- Inconsistent regulations, security issues, and red tape: key challenges foreign investors face in Pakistan’s business environment
Pakistan, with a population of over 250 million people, is a country with a rich cultural heritage, diverse landscapes, and lots of potential to grow. Pakistan’s business and investment landscape poses considerable challenges, according to investors. Complex and inconsistent regulations, inadequate protection of intellectual property rights, and ever-changing taxation policies are some of the many business climate challenges cited by investors. Security concerns marked by internal and regional conflicts also undermine investors’ confidence in the protection and profitability of their investments.
Pakistan’s economy remains fragile with weak macroeconomic indicators, hindered by a dependence on imports, low rates of foreign direct investment (FDI), and long-standing difficulties attracting FDI. The business community cites persistently high inflation, red tape, weak rule of law, corruption, political uncertainty, and security concerns as among the difficulties of doing business in Pakistan. Pakistan came close to defaulting on its external financing obligations in June 2023 after failing to meet the requirements of its IMF Extended Fund Facility. The Pakistani government and IMF subsequently agreed to a nine-month (July 2023-April 2024) $3 billion Stand-By Arrangement (SBA) to relieve the immediate economic crisis. Fiscal stability, economic growth, and attracting foreign investment were and continue to be top priorities for Pakistan’s caretaker government (August 2023-January 2024) and current elected government, which took office in February 2024. The government successfully completed the IMF SBA in April 2024.
In the fiscal year 2023-24, Pakistan missed GDP growth target and achieves 2.38% as against the projected growth rate of 3.5%, with growth in the agriculture sector which expanded by 6.25% as compared to 2.27% growth in last year. While both the industrial and services sectors grew by 1.21%. The investment-to-GDP ratio for FY 2024 remained 13.14%, a decrease from 14.13% in FY 2023. The Gross Fixed Capital Formation (GFCF) stood at Rs 12,122.5 billion, an 11.4% increase over the FY 2023. Both private and public investments grew by 15.8% and 18.2%, respectively. However, the national saving rate remained stable at 13.0%.
Despite limited integration into the global value chain, Pakistan’s economy remains sensitive to economic fluctuations in its major trading partners. The economic condition of these partners is assessed using the weighted average of their Composite Leading Indicators (CLI). Since the second half of 2023, the CLI positions of Pakistan’s main export markets, including the UK, US, China, and Euro Area countries, have consistently expanded.
The cyclical nature of Pakistan’s manufacturing sector plays a pivotal role in shaping the overall economy, as it is closely linked to the CLI of its major trading partners. Fluctuations in manufacturing output have a cascading effect on other economic sectors. In FY 2024, despite minor positive growth, the LSM sector showed resilience and signs of recovery compared to last year, leaving no offsetting impact on the overall economic growth.
Technological advancements are occurring rapidly in advanced economies, particularly in the major trading partners. The role of AI in boosting productivity and economic growth is widely discussed to spur its actual benefits. Though emerging economies lag in this race. The global economic downturn is dissipating, and international growth is showing signs of recovery, according to IMF’s World Economic Outlook for 2024. However, significant risks persist due to geopolitical tensions, such as the ongoing conflicts in Ukraine and Gaza, coupled with differences in reduction in inflation across major trading partners. These factors will likely affect the external sector and growth prospects in Pakistan. Despite a slight decrease in global inflation, these risks could exacerbate pressures on international prices, potentially leading to currency depreciation, fluctuations in commodity prices, and increase in production cost. Moreover, stringent financial conditions globally, particularly in key trading partners, may lead to heightened capital outflows from the country.
It seems that the Government of Pakistan is focused on maintaining a stable economy by prioritizing exports and investment. It is expected that by FY 2027 the growth is anticipated to reach its medium-term potential of 5.5%. A critical part of this strategy is to increase openness in trade and investment flows to ensure industries have access to the required raw materials. The government has taken steps to control speculation in the foreign exchange market to reduce uncertainty in the external sector. It is notable that by following suitable policy measures, improved agricultural output, and administrative actions, inflation decreased to 11.8% in May 2024 from its peak of 38.0% in May 2023. The government is aware of macroeconomic trends and is fully committed to ensuring sustainable economic growth in the medium term. To achieve this, sector-specific measures in agriculture, industries, and services, along with fiscal consolidation, energy sector reforms, state-owned enterprises, and governance reforms, are being implemented to move the economy towards higher and sustainable growth. Both federal and provincial governments are working together to achieve medium-term growth targets with price stability, demonstrating a dedication to sustainable economic growth. The world economy is bouncing back from the challenges brought on by the pandemic and the Russia-Ukraine conflict. Key trading partners are experiencing economic growth, and global supply chain disruptions are anticipated to diminish by 2024. Consequently, the industrial sector is expected to witness improvements in FY 2025. Thus, improvement in the commodity-producing sector will be translated into the services sector with its backward and forward linkages. In addition, improved business confidence from different government initiatives along with a stable exchange rate will enhance domestic production reducing supply chain distortion and therefore help in maintaining price stability. The inflation rate is projected to normalize due to the high base effect, improvements in the agricultural sector, and favorable global conditions.
