ISLAMABAD, 5 September 2005 — Eight roads lead to larger inflows of foreign direct investment (FDI) into Pakistan, to help it ensure a high GDP growth to feed exports and growing domestic consumer demand.
The “Eight” were identified last week at a conference on barriers to FDI. It discussed a report prepared by Foreign Investment Advisory Service (FIAS), a joint service of the World Bank — International Finance Corporation. Pakistani ministers and the central bank, however, questioned several of its findings. They insisted, an improved investment environment has resulted out of government’s five years of economic and financial sector reforms, deepened and widened especially during the last one year by Prime Minister Shaukat Aziz. Aziz, as finance minister, had initiated them. He completed first year of his prime ministership last week.
The “Eight” proposals to boost FDI inflows are:
• Policy reforms are real, but incomplete. Pakistan’s “business environment is in transition, with many policy improvements.”
“But there are “ many remaining business-unfriendly legacies.” Raising Pakistani investment climate indicators to China’s levels will increase annual sales growth of Pakistani businesses by 8 percent, and raise employment by 3 percent.
• Policy uncertainty remains a critical factor in investment patterns, due to a lack of strategic policy coherence in recent reforms. There are instances of a “special and different treatment” for enterprises with government access. “At least 2.0 percent of corporate operating costs are devoted to ‘speed money’.” Corruption results in a corresponding loss of Pakistani GDP.”
• Although recent legislative reforms were relatively successful”... there is “room” for more, at the provincial level.
• Merely “fist-tier policy improvements are insufficient to sustain economic development unless reforms are deepened.”
• Modern public sector management is a must, and government service delivery to the business community should be improved.
• There is insufficient public sector transparency, intra-departmental information sharing, and e-government, relative Pakistan’s technological capabilities. It results “in rent seeking opportunities and inefficiency within the civil service.”
• Taxes are evaded. “While Security & Exchange Commission of Pakistan has data on 48,000 registered companies, in 2004 just 21,500 of these had a National Tax Number (NTN), and only 13,000 filed tax returns.”
The formal sector, estimated “the cost of administrative procedures at 11-15 percent of overall revenues.
“Administrative compliance represents over 50 percent of operating costs.” Foreign investors-and large domestic businesses — “rely heavily on their connections with officials and on professional services providers.”
• An estimated 21 registration approvals are required — 15 at federal, and 9 at provincial & local levels — to start a business. “Investors devote an average of 397 calendar days to complete these business start-up procedures.”
Top regulatory and administrative barriers include land, finance, tax, business registration & approval, and labor. In a survey, 79 percent respondents said land acquisition and site development is a “barrier” of whom, 49 percent considered it as “severe.” Fifty-seven percent identified “financial regulation and administrative interface” as a barrier, of whom 40 percent said it as “severe.” Fifty-three percent said tax administration is a barrier, of whom 51 percent said it is “severe.” Thirty-eight percent identified business regulation and approval as a barrier, of whom 41 percent said it is “severe. Thirty percent identified labor regulations as a barrier, of whom 36 percent said it is “severe”.
Criticizing several of the “negative perceptions” of the report, Dr. Abdul Hafeez Sheikh, minister for investment & privatization, said, “Pakistan in 2005 is entirely different from what it was five to ten years ago.” Second generation reforms, now underway, focus on strengthening institutions, transparency in economic policy making, improving industrial competitiveness, and building a robust financial system.”
Sheikh said, “there is an increased role of private sector, reforming civil services, and improving physical infrastructure. We want to build Pakistan into a dynamic economy of our region with modernized agriculture, industry, sound education base and advancement in technology.”... “All sectors are open with even 100 percent foreign equity. FDI inflows of $1.52 billion in 2005, are projected to rise to $3.0 billion this year. Most of 600 foreign companies here make 20 to 50 percent profit. “No foreign investment has ever been harmed. These are fully protected under law.”
