily seeking government-to-government investments, which come with strings attached.

Given Pakistan’s political and economic landscape, these deals demand significant incentives.

Currently, Pakistan is struggling to repay incentives given to Chinese investors between 2015-2018 and is now offering new incentives to Middle Eastern countries. The question remains: who will be next?

Attracting investment through preferential treatment, special incentives, and tax concessions contradicts the IMF’s desire to eliminate tax holidays and create a level playing field for private sector-led investment. This discrepancy calls into question the viability and sustainability of the SIFC framework.

The current system is not working, and the state is in flux. Political stability and genuine economic reforms are necessary.

An incremental approach will not suffice. Pakistan desperately needs investment, but it cannot attract genuine foreign private investors unless major domestic groups invest first.

Local private investors have the expertise and resources to revive the economy. No external entity can achieve this; it is up to the local people to take necessary action.

Pakistan has provided substantial benefits to its business groups, who have amassed wealth here.

Overseas investments by banks, textiles, and other players have largely struggled, serving more as wealth parking techniques.

Successful local players, who have benefited from protectionist policies, now need to reinvest in productive sectors to spur growth and employment.

It is in the private sector’s interest to contribute to the country’s turnaround. Expecting external entities to do so is unrealistic, and allowing core wealth to sink would be detrimental. Their responsibility extends beyond job creation.

Foreign interest is lacking. For instance, no strong foreign group has shown interest in buying PIA, and some local bids appear government prompted.

PIA should be sold to a local group, which should also invest in power distribution companies. The private sector can transform the distribution and transmission systems, as demonstrated by K-Electric.

Policymakers and the private sector previously focused on manufacturing, which has a long gestational period and is becoming uncompetitive due to rising energy prices. They should now consider large-scale investments in the services sector, such as building technology and financial back offices.

In manufacturing, joint ventures such as Service Long March, which is doubling its capacity, offer promising opportunities.

For all these initiatives, the private sector is crucial. The discourse must shift from FDI to Domestic Direct Investment (DDI).

First, reverse capital flight (approximately $2 billion per year in the last two years), and once the local private sector invests, foreign investment will follow.

Copyright Business Recorder, 2024