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Will Pakistan overcome its demons to attract foreign investors

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News Analysis |

Over the last couple of years, Pakistan’s image has been developing as an investment hub, but the markets in 2017, experienced some turmoil and regressed to become one of the worst markets in Asia after being declared Asia’s best market in 2016. Nevertheless, in 2018, Karachi Stock Exchange (KSE) took the best start of the year since 2007.

Encouraging reports were released by major international publishers and institutions. For Pakistan, image rebuilding has been a major concern, while, simultaneously struggling to overcome political instability and militant insurgency. Investors’ susceptibility and apprehension with country’s image has been a concern. But at the same time, the country proved extremely fruitful for individual and institutional investors.

One such investor, Tundra Fonder, a Sweden-based asset manager, is helping transform Pakistan image among the fellow investors in his country. He’s been responsible for facilitating a visit of investors from Sweden. He is responsible for investing close to $100 million across different companies in Pakistan stock market. But, from November 2016 to January 2018 his fund reduced its exposure from over $160 million to around $100 million.

Under political instability and institutional chaos, investors may not be easy to lure. Stakes on Pakistan’s economy are high, the government is targeting 6% growth rate, but soaring external debt and liabilities along with twin-deficit does not send a positive signal.

Flourishing investment outlook/reputation, stable security environment coupled with improving energy situation has convinced the interested international investors to take interest in the country’s credentials as an investment hub.

Media branding of Pakistan as a state breeding terrorists has been out of proportion. First-hand knowledge of Pakistan’s actual security situation is not as precarious as indicated by the international media outlets, which is often acknowledged by the foreigners visiting Pakistan.

The delegation of investors from Sweden on invitation of Tundra Fonder is expected to visit Karachi, Lahore, and Islamabad. The investors believe that Pakistan is a story which needs reaching to the world community. Given the current security arrangements and economic outlook Pakistan is tipped to be a next big thing in Asia.

Read more: State Bank Pakistan reports decline in Foreign Direct Investment

Pakistan’s economy has been growing at a fast rate in the last decade or so and is expected to achieve even greater heights under CPEC. The economy has been grown at 5.3% per annum, and according to the latest report of State Bank of Pakistan (SBP), it is expected to reach 6% in the present year.

Pakistani economy has failed to revitalize itself on the backdrop of widespread corruption, higher cost of energy, weak trade facilitation and obsession with debt-financed growth. Currently, Pakistan’s economy faces acute challenges. Foreign Direct Investment (FDI) has declined by 3% in last 7 months, and twin-deficit along with the soaring debt to GDP ratio has been haunting Pakistan for some time now.

Though the proponents of depreciation of rupee expected the decline in the exchange rate to help improve the declining exports, the gap between the exports and imports widened to $21.55 billion in the current fiscal year.

With the expected sanctions from the US, the economy could further enter choppy waters and would further augment the problem. It could discourage the investors and FDI can dip more and Pakistan will struggle to generate access to international markets.

But on a positive side, after Army rule for most of the years in its 70-year history, it is completing the second tenure under democratically elected. Moreover, CPEC’s contribution may escalate growth further, once economic zones get operational and effect of import-related expenditure fade away which might lead to higher exports.

The only grey area has been constant political instability and an ongoing spat between the institutions. The spat among the judiciary, executive and parliament are yet to settle. The current political outlook indicates that next parliament can be a hung parliament which may jeopardize the prospects of political stability.

Read more: Increasing foreign debts: When will Pakistan be truly ‘independent’?

Pakistan faced the daunting prospects of financial restrictions when the US was nearly successful to put Pakistan on a grey list of countries that financially aid terrorism. The US and UK had joined hands to put forward the motion against Pakistan and also persuaded Germany and France which co-sponsored the move. But, it is believed that China, Saudi Arabia, Turkey, and Russia and other GCC countries opposed the motion against Pakistan after relentless diplomatic efforts from Pakistan.

Given Pakistan’s economic difficulties which may not be dealt with in the near future, It must safeguard its interests, if it’s to protect its economy from free fall, especially given its dependence on external institutions for financing needs. If put on the so-called grey list, it will restrict the financial aid to the country. Moreover, Pakistan will be prevented from exporting certain goods which could widen current account deficit.

Pakistan’s booming banking industry could get a hit as the decision could heighten the risk profile of the country negatively affecting financial transactions with Pakistani banks. Foreign banks may also pull over amid pressure from international regulators to guard off against the fear of terror financing. Legal risk may convince the potential investors to opt out of the investment.

Pakistan’s economy has been growing at a fast rate in the last decade or so and is expected to achieve even greater heights under CPEC. The economy has been grown at 5.3% per annum, and according to the latest report of State Bank of Pakistan (SBP), it is expected to reach 6% in the present year.

SBP also released the report on country wise FDI in Pakistan. It suggests that China continues to be the biggest investor in Pakistan as it totaled $1,003.3 million constituting 67.4 % of the total FDI received in the current fiscal year. Though, corporation tax declined to 30% from 35%, but, Super Tax was imposed on big companies which increased the overall tax rates to 33.8% of total profits.

Moreover, Pakistan has slipped three places on World Bank’s business report and now ranks 147th among 190 countries. Since this index is used as a guide by the investors, it hurts the country‘s pro-business image. Pakistan has also lost 16 positions on the indicator of paying taxes and receiving credit, stands at a 172nd place now.

Read more: Pakistan’s geostrategic environment and its impact on the economy

Macroeconomic indicators are showing a more of a pessimistic picture thus far. The trade deficit in the fiscal year so far has ballooned to $21.5 billion. Though the proponents of depreciation of rupee expected the decline in the exchange rate to help improve the declining exports, the gap between the exports and imports widened to $21.55 billion in the current fiscal year.

Under political instability and institutional chaos, investors may not be easy to lure. Stakes on Pakistan’s economy are high, the government is targeting 6% growth rate, but soaring external debt and liabilities along with twin-deficit does not send a positive signal to investors who rely on macroeconomic indicators to decide on investment.


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