Reversing the decline in investment

Private investment has plummeted sharply during the last two years. In 2009-10 the level of investment fell to the level attained four years ago in 2005-06. Due to the heightened risk and uncertainty arising from the war on terror and suicide attacks in major cities, the ongoing political and economic instability, shortages of power and other infrastructure and increasing costs of doing business due to growing problems of governance, especially corruption, private investment has fallen by as much as five per cent of GDP or Rs750 billion (almost $9 billion) since the peak attained in 2005-06.

Foreign direct investment has plunged even further by over 40 per cent in 2009-10. Last year Pakistan received $2.2 billion in FDI compared to the peak of $5.4 billion in 2007-08. Privatisation flows have ceased completely. Investment flows from the Middle East and the US have fallen the most in the aftermath of the global financial crisis.

The largest drop in private investment – of almost 16 per cent – has occurred in the telecommunications sector.  As the sector has become increasingly saturated and competition is intense, profitability has fallen. The manufacturing sector has experienced a fall of over seven per cent, reflecting, in particular, the negative effects of infrastructure shortages. The only silver lining in the cloud is the upsurge in agricultural investment in response to government policy of raising profitability by pushing up procurement/support prices. Tractors sales are up by 21 per cent and imports of agricultural machinery are up by 50 per cent. This augurs well for the future trends in production of major crops.

Beyond the non-economic reasons relating to security and governance, investment has been hit by the sharp rise in capital costs of projects, based on imported machinery, of over 40 per cent in the last two years, due largely to the devaluation of the rupee. Interest rates on advances to the private sector for machinery have shown a rising trend approaching 13 per cent recently, as compared to a low of four percent in 2005.

What needs to be done? First, there must be continuous dialogue of the government with representative institutions of the private sector. As a confidence-building measure, medium-term development plans should be finalised in consultation with the private sector. Second, fiscal incentives should be offered. The 10 per cent investment tax credit granted in the recent budget is largely redundant in the presence of accelerated depreciation allowances. Instead, the customs duty on imported machinery should be rationalised and new projects exempted for a number of years from the one per cent minimum income tax on turnover. Special tax breaks should also be offered for investment in self-generation of power.

FDI will, of course, only return when Pakistan ceases to be generally perceived as a high risk and a high cost location. Meanwhile, we will have to focus on the revival of domestic private investment.

Published in The Express Tribune, August 28^th, 2010.

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���ܬo be ethical and not hypocritically righteous.”

South to Karachi, where land and other mafias, associated with the varied political parties (mostly coalition) day after sickening day gun down rivals, on occasions bringing to a standstill economic activity already on the rocks.

In remote Islamabad, those un-exotic creatures known as politicians, manicured and pedicured, sit in their gilded plush drawing rooms ‘meeting’ whilst their constituents wade neck-deep through the ravaging waters of nature’s (as opposed to democracy’s) revenge.

Published in The Express Tribune, August 28^th, 2010.