To be or not to be: Does Pakistan stand a chance to climb the ladder?

Published: May 7, 2012

For starters, foreigners can own 100% equity and repatriate entire profits. ILLUSTRATION: JAMAL KHURSHID

RIYADH: 

Outside the US, Pakistan is one of the very few countries which has the potential to become self-sufficient in energy, food & water. Punjab province was the breadbasket of pre-partition India while Balochistan region is home to large, mostly unexploited reserves of oil, gas, gold, copper and other minerals. The public face however is, of people dying in terror related incidents at average of 10 per day or 20% of world total. So why discuss Pakistan now? After all, its $200 billion economy is less than US state of Massachusetts, and its capital market depth of $36 billion (1/1000th of world) is hardly significant in a global investment context.

For a start, ‘growth’ is what the world revolves around. I want a salary increase every year, every company wants to profits to grow and even rich countries take it as a slight if standards of living do not keep on increasing. So, as consumers in the developed world de-leverage –paying personal debt and affecting demand – many well-known investors based on historical trends, are projecting low equity (business) returns over the next 7 to 10 years. With interest rates at lows, bonds are expected to fare even worse. Hence, developed world capital will actively seek new opportunities.

Emerging markets (EM), such as India and China have been a fad for more than a decade but their investment valuations are almost twice the frontier markets (FM), which include Pakistan. The latter is technically a subset of the former in terms of growth potential.

Back to Pakistan, bad news first and this is a double header, religious extremism and a bad state of the economy and governance. The former has been fuelled by 1980s global support for non-state actors during the Afghan-Soviet War while the recent years upsurge in violence is a reaction from unpopularity of the country’s role in the war on terror. The resultant crippling of foreign direct investment has left industrial development stunted, with IMF programmes and $10 billion of foreign remittances having become critical in plugging the import-export gap.

The clouds are not all dark though. The media is remarkably independent having created political awareness. Result is the rise of third political force under cricketer-turned politician Imran Khan whose campaign on corruption, increasing tax collection (by taxing all including the ruling feudal elite) and a strategy to tackle extremism (by bailing out of war on terror) have gained wide traction. Whether he succeeds or not in the 2012/13 general elections, it is clear that the populace have been made aware of the issues that matter.

For foreign investors, Pakistani governments have always been welcoming. Overseas capital can own 100% of equity and can be freely repatriated. Corporate disclosures of listed companies are one of the best in Asia, while according to Frontaura Capital, an upcoming frontier market equity fund, ‘most of the companies are well managed’. Even for locals, corruption and bureaucratic red-tape aside, economic freedom and ability to pursue range of business activities, has always been high.

Another big advantage is that Pakistan, unlike many frontier markets is not commodity dependant. Its major export is textiles, but it has a significantly diversified manufacturing sector, ranging from chemicals, consumer goods, car assembling and others, combined with a vibrant services industry led by banking, advertising and telecom. This is not the result of a vacuum but rather the entrepreneurship ability of its people which took Pakistan from literal bankruptcy at birth to an Asian Tiger within 20 years of its existence. Presently there are more than three million skilled expatriates whose brains and money can be cashed by any new government with popular trust.

Recommendation: It is currently difficult to pitch Pakistan as a tourist destination, so investment certainly cannot be for the faint-hearted. However, this country of 180 million should be kept a frequent tab on. A recent advance is an increase in trade ties with historical adversary and neighbour India, which if not rolled back can potentially double exports over time. Nonetheless, Pakistan’s stumbling block has been political instability due to low level of mass political participation cowed out by feudal and military governments, which has left the education and health sectors in tatters. Hence, development on the political and governance side is what is really needed to be monitored and as was mentioned, the seeds for a turnaround may have been sown.

The writer works as an economist and portfolio manager.

Published in The Express Tribune, May 7th, 2012.

Reader Comments (16)

  • Common Pakistani
    May 7, 2012 - 7:46AM

    What a shame to see a country with so much potential, resources, manpower, middle class, vibrant youth and culture still going to the dogs. It’s truly a tragedy. I think we have become ignorant.

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  • Amjad
    May 7, 2012 - 7:49AM

    I agree with you, Pakistan has the potential to become a great nation with a strong economy if and when stability comes. That is what Pakistan’s neighbours don’t want.

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  • nisar shaikh
    May 7, 2012 - 9:10AM

    Let us not keep dreaming.

