Pakistan's latent investment
potential By Syed Fazl-e-Haider
QUETTA - Despite the country's weakened
reputation with foreign companies as a result of
continued political uncertainty and a perceived
threat from Islamic extremism, Pakistan's economy
has latent potential and has begun to reward
foreign investors brave enough to enter.
Recent growth numbers have been strong,
and Pakistan offers a strategic location and the
incentive of high profitability. Given that
government incentives to investors include a
provision, rare internationally, to allow 100%
equity, it becomes less surprising that official
sources mention 700 foreign companies already
operating in Pakistan and
making double-digit returns. Recent encouraging
signs in manufacturing and IT outsourcing have
further strengthened Pakistan's case.
Industries which offer promising
opportunities for investment include telecom, IT,
agricultural industries, engineering,
construction, power, oil and gas exploration,
fisheries and food processing.
Pakistan's
total labor force is estimated at about 46
million, and the hourly wage rate further boosts
the country's competitiveness, as it is only 37 US
cents, lower than India (58 cents) and China (67
cents). Investor confidence in the Pakistani
economy has been helped by continuity in
government policies over the years. Signs of this
confidence include the oversubscription of euro
and Islamic bonds in the international market.
Pakistan's major sources of foreign direct
investment (FDI) have been the United States, the
United Kingdom, the United Arab Emirates and
Japan. The principal sectors attracting FDI thus
far are financial services, oil and gas
exploration, power, trade, transport, storage and
communications, chemicals, pharmaceuticals and
fertilizers and textiles.
The American
Business Council of Pakistan recently estimated
total US investment in Pakistan at roughly $1
billion. In FY2004, major US investments were
concentrated in oil and gas exploration; textiles;
storage, transport and communications; trade; and
construction.
Manufacturing Pakistan's
manufacturing sector has been growing at more than
15% a year. The growth in large-scale
manufacturing (LSM) picked up in the 2003 fiscal
year and contributed more than one-fifth of GDP
growth. LSM production increased by 14.7% in the
first seven months of FY2005, compared with a
15.1% increase in the same period of FY2004.
The robust growth, led by sugar,
automobiles, electronics and cement, was
attributed to a strong recovery in investment in
the sector and continuing high demand. A sharp
increase in the flow of credit to the private
sector in the first nine months of the current
year indicates that the high growth of the
manufacturing sector is broad-based and
sustainable.
Vehicles are a notable bright
spot; Pakistan has witnessed a rapid growth in
domestic automobile manufacturing over the past
five years. Major automakers such as BMW, Toyota
and Honda have invested in manufacturing
facilities in the country; Honda has also built
two motorcycle factories. In FY 2002-03, real
growth in manufacturing was 7.7%. In the 12 months
ending June 30, 2004, large-scale manufacturing
grew by more than 18% compared to the previous
12-month period.
Another industrial
investor was Drillcorer Ltd, a British firm, which
moved production of its drills to Pakistan,
enabling the company to charge 15,000 pounds
sterling(US$26,186) rather than the 65,000 pounds
that would be required if they were produced in
Britain.
Overall, the growth in industrial
output, including the private sector, has
accelerated. With present government policies
aiming to diversify the industrial base and
bolster export industries, Pakistan could yet
become a manufacturing hub for Western companies
interested in exporting goods to the region.
Information technology Owing to
a combination of favorable economic circumstances,
Pakistan has been identified by major global IT
corporations as a new offshore investment
destination.
An indication of this was a
meeting between Pakistan President General Pervez
Musharraf and Microsoft chairman Bill Gates on the
sidelines of the World Economic Forum in January.
Musharraf noted that the effective use of IT was
fundamental to Pakistan achieving its strategic
economic objectives. "With its large domestic
market and strategic location, Pakistan could be
used as a hub for Microsoft initiatives in Central
Asia and Afghanistan," the president said. For his
part, Gates discussed possible areas of
Microsoft-Pakistan collaboration and investment in
the country's promising IT sector.
With an
export target of $72 million set for FY 2005-2006,
Pakistan is currently working hard to catch up
with its giant neighbor in software development
and business process outsourcing. Fifty-five
foreign IT and telecom companies have already
entered the market. In Pakistan's favor is a
tax-free policy for IT industries; India's high
attrition rates and recent decision to tax the
software sector have forced many overseas firms to
look at other options.
