Inviting investors: country must tread carefully

Govt should send right signals to investors by removing red tape, archaic regulations

ISLAMABAD:

Pakistan has received the much-awaited loan tranche from the International Monetary Fund (IMF) but the country’s economic situation is still precarious.

Although forex reserves for the week ended September 2 climbed 14%, they show a modest improvement in import cover from 1.5 months a few weeks ago to 1.6 months, data released by the State Bank of Pakistan (SBP) shows.

Inflation remains elevated and the country’s current account deficit has stayed high at over $1.2 billion for July, as per the latest reports of the Pakistan Bureau of Statistics (PBS) and SBP. The catastrophic floods have dealt a devastating blow to the economy, with losses expected to climb to over $40 billion, according to the National Flood Response Coordination Centre’s estimates.

During these difficult times, the government has been trying to lure investors, both local and foreign, towards various sectors in the hope of creating jobs, spurring economic recovery, and achieving sustainable growth. Reportedly, Saudi Arabia, Qatar and the UAE have shown interest in various ventures while local investors are also examining potential projects. It may, however, take some time before the actual investments materialise.

To expedite the process and move beyond the MoU signing phase, the government must send right signals to investors by removing the bureaucratic red tape, eliminating archaic and outdated regulations, and introducing business-friendly policies.

To this end, the government has identified the oil refining industry as one of the key areas where it wants to bring investment and is reportedly close to finalising policy recommendations. This makes sense, considering the critical role oil refiners play in the energy landscape and their potential to deliver substantial forex savings through increased production of petrol and diesel.

A new oil refinery policy has already been finalised and the government seems prepared to completely deregulate fuel prices to make this sector more attractive for investors as well as more competitive. This will be a big step in the right direction, as I have discussed in previous columns, but the policymakers must tread carefully. Missteps can be costly.

At this time, the legislators, policymakers and government officials could be at the receiving end of intense lobbying by those who may seek to maintain the status quo and resist changes such as the deregulation of fuel prices.

In the context of Pakistan’s fuel market, the deregulation refers to petroleum product prices being set by demand and supply fundamentals, not the government which will focus on collecting taxes, as practiced in many developed and developing countries. The deregulation of fuel prices will reduce the government’s encroachments on the functioning of the oil market, making it more lucrative to investors and resulting in greater competition. Over the long run, the deregulation should stimulate growth in the petroleum industry, encourage innovation, eradicate rent-seeking business practices, and reduce prices for consumers.

However, some key players within the oil sector have been resisting deregulation and other policy changes. Although the government should consult with all stakeholders and address their concerns, it must not lose sight of the big picture (bringing substantial capital to the petroleum industry). The government while protecting the vested interests of a select few at the expense of the larger industry can jeopardise future projects, like the establishment of a new oil refinery or expansion of an existing facility.

The government must commit fully to increasing competition in the petroleum industry. A half-hearted attempt likely won’t yield positive results. For instance, the new oil refinery policy is expected to encourage existing companies to upgrade and expand plants and new players to develop state-of-the-art facilities. But in doing so, the policymakers shouldn’t dictate which technology or equipment a refiner should install in order to avail certain benefits laid out in the new policy.

Instead, the government should set product quality and environmental standards and then let the industry decide what they need to do to meet those. At the same time, as the government takes a step back from the market through deregulation, it should empower regulators to ensure competition remains healthy, collusion does not occur, no company uses its market share to exploit consumers and all market participants comply with environmental, health and safety standards while meeting product quality requirements.

Pakistan has already seen how deregulation can lift an industry to a whole new level, which eventually benefits the consumers.

Around two decades ago, the government deregulated the telecom industry, triggering a revolution in the sector. Domestic and foreign companies invested billions of dollars, nationwide telecom infrastructure was developed, and tens of thousands of new employment opportunities opened up.

With deregulation and supportive policies, the government can bring a similar revolution to the petroleum industry, which should have a positive effect on the economy.

The writer focuses on subjects of
business and economics, specialising in the energy sector

 

Published in The Express Tribune, September 26^th, 2022.

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