Govt needs to charm private sector investors for growth

There are positive feelings across Pakistan in terms of business and economic sentiment. Mind you, the comparison here is not with the 5-6% GDP growth phases we achieved, but with the painful political and economic instability endured over the last two to three years.

There are tangible signs of economic stability in the form of International Monetary Fund's (IMF) bailout, currency stability, falling inflation rate, rising stock market, increase in auto financing, improving forex reserves, prudent fiscal spending, enhanced focus on increasing tax revenues, high-profile investment delegations from bilateral partners, controlled increase in the debt-to-GDP ratio, and sharpest U-turn in interest rates/sovereign bond yields.

However, not everything is perfect. There is a growing group of investors who are now quite apprehensive about making big-ticket investments and need assurance.

In the current independent power producers' (IPPs) restructuring saga, many have reportedly accepted renegotiated terms in the larger national interest, as naturally, high prices of electricity and the burgeoning circular debt will not expand Pakistan's industrial base to create enough job opportunities to propel socioeconomic prosperity.

Nor will the masses be able to absorb such hikes, especially as capacity charges will increase further in a few years due to new capacity and lower demand.

The culprits here are the falling currency rate and three macroeconomic busts in 2018, 2020, and 2023, which have eroded the forecast electricity demand growth needed to absorb new plants. Of course, there are massive shortcomings in improving efficiency in the transmission, distribution, and generation sectors by reducing theft, increasing recovery, and reconsidering the location of power plants.

It seems it was vital to first engage and get local IPP investors to agree to revise their agreed terms to shut down the assets earlier, reduce the return on equity (RoE), lower dollar indexation, and make the abrupt shift from "take or pay" to "take and pay."

There has been a loss for these investors – including minority shareholders of a few listed companies – worth hundreds of millions of dollars, but the bet is that in the long term, this will make Pakistan's economic stability sustainable.

These investors might have been shown their internal rates of return (IRRs) – both in rupee and US dollar – over the past decade and compared to the US Fed rate, Pakistan's PIB rates, currency depreciation, gold prices, and the KSE-100 index, chances are there, they have made good money, which is fair. However, they could have done better by investing in the S&P's "Magnificent Seven" technology companies.

But the truth is that they took a conscious, rational investment bet as per agreed terms with their government. That trust is shaken and will require time and new investors to bridge the gap.

Perhaps Pakistan had to show that the pain being felt by the masses in the form of higher electricity prices is also being felt by high-net-worth investors through lower IPP returns, and to some extent by policymakers with a reduced Public Sector Development Programme (PSDP) – though their perks remain comprehensive – before engaging in talks with China for debt extension and spread reduction.

It is probable that new bilateral investments under the Special Investment Facilitation Council (SIFC) also warranted Pakistanis to make sacrifices on the path to stability before expecting favours (yes, there is no free lunch) to keep the economy sustainable by securing additional debt rollovers and new investments.

Local investors now need to be comforted and shown progress in the area of governance to regain their trust.

It is always the top 1% of the population with an industrial and entrepreneurial mindset that sets up conglomerates, creates jobs, provides tax revenue, and increases exports or reduces imports. After demanding sacrifices, they need to see that the government is absolutely resolute in its commitment to fix the structural issues.

To win this trust, the government must reduce its role in business and provide incentives for the private sector to deploy capital in productive opportunities in exports and import substitution by reducing the cost of capital in terms of land, labour, and taxes.

Pakistan currently has one of the highest energy costs and tax structures in the world with low productive GDP orientation. Western technology giants such as Amazon, Nvidia, Google, Facebook, Microsoft, Tesla, etc are pouring wealth into Asia – across India, Thailand, Malaysia, and Indonesia – while Pakistan is still stuck in a low-growth, low-income country status.

For the private sector to feel more comfortable with policy incentives, policymakers need to privatise loss-making entities such as PIA, Hesco, Sepco, Qesco, Pesco, and other power distribution companies immediately or transfer the burden to provinces or local governments.

Similarly, the pain must also be visible in the vote bank dependent on agriculture, trading, and services – those occupying the assembly positions. Recently, the CFOs showed strong resistance when asked to sign affidavits for tax filing and demanded the FBR to make it a two-way affidavit with tax collectors as well.

It is not all doom and gloom. Within five years, a new set of investors – domestic and global – will find opportunities and start reinvesting. Those passionate about real economy investments, not rent-seeking, will replace those disheartened by the current changes in sovereign agreements.

If the country can truly make this its last IMF programme and work collectively to uplift the base of the pyramid through education, healthcare, technological skills, infrastructure, modern railways, and a competitive energy and tax structure, Pakistan could return to a sustainable growth path of 4-5% per annum in two years.

Under the current leadership, the resolve is clear, and execution seems on the right track. It's time to assure domestic investors, who do not repatriate profits out of the country and seek more incentives and fewer free lunches, to help steer the economy forward. It is always the private sector that leads progress; respect for the compliant ones is well-deserved.

The writer is an independent economic analyst