One IT success
story is Tech Logix Pakistan Pvt Ltd, one of
Pakistan's first few software exporters, which
gets 95% of its business from US customers. The
company had $8.2 million in revenues in 2004. It
brings in business through a front office in
Boston while back-office development is done by 90
software developers in Pakistan. The company
counts General Electric and Massachusetts Mutual
Life Insurance Company in the US as its biggest
clients.
The country is considered as an
attractive venue to set up service centers. In
2004, a global consulting center for NCR
Corporation was established in Islamabad to
provide services to clients all over the world.
Canadian telecommunications equipment manufacturer
Nortel is also planning to set up a software
development center in Islamabad.
Communications Some recent
high-profile investments have occurred in the
communications sector. One of these was a February
agreement between Infosat Communications of
Canada, a Bell Canada Enterprises (BCE)
subsidiary, and Comstar ISA Ltd, the leading
satellite service provider in Pakistan, to install
and operate the first Broadband Satellite Hub in
the country, which will provide broadband, 18Mbps
megabits per second Internet and other services to
subscribers around the country. The initial
investment from Infosat will be gradually
increased, company officials said.
In
remarks on the deal, Canadian High Commissioner to
Pakistan David B Collins acknowledged that
Pakistan was a very good destination for investors
and said Canadian businessmen would soon be
visiting Pakistan to explore opportunities.
Infosat senior management visited Pakistan
in 2005; the general manager of Infosat said that
Pakistan had been selected as the next Infosat
destination because of its market potential,
technology awareness and the current
investor-friendly environment. The agreement
reflected growing investor confidence in Pakistan
as a viable market for value added communications
services.
In Barcelona, Spain on February
13, Pakistan received a "Government Leadership
Award 2006" for its exceptional development and
progress in the field of mobile telecommunications
from the Global System for Mobile Communications
Association (GSMA).
Pakistan was the
second country after Brazil to receive this honor,
which recognized the nation's rapid progress in
mobile telephony; the number of mobile subscribers
in the country has increased from 2 million to 20
million in the last five years alone.
Rob
Conway, CEO and board member of the GSM
Association, remarked at the association meeting,
"The GSMA is delighted to recognize Pakistan for
its work in mobile communications. In a short
period of time, the government has established a
strong and clear policy framework and a stable
regulatory environment. Its deregulation policy
has been successful in stimulating growth in the
mobile sector and, most importantly, bringing
mobile phones within the reach of ordinary people
of Pakistan."
The government is expecting
a further increase of 50 million subscribers in
the next three to four years with associated
investments of between $3 billion and $4 billion,
presenting an additional opportunity for telecom
investors.
Exports Pakistan
established its first Export Processing Zone (EPZ)
in Karachi in 1989, with special fiscal and
institutional incentives available to encourage
the establishment of exclusively export-oriented
industries.
The government subsequently
established additional EPZs in Risalpur,
Gujranwala and Sialkot in the Punjab, and Saindak
and Duddar in Balochistan. Principal government
incentives for EPZ investors include an exemption
from all federal, provincial and municipal taxes
for production dedicated to exports; exemption
from all taxes and duties on equipment, machinery
and materials (including components, spare parts
and packing material); indefinite loss carry
forwards; and access to Export Processing Zone
Authority "One Window" services, including
facilitated issuance of import permits and export
authorizations.
Pakistan also offers
incentives for additional categories of export
manufacturing. An Export-Oriented Unit (EOU) is a
stand-alone industrial unit, allowed to operate
anywhere in the country, that exports 100% of its
production. EOU incentives include an exemption
from duty and taxes on imported machinery and raw
materials and duty-free import of two vehicles per
project. Pakistan also has 83 industrial zones
(IZs): 27 in Punjab, 29 in Sindh, 16 in the
Northwest Frontier Province and 11 in Balochistan.
The IZs provide infrastructure facilities but do
not enjoy fiscal incentives like those of EPZs.
The EPZs and IZs have produced results:
the country witnessed 45% growth in exports during
FY2002-2003, according to State Bank of Pakistan
transaction statistics.
Syed
Fazl-e-Haider is a Quetta-based development
analyst in Pakistan. He has contributed articles
to the Daily Dawn newspaper and is the author of
six books, including The Economic Development
of Balochistan, published in May 2004.
(Copyright 2006 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing
.)
