JETRO survey shows Japanese cos in Pakistan facing various issues, including higher import costs

KARACHI: The Japan External Trade Organization (JETRO), the Japanese government’s trade and investment promotional arm, conducted an annual survey of Japanese companies in 20 countries and regions in Asia and Oceania to determine their business conditions in 2023.

The main results are as follows;

The percentage of Japanese companies in Pakistan that responded “Expand” to the question “Business expansion over the next 1-2 years” was 43.5 percent, ranking 11th among the 20 countries/regions. This is the lowest level ever, along with the previous year’s 42.1 percent (12th place).

Even in 2020, the year of the COVID Pandemic, 53.5 percent (1st place); in 2018, 66.7 percent (5th place) and in 2019, 62.5 percent (4th place), Japanese companies in Pakistan have consistently been eager to invest in the past. However, amid the current economic crisis, Japanese firms’ willingness to expand investment has declined significantly. Japanese companies in India responded to the same question at 75.6 percent (1st place), while Japanese companies in Bangladesh responded at 61.2 percent (3rd place).

Among Japanese companies in Pakistan, 93.3 percent cited “Unstable political and security situation” as the biggest risk, and 86.7 percent cited “Unstable foreign exchange” as the second biggest risk. In the 2022 survey, reflecting the significant depreciation of the Pakistani rupee, the number one concern was “exchange rate fluctuations” and the number two concern was “higher procurement costs.”

Japanese companies in Pakistan are facing higher import costs due to the depreciation of the rupee, and the crisis in foreign exchange reserves is making it difficult to remit money overseas; these two factors are putting pressure on Japanese companies’ business.

Regarding “Advantages of the investment environment,” 75 percent of Japanese companies in Pakistan cited “Market size/growth potential” and 70.5 percent cited “Low labor costs” as the main points. It is understandable that Japanese companies have a high regard for the growth potential of the Pakistani market and a consistently strong desire to expand their investment.

The survey also examines wages at Japanese firms in the Asia-Oceania region.

With regard to the “Year-on-year wage increase rate,” reflecting domestic inflation, Pakistan ranked second in the manufacturing sector at 14.4%, and first in the non-manufacturing sector at 18.4%, which was outstandingly high among Asia-Oceania countries in the 2023 survey.

However, in terms of the “Annual real burden of wages” in dollar terms, the summary of responses from Japanese companies in Pakistan showed that one employee’s burden for “manufacturing workers” ranked 15th with $2,370, while “non-manufacturing staff” ranked 18th in the region with $4,733.

The rupee’s significant depreciation against the dollar has increased import costs for firms. Inflation is also causing firms to face significant wage increases, however still Pakistan is one of the most competitive countries in the Asia-Oceania region in terms of wage levels.

In Pakistan, unstable security, high inflation, and an unstable exchange rate are major business concerns for Japanese companies. The government needs to remove these obstacles as soon as possible and get the economy back on a growth track.

JETRO lauds that the Pakistani government recently completed a successful review of the International Monetary Fund (IMF) Stand-By Arrangement (SBA) and has indicated its willingness to participate in a new IMF program over the next 2-3 years.

JETRO believes that continuing reforms together with the IMF will lead to economic stability and growth, which in turn will lead to the restoration of foreign credibility and increased FDI.

Copyright Business Recorder, 2024