Money Matters

A hard sell

Money Matters
By Muhammad Sheroz Khan Lodhi
Mon, 11, 22

Many developing nations increasingly view foreign direct investment as a major source of much-needed finance, innovative technology, and managerial skills. Pakistan stands nowhere close to many other Asian countries in attracting FDI.

A hard sell

Many developing nations increasingly view foreign direct investment as a major source of much-needed finance, innovative technology, and managerial skills. Pakistan stands nowhere close to many other Asian countries in attracting FDI. Massive foreign direct investment (FDI) in the electricity sector since the 1994 power policy is another significant issue for Pakistan. Due of the significant ramifications for the balance of payments, it has drawn a great deal of criticism. Because of the current power policy, the power sector is overcapacity, which has led to industrial standstill. Massive FDI inflows also led to a significant increase in recurring foreign exchange costs to pay for both fixed and variable foreign exchange expenses. It also has to do with the issue of significant cash outflows by IPPs for fuel, dividend, and debt repayment. Pakistan is anticipated to suffer a recurrent foreign currency liability of $900 million minimum to $1.4 billion maximum per year over the next 14 years given the terms and conditions outlined in the power policy and the numerous assumptions employed in calculating the balance of payments repercussions. This is a large amount given Pakistan’s foreign exchange reserves of $13.72 billion at present. For other developing nations, Pakistan’s experience can provide valuable policy lessons. First, if a flawed FDI policy is put into place, FDI may not be immediately advantageous to developing countries. Second, developing economies should prioritize attracting FDI to the sector that generates foreign exchange, or at the very least, both the sector that generates foreign exchange and other sectors at the same time. This need must be taken into account by international development institutions, including the Asian Development Bank, in their operations, especially build-own-transfer initiatives that involve participation from foreign private investors.

In the near future, Pakistan should do more effort to entice FDI into the foreign exchange industries. Given its unfavorable prospects for the balance of payments, it should hold off on drawing any more significant FDI in the non-exchange-earning sectors for a number of years. Political stability and satisfactory law and order are likewise critical to attracting FDI. The political elite of the nation must take action to strengthen law and order, especially in Karachi and other important “growth poles” of the nation. In order to increase economic growth and regain the confidence of foreign investors in the economy, macroeconomic stability is essential. Large fiscal deficits and unstable foreign exchange reserves make it doubtful that foreign investors will enhance their involvement. For new initiatives to draw international investment, economic stability and rupee-to-dollar parity must be present. Due to the rupee’s recent 33 percent (or Rs51) decline in value versus the US dollar, which has reduced its value to Rs208.75, international investors’ profit margins (measured in dollars) have been negatively impacted. Even when the IMF program was restarted, some of the leading foreign investors would still be hesitant to participate in new projects because Pakistani labor’s low productivity and a high tax environment sent the confusing signals.

In Pakistan, paying taxes and contributions is complex and time-consuming. The federal, provincial, and local governments impose a sizable number of indirect taxes in addition to corporate income taxes. In essence, the separate collection of taxes and contributions has forced businesses to deal with a huge number of collecting agencies at all three levels of government and redundant, onerous, and expensive administrative procedures. The amount of taxes and contributions must be drastically reduced, tax laws and administrative processes must be streamlined, and most crucially, foreign companies must have less contact with the numerous tax and contribution collection organizations. The presence of so many taxing and collecting bodies may encourage corruption, raising the cost of production. Investment has been hampered by import taxes on machinery and plants, especially in Pakistan where cash is scarce and borrowing costs are high. Due to this high cost, firms are dissuaded from modernizing, and the quality of local industry products is constrained in order to compete with those made abroad. In order to significantly lower them, plant and machinery tariffs need to be examined.

Ideas must be fostered. Few nations have advanced without the participation of their youth. Pakistan has a young population; just under three-fourths of the country’s people are under 40. This is a tremendous chance. Foreign investors won’t take the chance of roulette with their money based solely on “promises.” However, Pakistan stands a decent chance of luring inflows if it pitches itself when development in the west slows. Both the public and corporate sectors, as well as academic institutions will need to play their part.

Building confidence depends on the public and private sectors working closely together. In this regard, it is advised that a forum be created where representatives from the public and private sectors could gather to talk about problems pertaining to business development. The prime minister, all of the national chamber presidents, leading businesspeople, industrialists, and bankers, as well as the leaders of international chambers of commerce, appropriate ministry secretaries, and ministers, must be present at the forum. The group might hold regular meetings to assess the nation’s economic status. Decisions could be made right away and the business community’s issue could be discussed. This kind of collaboration between the public and commercial sectors will aid in regaining market confidence and open the door to further investment in Pakistan.


The writer is an economic analyst