Government’s bearing
In 2023, the Government of Pakistan introduced a new “Investment Policy (PIP)” that aims to boost investment and hence to improve the investment climate by maintaining liberal investment policies and facilitating investors on all stages of their investments. According to the PIP, Pakistan seeks to become a destination of choice for FDI in the region through five investment strategies:
- Increase economic complexity
- Creation of high-value jobs
- Extend domestic linkages
- Develop new and existing clusters
- Improve inclusivity
Pakistan’s investment promotion agencies are the Board of Investment (BOI) and the Special Investment Facilitation Council (SIFC), are responsible for attracting investment, facilitating local and foreign investors, implementation of projects, and enhancing Pakistan’s international competitiveness.
The SIFC’s scope has expanded considerably since its enactment including serving as a clearing house on a wide range of policy reforms. The SIFC’s investment promotion mandate mirrors BOI, which has garnered confusion and criticism from businesses and Pakistani civil society.
Hindrances in foreign investments
Addressing the challenges hindering foreign investments in Pakistan requires a multi-faceted approach, encompassing political stability, security enhancements, anti-corruption measures, infrastructure development, trade reforms, and skill development initiatives.
By implementing these corrective measures, Pakistan can enhance its attractiveness as an investment destination, unlock its economic potential, and pave the way for sustainable growth and development in the country.
Challenges
Political and economic instability: One of the primary reasons deterring foreign investors from Pakistan is the prevailing political and economic instability. Inconsistent policies, frequent changes in government, and uncertain regulatory frameworks create an environment of uncertainty, making it risky for foreign investors to commit their capital.
Security concerns: Pakistan has been grappling with security challenges, including terrorism and political unrest, which pose a threat to businesses and investments. The perception of insecurity has deterred foreign investors from considering Pakistan as a viable investment destination.
Corruption and red tape: Rampant corruption and bureaucratic hurdles in Pakistan have made it difficult for foreign investors to navigate the regulatory landscape. Lengthy procedures for obtaining permits, licenses, and approvals increase the cost of doing business and discourage foreign investments.
Infrastructure Deficiencies: Inadequate infrastructure, including power shortages, inadequate transportation networks, and limited access to utilities, hinders the smooth operations of businesses in Pakistan. These deficiencies not only increase operational costs for foreign investors but also impact the overall investment climate.
Limited market access: Pakistan’s market size, though substantial, faces challenges due to trade barriers, high tariffs, and non-tariff barriers. Limited market access restricts the growth potential of foreign investors, leading them to explore alternative markets with more favorable trade conditions.
Skill gaps and human capital: The availability of skilled labor is essential for attracting foreign investments, but Pakistan faces skill gaps and shortages in key sectors. The lack of a skilled workforce hampers productivity and innovation, making it less attractive to foreign investors.
Corrective measures required: Political Stability and Policy Consistency: Ensuring political stability and consistency in economic policies is essential to build investor confidence. The government must introduce long-term policies that provide certainty and predictability for foreign investors.
Enhanced Security Measures: Improving security infrastructure and implementing stringent measures to combat terrorism and ensure the safety of businesses and investors can help alleviate security concerns.
Anti-corruption reforms: Implementing robust anti-corruption measures, enhancing transparency, and simplifying procedures to reduce red tape can improve the ease of doing business and enhance the investment climate.
Infrastructure development: Investing in infrastructure projects, such as energy generation, transportation networks, and digital connectivity, is crucial to create a conducive environment for investment. Improving infrastructure will reduce operational costs and enhance the efficiency of businesses.
Market access and trade reforms: Promoting free trade agreements, reducing tariffs, and eliminating trade barriers can expand market access for foreign investors. Creating a more liberal trade environment will attract foreign companies looking to leverage Pakistan as a gateway to regional markets.
Focus on education and skill development: Investing in education and skill development programmes to bridge the existing skill gaps and enhance the quality of the workforce will make Pakistan more competitive in attracting foreign investments. Collaboration with educational institutions and industry stakeholders can help align skills with market demand.
The author, Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at nazir_shaikh86@hotmail.com