Impediments to investment

Private investment has been declining in Pakistan for several years, which is no surprise given how rapidly private investors have been losing confidence in the economy. Investment is heavily based on perceptions, and hurting industry sentiments with frequent policy changes serve to destroy business confidence and break the pillar of trust in the government.

Market perceptions and demand are two critical factors for encouraging investment, and while the demand is present for now, perception is quite poor thereby putting export growth at risk and giving our competitors an advantage. The government needs to take measures to rebuild confidence which has largely been sullied by the energy sector with its frequent and illogical policy distortions.

Fundamentally, the traditional sources of equity capital for investment are business profits, savings and through the stock exchange. In Pakistan’s case, the country suffers from one of the lowest gross savings rates in the world. As of 2019, Pakistanis saved 12.3% of GDP. For comparison, the world and South Asian average is 24.69% and 27.97%, respectively. The country’s current account has been in near-constant deficit throughout the last 15 years.

The trend can be coincided with the degree of savings (as a % of GDP). Despite maintaining a stable trajectory, savings rate has never been adequate enough to compensate for the current account deficit. In fact, it has actually declined since reaching its peak in 2003 at 24.5%, resulting in a low savings-investment trap. Factors such as low income, high double-digit inflation, persistent macroeconomic instability and a low growth rate in Pakistan have all led to the historically low savings rate in the country.

The main impediment to a higher savings rate is by and large the limited availability of disposable income. To increase savings, minimum wages must be increased to at least PKR 25,000 – a policy recently announced by PM Imran Khan and supported by APTMA. In 2021, the Patron-in-Chief of APTMA proposed to the government that the best way to serve the poor and disadvantaged working classes was to raise the minimum wage by at least 20%, which is expected to improve not only standards of living but also the savings rate.

Incentives to invest and access to stock market need to be significantly increased for the industrial sectors to prosper. With a more fulfilled workforce, productivity improves, and this productivity coupled with the government’s provision of RCET have contributed to higher profitability, thereby leading to a surplus and driving investment, creating a cycle conducive to economic growth.

Furthermore, in Pakistan the average firm size tends to be much smaller than the global standard, while other regional textile players benefit from much larger and more integrated firms. The government must take measures to incentivize larger, amalgamated firms which can access the stock exchange and raise more capital for expansion and investment.

In addition to Pakistan’s imports being greater than the exports, they are also more expensive, since exports largely comprise raw materials while imports mainly consist of finished goods which have higher values. This persistent current account deficit has had an adverse impact on the country’s GDP, foreign exchange as well as employment levels.

Furthermore, the export sector experiences several barriers in the form of taxes, high tariffs, poor and inconsistent policies, lack of technological advancement and poor diversification, all of which have rendered Pakistan’s exports somewhat uncompetitive. To a large extent the RCET policy offset these disadvantages; however, despite global trade increasing rapidly, Pakistan’s exports have still been unable to make a notable share in the global market.

Investments in the textile sector will enable the sector to expand and diversify, while creating jobs in the process, thereby increasing employment in the country and moving towards sustainable growth and economic prosperity. However, this target cannot be achieved if the energy tariffs in the country are not regionally competitive.

Pakistan already experiences lack of investment, both domestic and foreign, owing to the unstable political and business environment. Yet, in the last year $5 billion investment was made in the textile sector due to higher profitability, increasing orders, RCET and TERF.

The industrial sector of Pakistan can be characterized by limited resources, lack of technology, unskilled labor force and lack of investment. Moreover, there is increasingly high foreign debt which has put continuous pressure on the economy. Therefore, it is crucial to support industries with export capacity in order to improve their productivity and provide them with an environment where they can work at their full potential.

The textile industry in Pakistan contributes more than 60% to the country’s exports and is a major source of employment in the country, driving the country to a path of sustainable economic growth.

Development of value chain relationships is an essential part of the modern-day economy. Now that Pakistan has been able to establish an industrial base, its needs to make efforts to develop vital supply chains. For this purpose, it particularly needs to focus on its cotton sector keeping in view the ever-rising demand for cotton by the textile industry.

Pakistan is the fifth largest cotton producer in the world; however, inconsistent policies, low investment and lack of technological upgradation have created bottlenecks in the sector, resulting in heavy reliance on cotton imports to meet the industrial requirement. Efforts should be made to improve global value chains by strengthening industrial and agricultural connections to foster innovation and productivity.

Fundamental changes are required in the country’s agriculture policy in order to enhance production and conserve the forex lost to excessive agricultural imports. Should Pakistan’s agricultural sector achieve 50% of the productivity that is the norm of neighboring countries with comparable soil conditions, the GDP of Pakistan stands to rise by many trillions of rupees which would pave the way for an exportable surplus and a secure economic future for Pakistan.

At present, 50% of Pakistan’s cotton is imported, even though we have the capacity to produce more than we need and under normal circumstances, should be exporting it.

Growth in the domestic market and other prospects like Free Trade Agreement with China, the regional Textile Production-Consumption Hub and China Pakistan Economic Corridor (CPEC), all provide investments opportunities. The CPEC in particular provides a unique opportunity for Pakistan to boost its strategic and economic position. It has the potential to transform Pakistan into a regional hub for trade and investment.

The project covers four key economic areas which include energy, transportation, infrastructure and industrial cooperation. CPEC, once fully implemented, has the potential to transform Pakistan’s economy from a low growth mode to a high and sustainable growth economy by removing key infrastructural bottlenecks and promoting balanced regional growth and connectivity.

Regional and global connectivity is crucial to meet technological requirements, improve marketing and branding and eventually creating global recognition. The quality of exports must be improved by minimizing inefficiencies and enhancing productivity.

Measures to expand and diversify the country’s export market will in turn result in employment opportunities in the country. Moreover, the export earnings, necessary for balancing import payments, will increase, thereby, reducing the trade deficit. This requires correct and favorable policies that would lead to sustainable growth in the export market and overall uplift the country’s economy.

To maintain the pace of industrial expansion and increase in exports, there must be continued investment in upgradation and expansion, as well as new projects. Profitability and competitiveness must be maintained, with a focus on export-led growth in order to maintain Pakistan’s economic and political sovereignty through the implementation of a long-term policy of uninterrupted energy supply and regionally competitive energy tariffs.

Furthermore, measures are required to ensure access to capital funds and availability of credit. Policies should target and facilitate young innovative companies in order to build them up and help to modernize Pakistan’s business environment.

Copyright Business Recorder, 2022