Pakistan’s foreign direct investment has been nothing to write home about. The 9MFY19 numbers have been dismal with FDI for the period going by almost 51 percent on an annual basis while the Mar-19 net FDI dropped by 13 percent.
In times like this, it is imperative that a facilitative atmosphere be provided for firms looking to invest in the country especially when the objective is to export as well. Unarguably, for any company looking to set up manufacturing in Pakistan, the taxation and regulatory duty structure on raw material imports is a crucial element.
Raw materials account for the bulk of direct operations cost for most manufacturing firms and in most cases the decision to set up a manufacturing plant goes in favour of the country having the most favourable duty structure on raw material imports.
However, if one looks at the local dynamics more often than not, presence of lobbying groups means that a particular regulatory duty structure is well-suited to existing market players but counter-productive for entry by new firms and acts as a barrier to entry.
It can be seen in the steel sector where lobbies have pushed the government to put regulatory duty on bars and billets to protect existing domestic manufactures. Another sector is packaging where there is a high RD on import of raw materials.
An example is the case of Swedish founded Ecolean Pakistan which is looking to set up a manufacturing facility for packaging solutions. In an interview with this paper last year, the management disclosed its plans to invest $150 million to set up a manufacturing plant in Pakistan to produce 5 billion packs per year for catering to domestic demand and exporting the surplus. However, channel checks suggest the Swedish investors might be tempted to shift this manufacturing facility across the border to China. The reason is the considerably lower duty on specialized film in China which is a core raw material for the manufacturing facility. The film has a 6.5 percent import duty in China while Pakistan has a 16 percent duty for the same raw material.
Obviously, for a company the end goal is to maximize profits and such a big difference would tilt the decision in favour of China which has a lower duty on the import of this raw material. The authorities should consider the issue in an objective manner and if the imposition is only to protect the interest of existing players it should be rationalized.
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