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  • BlackJack
    May 7, 2012 - 9:45AM

    I do not deny that Pakistan is one of the largest frontier markets and could become a potential destination for capital if the present scenario changes dramatically. However, market attractiveness is the market’s estimation of present value of future earnings – you need a future for a capital inflow; the present state of affairs is likely to continue because even educated people like the writer gloss over the reasons for Pakistan’s present condition – and thus are prisoners of fate that choose to remain blindfolded even when their hands are untied. You need to examine all events in Afghanistan from mid-70s to 2001 to understand what Pakistan’s role has been, and why it has suffered almost the entire brunt of the extremism that resulted. Similarly, even after the ISAF leave Afghanistan, Pakistan will not achieve stability unless it can control its insurgencies, which seems unlikely – the extremist infrastructure is now well-entrenched and Pakistan may not survive the social upheaval that is required to remedy the situation.

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  • Hunter Punter
    May 7, 2012 - 12:07PM

    USD 200 billion economy is 46th largest in world. hardly attractive enough for serious investments, even in the best of times. Currently with the country in the doghouse and extreme suspicion and mistrust by the world, firstly pakistan has to completely change over into a new leaf. It keeps company with Algeria, Philipines, khazakistan in its DGP size. So be realistic. Being delusional, ensures that policies are at complete variance with reality.

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  • Lateef Khan
    May 7, 2012 - 5:57PM

    It is 27th largest economy.
    .
    With a little effort, we can be in G20!!!

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  • Lateef Khan
    May 7, 2012 - 5:58PM

    South Korean GDP is also similar to Pakistani in size.
    .
    Pakistani economy is larger in size than New Zealand!

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  • Hunter Punter
    May 7, 2012 - 6:11PM

    @Lateef Khan:
    In PPP terms 27th. In nominal GDP, pakistan is 46th. South korea at USD 1.2 trillion is 6 times the size of korea.
    Do not compare with New zealand, where the population is just 4 million compared to pakitans 180 million.

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  • Meekal Ahmed
    May 7, 2012 - 7:25PM

    Pakistan has every chance to climb the ladder. You need to implement sound policies because there are no short-cuts and/or free lunch.

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  • May 7, 2012 - 8:00PM

    Elliot Wave theorist Mark Galasiewski is forecasting continuation of multi-year bull market in Pakistan. This forecasts marks an unusual agreement of a technical analyst with fundamental research done by Jim O’Neill of Goldman Sachs who recently reiterated Pakistan’s place on its growth map.

    http://www.riazhaq.com/2012/05/us-technical-analyst-bullish-on.html

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  • Sajida
    May 7, 2012 - 9:01PM

    The leaders are holding it back. They are not nurturing manufacturing and ag sector is not taxed.
    Other countries do both things.

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  • Cautious
    May 8, 2012 - 12:10AM

    Interesting article which spouts the IK line that everything in Pakistan will become rosy when you abandon the WOT. Well for all piratical purposes you abandoned the WOT and things haven’t gotten any better. Further – the authors belief that India is somehow gong to be the lifeline for Pakistan’s economy ignores that the non state actors your protecting are avowed enemies of India — hows that going to establish a foundation for growth? If Pakistan’s economy is to grow it needs to do so with cooperation of the International Community which views Pakistan as the nexus of terror – fix that before you talk about growth.

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  • Syme
    May 8, 2012 - 2:06AM

    A non producer economy should be a closed economy otherwise there is no hope for the growth. The GDP is a favored term of all the economical jugglers because it gives them some ground to brag their bloated pride.
    Our export to china are?? Our imports are some 5 billion dollars cheap ballpoint and toys.

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  • rameez
    May 8, 2012 - 2:27AM

    Pakistan is country full of tigers but led by donkeys. Considering the untapped mineral reserves available in Pakistan i am sure Pakistan can become third Asian tiger along side India and china. … in the order to do this we need to do the following.

    1) sort out the law and order in the country. this can be done by making our police strong. this will improve the security in the country . No one is above law

    2) improve the education .. set one education board. all educational institutions must meet the syllabus this also includes madrass.. In fact i think the madrass should not be allowed as an alliterative to school for poor children.

    3) create a good business environment. The government should create areas dedicated for over sea business ( such as silicon valley). only the authorized individuals will be allowed to enter such areas. Provide these areas with maximum security, and other basic needs. this will attract over sea companies to set up their assets in such areas.

    4) the most in my view is bann islamic parties from main stream politics

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  • ayesha_khan
    May 8, 2012 - 8:20AM

    @Lateef Khan: “It is 27th largest economy.
    .
    With a little effort, we can be in G20!!!”

    G20 is based on nomial GDP not PPP GDP. By nominal GDP, Pakistan is 46th.

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  • You Said It
    May 8, 2012 - 9:09AM

    @Lateef Khan:
    South Korean GDP is also similar to Pakistani in size.

    I think you mean North Korea.

    Pakistani economy is larger in size than New Zealand!

    You forgot to mention that NZ has a population less than that of Faisalabad.

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