Boosting investment for growth and poverty reduction

A good investment climate is central to growth, employment generation and poverty reduction. The changing nature of competitiveness and dynamics of world market need vibrant public and private sectors. The public sector provides necessary social and physical infrastructure and enabling regulatory environment that makes investment more business friendly.
The private sector on the other hand creates jobs, provides the goods and services needed to improve living standards, and confronts challenges and opportunities to face international competition and globalisation.
2. Pakistan's competitiveness has recently been greatly increased due to current policies and programmes of the Government of Pakistan. In the Global Competitiveness Report of World Economic Forum, Pakistan moved among 117 countries from the rank of 91 in 2004 to 83 in 2005. As the medium term growth prospects for the economy look good, we want to make it sure that required pattern and composition of the investment needed for sustain growth are forthcoming without hiccup.
What required is to have a brief look at the reasons for the relatively low and slow growth of investment in the past. And highlight some of the measures taken recently by the government to accelerate both domestic and foreign investment so as to see that Pakistan continue growing strongly. The objective of this short article is to examine investment situation in the country and to see how far the government is playing its facilitator role to boost investment.
STRUCTURE OF SAVINGS AND INVESTMENT:
3. Both public and private fixed investments in 2005-06 grew at a respectable rate of 28.2 per cent and 31.6 per cent, respectively. An impressive growth rate of 88.8 per cent was observed in the public sector programme. Higher development activities were experienced in socio and physical infrastructure sectors. Transport & communication, manufacturing, ownership & dwellings and oil & gas are the prime investment growth sectors. It is encouraging to see that even for the next year 2006-07, the growth momentum set in the previous years would be maintained.
To attain 7 per cent GDP growth rate in 2006-07, total investment of Rs 1895 billion (21.2 per cent of GDP) has been envisaged, of which one quarter comes from the public investment and two-third from private investment. Of the total investment, 80 percent is to be financed through national savings while the rest 20 percent from foreign savings, ie from external resources. A higher level of fixed investment of Rs 1754 billion touching a record level of 20 per cent to the GDP is also envisaged. A milestone has also been established by setting the unprecedented level of PSDP size to the tune of Rs 415 billion. The details are presented in the Table A.
IMPEDIMENTS TO INVESTMENT:
4. Some of the reasons that contributed to relatively slow growth in investment in the past have been experienced as weak judicial system, political instability, inconsistent government policies, bureaucratic hurdles, lack of physical and social infrastructure, and image problem abroad.
In addition to these constraints, there are many other factors contributing to the slow growth of investment in the country. These are: lack of investors' confidence; high cost of doing business, due to high utility costs and multiplicity & duplicity of taxes; deficient statistical data; unwarranted speculation in stock exchanges and low private and public savings.
STRATEGY TO BOOST INVESTMENT:
5. Government of Pakistan is committed to Vision 2030 of establishing a just, prosperous and innovative society. This requires sustainable economic system to be achieved through increase competitiveness and higher productivity by investing more in social and physical infrastructure and knowledge based economic activities. Though in the current Investment Policy, tax holidays have been withdrawn, the investment is promoted through initial higher rates of depreciation allowances and concessions in the import duties on machinery and equipment. While the hi-tech and export oriented industries and those having 40% value addition are provided maximum incentives, for others, specific incentives have been clearly specified.
6. A long term strategy to raise Foreign Investment has been designed. Foreign investors are allowed to hold 100 per cent equity of industrial project. Remittance of dividends and dis-investment proceeds no longer require the State Bank's permission. Foreign firms are allowed to raise equity capital and loans from the domestic market.
On repatriation basis, investment in stock exchange has been allowed. Restrictions on royalties and technical fees have been removed. Foreign investors have also been provided relief from double taxation in cases of those countries with which Pakistan has agreement on avoidance of double taxation. To encourage assembly-cum-manufacturing, government provides incentives to assembly through lower import duties on components if the producers agree to a programme producing them indigenously.
7. All the factors outlined earlier have contributed positively in creating favourable investment climate that eventually pushed the level of foreign direct investment (FDI) to its new heights. The FDI during July-April 2005-06 reached to all time high level of $3.02 billion compared to $0.89 billion during the same period last year. The FDI thus posted an unprecedented high growth rate of 239% in a single year.
8. The judicial system is weak and inadequate to serve the dynamic nature of our economy and is a serious obstacle to economic growth. As the legal system is not supportive, it curbs initiative of the investors. Unenviable law and order situation has been one of the main reasons that deter the investors. Accordingly, under the access to justice and police reform programmes, the judiciary and law enforcing agencies are provided with more funds to revamp their system and increase their capacity to be efficient and effective. Emphasis is, therefore, placed on the human resource development and enhancing their infrastructure facilities.
