Invest, but not for profit

The government and other key actors are grappling with conflicting objectives in addressing Pakistan’s economic challenges. On the one hand, they aspire to attract investments and stimulate economic activity; on the other, they demonize private profit-making. The contradiction is stark: they aim to create private-sector champions while simultaneously pushing existing business leaders to relocate abroad. The math simply does not add up.

One issue is the glaring disregard for contract sanctity, as seen in the treatment of Independent Power Producers (IPPs). This is not just about renegotiating the lopsided agreements — a process carried out twice in the past — but also about the sheer disrespect for investors in the current renegotiations.

Key business figures, including leading exporters and major players in the energy sector, have recently faced serious restrictions such as travel bans. Ironically, some of these very individuals are involved in flagship projects touted as examples of fresh investment, such as ventures in new green energy vehicles. The contradictions are palpable.

The mistreatment of IPP owners is sending ripples through other sectors. Potential investors, both local and foreign, are watching these developments unfold with concern. Local private sector players, despite holding significant liquidity both within and outside Pakistan, are unwilling to commit funds. Unsurprisingly, foreign investors remain cautious spectators.

The hostility doesn’t stop at IPPs. Powerful forces are now targeting commercial banks, dissatisfied with the industry’s profitability over the past two years. With existing taxation already exceeding 50 percent, there are moves to impose further taxes on banks. This approach ignores the broader context: while banks did record bumper profits recently, long-term trends tell a different story.

Between FY12 and FY22, the compound annual growth rate (CAGR) of post-tax profits for banks was just 8 percent, barely exceeding the 10-year CPI CAGR of 7.1 percent. This figure becomes distortive due to record interest rates only over the last two years, with banking profits CAGR for FY14 and FY24 climbing to 14.7 percent, against CPI CAGR of 10.5 but is not a true reflection of sectoral profitability.

Banking profits have barely kept pace with inflation, and future earnings are likely to normalize due to declining interest rates.

Yet, the FBR views banks as a convenient target for bridging revenue shortfalls, despite opposition from the finance minister. This highlights the finance minister’s diminishing authority. Key decisions, such as those regarding tax policies, are influenced more by the deputy prime minister rather than the minister in charge. This erosion of authority underscores systemic dysfunction.

The finance minister’s stance—that higher taxes on the salaried class are unfair, retailers need to be brought into the tax net, and that banks should not face additional taxation, aligns with broader public sentiment. However, he remains unable to influence policy effectively, reducing his role to that of a spokesperson.

The state’s current carrot-and-stick approach to the private sector is fundamentally flawed. Policymakers often label businesspeople as thieves and crooks while publicly shaming them. However, corrupt practices within government institutions, including the FBR, go unchecked. Smuggling at the borders and malpractice among officials receive little attention, while the private sector bears the brunt of selective justice. Arresting CFOs over minor procedural violations only exacerbates the issues of brain drain and capital flight.

To attract meaningful investment, Pakistan must rethink its strategy. The absence of consistent reforms, combined with selective and punitive measures, will only deepen economic stagnation. Trust must be rebuilt through transparent policies and equitable treatment of stakeholders. Investment does not flourish in an environment of distrust.

A nation that demonizes profit-making while seeking growth is bound to falter. To revive the economy, Pakistan must embrace a fair, predictable system where profits are not vilified but valued as drivers of development.

Copyright Business Recorder, 2024