Investment policy and way forward
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While the final approval of the $3 billion IMF loan and another $10 billion from other sources, including friendly countries and international organisations, ensure that Pakistan can meet its external payment obligations for 2023-24, there are serious worries about the future beyond the current financial year.
We need at least $30 billion annually for international debt servicing in the foreseeable future. Therefore, the question on everyone’s mind is how future governments will be able to meet their payment obligations in the years to come.
Many expect that the next incoming government will have to enter into immediate negotiations with the IMF for another much bigger loan of $12-15 billion. However, as evident from the protracted negotiations for the standby loan, it will not be easy. The IMF is going to ask for much deeper reforms.
Similarly, how friendly Gulf countries held out from paying any additional support funds until the IMF first approved the agreement shows that they are also unwilling to extend any further loans unconditionally.
The Gulf countries will also ask for a much higher price for future loans. Their demands will likely be a replica of what they are doing in Egypt, whose economy is equally bad. One of the major demands is getting controlling shares in various state enterprises.
Considering the political instability and being at the end of its term, the government was not able to undertake any long-term structural reforms. Nevertheless, it has taken some measures to attract investment from the Gulf countries.
Two of the recently announced initiatives, the Pakistan Investment Policy 2023 and Green Pakistan, seem to be part of this policy.
The key features of these policies include removing the minimum equity requirement for foreign investment, except in a minimally restricted sector.
Foreign investors can repatriate their profits in their currency and receive special protection. Restrictions on land leasing and transfer for foreign investors have been lifted, and there will be no differentiation between foreign and domestic real estate developers.
Foreign investors can have a 60% stake in agricultural projects and 100% equity in corporate agricultural farming. The new policy aims to increase the net foreign direct investment (FDI) ratio from 15% to 20%.
These new initiatives are in addition to various safeguards provided under the legislation enacted in August 2022 for government-to-government (G2G) agreements.
After having leased out some berths at the Karachi Port to Abu Dhabi, the government has decided to lease out Islamabad airport on a public-private partnership basis for 15 years.
It is looking at various airports to see which can be leased without too many difficulties. This is likely to be followed by leasing out of Karachi and Lahore airports. The government is also in the process of leasing out land for corporate farming.
While the private sector foreign management ownership can result in higher productivity and partially meet foreign funding requirements, the government should also exercise caution because so far most of the foreign investment is targeting the highly protected domestic service sectors with limited competition.
They have yet to show interest in our loss-making state-operated service sectors, such as PIA, railways, or energy distribution companies. It would be better if the government also privatises these loss-making enterprises.
At the same time, it should be ensured that there is no discrimination between domestic and foreign investors in terms of any tax or other concessions.
In the medium to long run, we will also need to involve the general public through share offerings. However, this can only happen if the rate of domestic savings can be improved substantially and those funds can be channelled into investments. Only then will we be able to reduce the current account deficit effectively.
While encouraging investment, the government should keep in mind that it should not be wholly inward-looking but should also focus on increasing exports. The dual strategy of attracting foreign investment and raising exports has been the success story of other developing countries.
While the PML-N government can be credited with several achievements for stabilising the economy during its previous tenures, exports have never been an area where they could claim any success.
In fact, during each of their tenures, export volumes declined in absolute terms and as a percentage of GDP from when they took over and when they left. This is no coincidence but a result of following regressive taxation policies, including a big rise in customs duty rates. To facilitate the incoming FDI and boost exports, the new government needs to make an effort to achieve a paradigm shift from the existing inward-looking to outward-looking policies.
The writer is currently serving as an international trade disputes arbitrator. Previously he has served as Pakistan’s ambassador to WTO and FAO’s representative to the United Nations at Geneva
Published in The Express Tribune, July 24th, 2023.
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