Pakistan remains ‘challenging environment’ for FDI

Despite increased, positive rhetoric regarding foreign investment in the country, the incumbent Pakistan Tehreek-e-Insaf (PTI) government has found it slow going in its attempts to broaden the tax base and reform the taxation system as it remained embroiled in the country’s immediate finance needs to offset a balance of payments crisis.

As a result, Pakistan remains a challenging environment for foreign investors despite having a relatively open foreign investment regime.

This was stated in the Investment Climate Statements for 2020 which were released by the US State Department on Wednesday. The statements review the openness to investment, legal and regulatory systems, dispute resolution, intellectual property rights, transparency, performance requirements, state-owned enterprises, responsible business conduct, and corruption in some 170 countries and economies. The report was prepared by American economic officers who are stationed in embassies and posts around the world.

The report on Pakistan noted that owing to the payments crisis it faced, the ruling government had to focus on the immediate needs of the country to acquire external financing through the International Monetary Fund’s (IMF) Extended Fund Facility in July 2019, rather than work on medium to long-term structural reforms.

With that, the report said, the country had made “significant progress over the last year in transitioning to a market-determined exchange rate and reversing its large current account deficit, while inflation has decreased each month of 2020. “

Even though Pakistan jumped 28 places on the World Bank’s ease of doing business ranking, its current position of 108 “demonstrates much room for improvement”.

The report added that even though the government has presented a relatively open foreign investment regime, the country remains a “challenging environment for foreign investors”.

The main reasons for this were an improving but unpredictable security situation, difficult business climate, lengthy dispute resolution processes, poor intellectual property rights (IPR) enforcement, inconsistent taxation policies, and lack of harmonisation of rules across the provinces as compared to regional competitors.

The report also noted that the US, which was consistently one of the top five sources of foreign direct investment (FDI) in Pakistan over the past two decades, saw China overtake it in 2019, largely due to the China-Pakistan Economic Corridor (CPEC). Moreover, data contained in the report showed that during the corresponding period, US investments in Pakistan fell from $386 million in 2018 to just $88 million in 2019.

However, over the past year and a half, US corporations have pledged more than $1.5 billion in direct investments in Pakistan in the fast-moving consumer goods, financial services, franchising, information and communications technology (ICT), thermal and renewable energy, and healthcare services.