An uncomfortable reality check

It is imperative for policymakers to look beyond superficial observations

The recent news of a leading oil marketing company’s decision to leave Pakistan has created a stir in the country. While some attribute this to the current economic environment, the underlying factors are far more intricate and pervasive than they appear on the surface. This issue permeates not just the petroleum sector, but the entirety of Pakistan’s industrial fabric. Now, more than ever, it is essential for policymakers to look beyond superficial observations and grapple with the layered realities shaping investors' decisions.

As it stands, Pakistan is facing an economic crunch unlike any in its history. An alarming balance of payments crisis, political unrest, and catastrophic floods have all dealt heavy blows to the nation’s finances. The economy crawled at a growth rate of just 0.29% in the fiscal year 2023. The three pillars of the economy – agriculture, industry, and services – are all feeling the pinch, with the industrial sector recording a contraction of 2.94%, fuelling a rise in unemployment. This downturn coincides with high inflation, stubbornly hovering at 29% within the fiscal year’s first ten months.

This economic downturn, coupled with record fuel prices, has led to a slump in oil sales. The devaluation of the Pakistani Rupee that led to massive exchange losses, issues in opening Letters of Credit (LCs), and an environment where fuel prices are stringently controlled by the government have all created a harsh landscape for oil companies. Many, including Shell, have recorded substantial losses, with Shell registering a staggering net loss of Rs4.7 billion in the first three months of 2023.

However, attributing Shell’s decision to leave merely to recent economic conditions oversimplifies the situation. A complex interplay of factors, such as the long-term strategy of its parent company, likely influenced its decision. However, regardless of the reasons, Shell’s exit underlines an alarming trend. Recall that Italian oil giant Eni, after two decades of operation, and Singapore-based Puma Energy both left Pakistan within recent years. Back in April, the Secretary of the Petroleum Division told a National Assembly Committee that only three foreign companies were left in the oil and gas sector.

The environment for all oil companies is challenging. Petroleum product prices are generally tightly regulated, credit lines have shrunk in the past few years while working capital requirements have gone up, and the omnipresent government dominates every aspect of the industry. State-owned petroleum companies monopolise the spaces that, in a free and fair market, should be held by the private sector, fostering inefficiency and complacency.

The SOEs’ dominance has muffled the industry’s lobbying power for more favourable government policies that are also sustainable. This lack of policy support restricts the industry’s potential for innovation and growth. Advancements in technology, research and development, human capital cultivation, and facility modernisation are all stifled. Similarly, the building of Environmental, Social, and Governance (ESG) capabilities is impeded.

Moreover, red-tapeism continues to hurt the petroleum industry, especially the private-sector operators, and despite potential investors waiting in the wings, the business climate remains unfavourable.

Saudi Aramco, the world’s largest oil company, has expressed interest in developing an oil refinery in Pakistan with an investment of tens of billions of dollars. Similarly, local oil refineries have shown interest in expanding their capacities. This illustrates that both domestic and foreign investors recognise the potential of the Pakistani market.

On a broader spectrum, the struggle to attract foreign capital isn’t confined to the petroleum sector. Other areas, especially manufacturing, face similar issues, deterring not just foreign but also domestic investors.

The need for Pakistani policymakers to introspect has never been more vital. The questions are tough. Why are the promised investments not materialising into actual financial commitments? Why are foreign investors exiting despite the apparent potential? Why are local investors gravitating towards real-estate rather than putting their wealth into more productive sectors? What is hindering them from establishing new factories or expanding current capacities?

Finding solutions to issues like these is no easy task. The political instability and the absence of consistent and favourable policies have played a role in this complex situation. The deficit in digitisation, particularly in the financial sector, and the bureaucracy with its superfluous roles and regulations contribute to the problem. The scarcity of constructive dialogue between the state and industries, compounded by the government’s inclination to maintain strict control and regulate prices, exacerbates the issue.

Policymakers might wish for straightforward solutions, but such quick fixes are illusory. These multifaceted challenges necessitate equally comprehensive solutions – there’s no room for shortcuts. It’s incumbent upon the policymakers to acknowledge this truth and focus their efforts on formulating comprehensive policies that are conducive to progress. The sooner they do, the better it will be for Pakistan’s economic future.

The writer is a corporate consultant who writes on subjects of business and economy, specialising in the oil sector.