The week in focus
Pakistan’s investment-to-GDP ratio has dropped for three years in a row.
Pakistan’s investment-to-gross domestic product (GDP) ratio has dropped for three years in a row as foreign investors have shied away from pouring money into the country, while domestic banks invested more in government papers.
According to State Bank of Pakistan data, the investment-to-GDP ratio stood at 16.6 per cent at the end of the last fiscal year (June 2010), compared with 19 per cent a year earlier. The decline in investment was mainly in the industrial and services sectors.
Confidence of domestic investors improved following a recovery in consumption demand, which also led to an increase in the demand for capital goods from November 2009. However, capital spending was mainly concentrated in the agriculture and textile sectors, says the State Bank.
One of the major areas where investment is most needed is power and energy. Heavy local and foreign investment in power and gas will ensure uninterrupted supplies to the industrial, agriculture and services sectors.
This in turn will lead to a smooth functioning of industries, catering to the demand of both, domestic and international markets and lead to further investment towards expansion of operations.
According to an expert, the investment ratio in Pakistan is quite low and must be increased to around 25 per cent to power the economy ahead. “The previous government had tried to keep the investment level above 20 per cent and it had pretty much succeeded in achieving that,” he said.
What to do
Suggesting how investments could be given a boost, Head of Equity Research BMA Capital Hamad Aslam said the government needs to make the environment more conducive. The foremost step, according to him, is an improvement in the security condition which continues to hurt the image of the country abroad.
However, other areas where the government can work on include a favourable interest rate, bridging the energy deficit and controlling unessential expenditures. Elaborating, he said low interest rates stimulate credit demand by the private sector and lead to opening of new business ventures and expansion of existing ones. Moreover, a check on government expenditures eases the pressure on the rupee and results in lower or stable interest rates.
In the last 10 years or so, no dams have been built to cope with acute energy shortages and switch from expensive oil-fired power generation to generation based on water.
Corporate tax
In a bid to woo investors, some countries keep the corporate tax rate at a low level and in this regard the example of Ireland, which is reeling from a huge debt crisis as public deficit soared to 32 per cent of GDP, seems to be the most appropriate.
Despite pressure to launch an austerity drive, Ireland has left its corporate tax rate unchanged at 12.5 per cent – a major attraction for investors.
Aslam said Pakistan could not cut its corporate tax rate of up to 35 per cent to a level attractive for investors. “Around 20-25 per cent contribution to the GDP comes from agriculture which is exempted from tax, while the labour force which accounts for another 25 per cent is also outside the tax net. A good number of those who are taxed either shirk their responsibility or pay less by under-reporting incomes. This situation prompts the government to maintain a high corporate tax rate to bridge the deficit in revenues.”
However, it cannot be denied that the government, in order to encourage foreign investors, does allow them 100 per cent repatriation of profits and dividends.
The writer is incharge Business desk for the Express tribune and can be contacted at ghazanfar.ali@tribune.com.pk
Published in The Express Tribune, November 29th, 2010.
According to State Bank of Pakistan data, the investment-to-GDP ratio stood at 16.6 per cent at the end of the last fiscal year (June 2010), compared with 19 per cent a year earlier. The decline in investment was mainly in the industrial and services sectors.
Confidence of domestic investors improved following a recovery in consumption demand, which also led to an increase in the demand for capital goods from November 2009. However, capital spending was mainly concentrated in the agriculture and textile sectors, says the State Bank.
One of the major areas where investment is most needed is power and energy. Heavy local and foreign investment in power and gas will ensure uninterrupted supplies to the industrial, agriculture and services sectors.
This in turn will lead to a smooth functioning of industries, catering to the demand of both, domestic and international markets and lead to further investment towards expansion of operations.
According to an expert, the investment ratio in Pakistan is quite low and must be increased to around 25 per cent to power the economy ahead. “The previous government had tried to keep the investment level above 20 per cent and it had pretty much succeeded in achieving that,” he said.
What to do
Suggesting how investments could be given a boost, Head of Equity Research BMA Capital Hamad Aslam said the government needs to make the environment more conducive. The foremost step, according to him, is an improvement in the security condition which continues to hurt the image of the country abroad.
However, other areas where the government can work on include a favourable interest rate, bridging the energy deficit and controlling unessential expenditures. Elaborating, he said low interest rates stimulate credit demand by the private sector and lead to opening of new business ventures and expansion of existing ones. Moreover, a check on government expenditures eases the pressure on the rupee and results in lower or stable interest rates.
In the last 10 years or so, no dams have been built to cope with acute energy shortages and switch from expensive oil-fired power generation to generation based on water.
Corporate tax
In a bid to woo investors, some countries keep the corporate tax rate at a low level and in this regard the example of Ireland, which is reeling from a huge debt crisis as public deficit soared to 32 per cent of GDP, seems to be the most appropriate.
Despite pressure to launch an austerity drive, Ireland has left its corporate tax rate unchanged at 12.5 per cent – a major attraction for investors.
Aslam said Pakistan could not cut its corporate tax rate of up to 35 per cent to a level attractive for investors. “Around 20-25 per cent contribution to the GDP comes from agriculture which is exempted from tax, while the labour force which accounts for another 25 per cent is also outside the tax net. A good number of those who are taxed either shirk their responsibility or pay less by under-reporting incomes. This situation prompts the government to maintain a high corporate tax rate to bridge the deficit in revenues.”
However, it cannot be denied that the government, in order to encourage foreign investors, does allow them 100 per cent repatriation of profits and dividends.
The writer is incharge Business desk for the Express tribune and can be contacted at ghazanfar.ali@tribune.com.pk
Published in The Express Tribune, November 29th, 2010.