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Rewiring the investment model

Pakistan’s Investment to GDP ratio has remained stubbornly low compared to other emerging markets for many years. The reasons are manifold and well documented: inconsistent policies, macroeconomic instability, inadequate infrastructure, red tape, security situation, and retrospective investigations, among others. Since our “ease of doing business” ranking is not going to suddenly climb to the top, what could be done in the meantime to attract long term domestic and foreign investment to create jobs and economic growth?

All governments sincerely attempt to launch “one window” operations, under different names and permutations, to facilitate investment inflows without reforming the “rules of business” governing various line ministries. Backed by seminars and road shows, we try to lure hard-nosed investors with healthy incentives and the prospect of selling their products and services to a large and growing middle class population in a geostrategic location. When this doesn’t quite work out with private institutional capital, except those “hot” money types seeking quick arbitrage opportunities, we inevitably succumb to taking the relatively easier route of government-to-government deals that do not explicitly oblige us to think outside our box and undertake difficult reforms.

To be clear, there is nothing wrong with G2G transactions that result in value-add investment inflows, local employment, and gradual transfer of technology, know how, and development of domestic supply chain. Since time is not on Pakistan’s side, such strategic relationships can help bridge the gap to a more sustainable investment model based on a level playing field. A competitive and deregulated marketplace for all participants would, however, ultimately serve the customers better compared to one in which there are financial and other guarantees for a select few.

At the end of the day, all investors (local or foreign; private or public) are explicitly and implicitly taking a view on Pakistani consumers needing, wanting, and affording their products and services. If the market fundamentals don’t make sense on their own, or largely depend on subsidies, the business case is flawed and there is no comparative advantage per se in import substitution.

A long-term foreign investor would also keenly diligence the extent to which local private business houses are themselves investing in the country. In fact, Pakistan’s most effective investment ambassadors and conduits should be its blue-chip domestic companies that have the capacity and willingness to put their money where their mouth is. Despite the adverse impact of recent macroeconomic challenges on investment climate, our local boys can bring in much more FDI than the government if the market is liberalized and some of their genuine issues addressed.

Unhindered sourcing of private energy from wherever and at whatever price, and enforcing the State’s writ against dumping and smuggling, are just two illustrative action items. However, we need to also walk a fine line between promoting the consumer interest with cheaper products and protecting local industry via high import tariffs and barriers as allowed by the WTO (World Trade Organization). Beyond a certain sunset date, public interest should be paramount to incentivize domestic productivity growth and continued value-add investment.

Global institutional capital earmarked for investment in emerging markets is generally country agnostic, subject to certain limits, sanctions regime, and the required rate of return which is currently high for Pakistan. Alongside market reforms, we should seek “guarantee products” from multilaterals (such as World Bank and the Chinese-led Asian Infrastructure Investment Bank) to cover an array of sovereign-related risks that are not commercial in nature. These instruments can greatly mitigate the perceived political risks of foreign currency availability, change of law, and expropriation, and lower the cost of private capital for Pakistan. Whether or not the IMF will treat such contingent liability as part of national debt is an academic debate for another day.

No investment model is fail-proof or without its flaws. For example, the largely unregulated auto industry now supplies customers with several vehicle brands to choose from but is often accused of price gouging and not doing enough to increase local content. On the other hand, the heavily regulated pharmaceutical industry suffers from price caps and lack of investment despite our huge population size.

In any case, the State should neither stifle the market (while protecting the consumer interest) nor backstop the commercial risk and reward of investors regardless of who they are. Instead, its limited balance sheet should be employed to fund social investment in basic education and vocational training that the private sector won’t do other than as a “corporate social responsibility” sideshow. Human capital development is where a national emergency ought to be declared rather than leaving most of it to philanthropists and NGOs.

The cumulative losses of Pakistan’s state-owned enterprises reached Rs 1,000 billion nearly five years ago yet we are still debating whether to privatize them, transfer their assets to a holding company, or turn them around in the public sector. It’s a tired cliché but the lack of political will means that we would rather not sell these loss-making entities for Re. 1 and save the hundreds of billions in yearly losses that could otherwise be spent by the State on public health and education.

Our collective fear of transferring ownership and operations of these so-called family silver (particularly land that is otherwise idle) means that few investors worth their salt show interest in these assets while they continue to bleed. Provided we don’t offer market monopoly to anyone, the management of these SOEs must urgently be privatized or outsourced under an open and transparent process.

When it comes to attracting investment, Pakistan is neither a beggar that cannot be a chooser, nor totally self-sufficient. As part of the global community, we need to find a middle ground with the right set of tailored policies and market incentives without reinventing the wheel.

Tabish Gauhar, "Rewiring the investment model," Business recorder. 2023-08-02.
Keywords: Economics , Foreign investment , Economic growth , Supply chain , World trade , Investment bank , World Bank , Pakistan , GDP , IMF , FDI

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