Investment perceptions

October 06, 2022

LAHORE: We are paying heavily on the perception of our country propagated by influential segments of the society. Foreign investors make their investment decisions based on this perception. Friendly...

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LAHORE: We are paying heavily on the perception of our country propagated by influential segments of the society. Foreign investors make their investment decisions based on this perception. Friendly countries hesitate to cooperate with shaky regimes.

When a chartered accountant of global repute like Shabbar Zaidi warns that Pakistan has already defaulted technically because we are taking loans to service our debt; it is not taken well by foreign investors or governments. What we conveniently ignore is the fact that there are numerous countries in the world who have lower foreign reserves than their total foreign debt.

In that sense all these countries he conveniently forgets have technically defaulted. The fact that Pakistan has never actually defaulted on its foreign loan despite a bad economy shows our resolve to fulfill our sovereign commitments. That we return loans by taking further loans is an indication that nations and global institutions still trust us.

When Zaidi says that Pakistan is not a suitable place for investment in the manufacturing sector because of high taxes, he conveniently forgets that the same tax regime was in vogue when he was the chairman of the Federal Board of Revenue.

Moreover, if we look at the industrial sector, heavy investments have been made in many industries in the past two decades. The problem, however, is that the entrenched players expanded their activities.

They expanded, because they were making good money. There were 23-24 cement manufacturers 32 years back.

That number remains the same, but production capacity of the cement industry has expanded from 9.9 million tonnes per annum in 1990 to 65 million tonnes in 2022.

The high tax rate is not an issue but barriers to entry created by existing operators is. Similarly, the capacities of sugar mills have increased, but the number of mills remains the same.

Spinning mills have added millions of spindles, but the number of mills have declined. The dairy business of two largest multinationals operating in Pakistan has increased manifold and they are regularly investing millions of dollars annually in expansion.

Instead of finding faults in high tax rates, the experts should find out the absence of green projects in Pakistan. Is it due to bureaucratic red tape? Or due to weak regulatory institutions? Are the unholy cartels operating in each sector frightening away new investors?

Is the informal sector a hindrance in new investment? Some players agree with Zaidi and point out the decline of weight of the industrial sector in the GDP in the past two decades.

We have already listed many sectors that have shown growth. We have to now look at which industries have predominantly closed or curtailed their production.

These industries include tile manufacturers, sanitary ware, ceramic, artificial leather, and tyre manufacturers. One thing common in all these sectors is that the items they produce find their way from foreign producers into the domestic market either through smuggling or heavy under-invoicing.

Since in both cases government levies are largely avoided, domestic producers (that pay all taxes) cannot compete with imported stuff. Declining industrial investment is mainly because of the failure of the state to exert its writ.

Pakistan is a lucrative place for investment only if governance is improved and tax evaders are treated like criminals.



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