9. Political stability in a country is essential for attracting investment. Till recently, Pakistan has been in the grip of political instability, which has negatively affected investment in its own way that resulted in periods of high and low investment. For more than half a decade political stability is very much evident in Pakistan. Senate, national and provincial assemblies are completing their full tenure. Governing structure at all tiers of the government also remained stable.
Thus, the political stability and stable political institutions are ensured by the present government. And the element of uncertainty the major obstacle to investment growth does not exist anymore. This in turn has exerted positive influence on the investment climate in the country which resulted in record growth in both domestic and foreign investment in recent years.
10. Consistent economic policies are key to foster investment. Change of every government in Pakistan, unlike many other countries, had resulted in drastic shift in the economic policies of the previous government. This surely is not a very positive attitude and costs the nation dearly for its negative consequences on business and investment activities.
All programmes and projects that were shelved half way through, with a change in governments, during 1980's and 1990's, entailed a very high termination cost, which our resource-starved economy was made to bear to justify some political ends of those in power. Abrupt changes in policies shook the confidence of both local and foreign business class. Pakistan allowed operation of foreign currency accounts in 1993 but freezed the foreign currency accounts after the nuclear explosion in 1998.
It created crisis of confidence. Further, the row with IPPs, and the court decision on interest free banking also created confusion and mistrust among the investors. In addition to inconsistency in policies, the system also suffered from inertia and non-implementation of new policies. The logical outcome was the fall in level of investment that proved harmful for an economy that already has a comparatively narrow industrial base, for its size.
11. Realising this shortcoming the present government made it a point that policy once made be continued till its fruition. A case in point is successful completion of the structural adjustment and other economic reforms programmes initiated with financial assistance from the IMF, World Bank and ADB. Legal protection to foreign investment is provided. And sanctity of agreements is upheld.
This has not only increased our credit rating in the international capital market but has also instilled confidence in the foreign investors. They realise that contractual obligations between the parties are now honoured. Instead of making abrupt policies these are now evolved by experts and experienced policy makers so that need does not arise to reconsider and reformulate the same after every few years.
12. The bureaucratic procedures and other formalities to start and run the business were considered to be complicated and non-transparent. Investors shy away if they perceive that government authorities are unreasonably delaying things. Bureaucratic hurdles and red tapism result in higher transaction costs. This also results in time and cost over run of the project if the gestation period of the investment gets too long.
Accordingly the rules and regulations governing investment are simplified and the discretionary element in the bureaucratic decision making is minimised. Devolution, capacity building and other governance improvement programmes have decisively changed the administrative and organisational behaviour of the bureaucracy. Bureaucratic attitude and managerial practices have now become performance oriented. All these positive factors have rehabilitated the confidence of the investors.
13. A large number of inspecting agencies at the federal and provincial levels are a big source of nuisance for the private sector. Efforts are underway to cut down the involvement of these agencies and curtail their discretionary powers. Further domestic industry is also protected by controlling smuggling through rationalisation of input and output prices and tariff rates. Public and private investment decision making requires reliable data. Every effort is made to improve the statistical system of Pakistan, so as to ensure reliability, accuracy and timeliness of the needed data.
Recently stock exchanges in Pakistan and real estate business have become victim of un-necessary speculation. Accordingly the government on priority basis has restructured the Security Exchange Commission of Pakistan (SECP) so that it can exercise strong control over stock exchanges to protect the interests of genuine investors in stocks.
14. The all-pervasive corruption in Pakistan was a discouraging factor for any one who may wish to invest in Pakistan. The administrative and financial system did not work for a person unless he knows how to lubricate the system by injecting money and grease the palm of persons holding authority. Government has made concerted efforts to eliminate corruption at every level of the government. Procurement procedures and discretionary powers of the government functionaries have been rationalised.
Accountability and transparency in organisational operations have also been ensured by proactive policies. All the public utilities are undergoing reforms and restructuring so that they can perform to their full potential. With improvement of their operational and institutional efficiency, not only burden on government budget would be less but cost of utilities would also be reduced that would enhance investors profits on their investment.
