Tuesday May 17, 2022

Economic prudence

May 14, 2022

LAHORE: Asif Ali Zardari is not an economist, but he has rightly advised the ruling elite to think of out of the box solutions, and instead of attracting foreign investment seek the assistance of domestic investors.

All public sector companies whether making profits or operating in loss are operating much below their potential. Pakistan State Oil (PSO), enjoying a lion's share in our oil market, is making less profit than numerous smaller players in this field in the private sector, when compared with the turnover of each company.

The PSO having advantage of economies of sales and the largest distribution network should earn more. The only disadvantage of PSO is that it is a public sector company, and the employees or directors are not pushed to improve further.

The state is satisfied that at least PSO is in profit and not operating in loss like the majority of the public sector entities.

Former president has rightly suggested that 26 percent of PSO shares should be sold to any suitable domestic investor and to disinvest 36 percent shares in the stock market. Domestic investor with 26 percent shareholding must control the company through its board of directors.

The state would get much needed resources from these two sales. We will see a turnaround in profits after two years.

By passing on the ownership to local investors we would not be selling our assets to foreigners who would start repatriating profits outside. The repatriating of profits by foreign investors in the first six months of this fiscal year stood at $891 million. This is almost the same amount that we receive as FDI in six months.

We should refrain from handing over our national assets to foreigners, particularly if the concerned public enterprise serves the domestic market only.

Foreign investment should be allowed only if the investors assure export of 10 percent of its production.

This way the repatriation of profit would be covered from the exports. There must be no repatriation in case of failure to export.

We should wake up now as we have seen that despite a liberal investment policy, we have received foreign investment in fields where the product or the services are for domestic production only. Only a Chinese car brand has started exporting its right-hand drive models from Pakistan which is a good omen.

Change in policy might reduce the FDI, but whatever new investment would come it would boost our exports. Domestic investors must be given the same incentives that are offered to the foreigners.

Larger enterprises like LNG-based power plants could be offered to a consortium of domestic investors. This could also be done in case of PIA, Pakistan Steel Mill and Railways.

Assets of these entities should also be handed over to new buyers along with liabilities with the condition that the sales of these assets be shared equally between the state and new buyers. Moreover, the new owners could use the proceeds of these assets to retire liabilities or upgrade technology.

These measures would not resolve the immediate economic problems. Still some additional funds would be available.

This policy would stop the ever-increasing flight of capital through repatriation of profits. In the near term, Pakistan needs massive inflow of funds, which the present regime must arrange.