15. The GDP of Pakistan is growing fast. It is becoming broad based. New growth areas and sectors are emerging. For that we need skilled labour force, diversified entrepreneurial skills and competent cadre of scientists, technologists and managers. In order to fill the skill gap, the government is massively investing in vocational training and technical and higher education.
16. The lack and erosion of existing infrastructure impedes GDP growth and keeps the investment cost of new projects high. This discourages the new investors. The adequacy of infrastructure helps in determining country's ability to expand production & trade, and improving investment environment. Once the investor is satisfied with all other prerequisites, his next concern would be the availability of infrastructure services.
The availability, reliability and cost effectiveness of infrastructure services affect his manufacturing cost. To draw in investment, the government alone and in partnership with private sector is investing heavily for infrastructure development. Recently higher public sector investment in roads, port and construction of dams may be seen with satisfaction. Access to long-term finance is critical for private investment. Capacity of the financial sector to finance long-term projects is strengthened. Innovative methods on the line of public-private infrastructure financing facilities are also explored.
17. National image of a country contributes significantly towards attracting foreign investors. Pakistan's negative image abroad is a big hurdle in attracting investment. We had been labelled as fundamentalists and sympathisers of the terrorists. Our religious parties and Jehadi organisations have played a big role in the formation of this image. Some of our past Governments' policies have also added to this negative image. The present government has presented Pakistan a moderate and an enlighten nation. A conducive environment has been provided where the foreign investors can enjoy full social and cultural freedom. Negative image abroad is also dispelled through aggressive media campaign and economic diplomacy.
18. For achieving higher growth rate, needed increase in investment is required. The rate of increase in saving should be in line with the investment requirements. Knowing well that households, corporate and public savings are low as well as increasing with slow place, effort has been made to enhance the saving rate to the required level so that reliance on the external resources is minimised.
Accordingly, the government besides narrowing the difference between borrowing and lending rates of banks is gradually enhancing the rates of return on various national saving schemes. Measures both from supply and demand sides are taken to lower down the inflation. This would bring the real interest rate positive and thus encourage the households to save more.
19. Government is trying hard to increase tax revenue and rationalise current expenditure, so that surplus is available to spend on development activities. Public sector enterprises are either privatised or revamped to improve their efficiency, resulting in less burden on the government exchequer. Corporate sector is also encouraged to save more. Corporate tax rates are gradually reduced. Government spending on social and physical infrastructure has increased sharply in recent years. These factors not only have enhanced the profitability and productivity of the corporate sector but have impacted positively on the corporate saving.
All things combined, national saving is on a rising trajectory. In 2003-04 it grew by 3% and in 2004-05 by 5%. It sharply increased to 12% in 2005-06 and is likely to grow with much faster rate of 24% in 2006-07.
20. As concluding remarks, one could safely say that higher and quality investment has been achieved by working on a combination of factors. To boost investment, the government has taken up a number of measures in the recent past. Political stability and consistency in macroeconomic policies have been ensured. Heavy investment in social and physical infrastructure has been made to make Pakistan's economy competitive in the international arena.
Police and judicial reforms that promote security to life and property and enforcement of contracts have been put in place. Restructuring of the government organisations are also under way that promotes efficiency, accountability, and transparency of the public sector institutions. Reforms in taxation system have also been introduced to foster investment in the country.
TABLE: A
INVESTMENT AND SAVING:

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                                              Rs Billion)

Description                 2004-2005     05-06     06-07

                                                  Targets

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Total Investment              1192.0     1544.0    1895.4

Fixed Investment              1086.7     1420.6    1754.4

 Public Investment             290.6      372.6     493.9

 (PSDP)                      (160.5)    (303.0)   (415.0)

 Private Investment            796.1     1048.0    1260.6

Foreign Savings                104.1      320.9     380.5

(external resources)

National Savings              1087.9     1223.1    1514.9

As % of GDP

Total Investment                17.7       19.6      21.2

Fixed Investment                16.2       18.1      19.6

 Public Investment               4.3        4.7       5.5

 (PSDP)                        (2.4)      (3.9)     (4.7)

 Private Investment             11.9       13.3      14.1

Foreign Savings                  1.6        4.2       4.3

(external resources)

National Savings                16.2       15.6      16.9

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