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Foreign investment in Pakistan.

Foreign Investment in Pakistan

Mr. Shohei Kurihara of The Bank of Tokyo who led the Japanese investors delegation to Pakistan in October 83. *1 "found industrial and economic infrastructure too inadequate and the bureaucratic controls too cumbersome for the Japanese free enterprise" in Pakistan. Mr. Kurihara also did not favour the then military rule and |uneasy calm' on Pakistan borders and considered them as disincentive for economic growth much less the foreign investment. He favoured democracy and cessation of hostilities across the borders in order to attract foreign investment in Pakistan.

The Economy

Despite the inadequacies pointed out and the fears expressed by Mr. Kurihara, Pakistan economy has progressed quite satisfactorily since then. There has been an overall growth in the economy. Average growth in the GDP has been 6% annually. Contribution of the manufacturing sector in the GNP has increased from the then about 14% to over 20%. Crops have been good throughout contributing about 24% to GNP. Yeild in our agriculture is one of the most acceptable in the world. While our imports doubled the exports have grown three times during this period. In 1990 exports increased by 19% while imports by 9.6% in dollar terms. The total foreign trade was 31.18% of the GNP. Pakistan is now No. 1 in export of raw cotton and cotton yarn in the world. We also continue to export rice. We have developed a special variety of rice with Japanese taste and with Pakistani top class |basmati' rice flavour. The import of wheat has gone down to a nominal quantity. We are almost self sufficient in food.

Pakistan has an area of 796,095 sq. km. with roads coverage of 71,091 km. It consists of mountains, valleys and plains. Most of the land is fertile and suitable for growing wheat, cereals, rice, sugar cane, cotton and fruits. There are ample water resources and rich potential for growth of industry, commerce and trade. The country is also rich in mineral resources though mostly lying untapped. The total population by 1990 was 114 million with majority being below 30 years of age. The population growth rate is 3%. Adult literacy is 27% which is planned to be raised to 70% in the next decade. Life expectancy is 55 years. Per capita income has risen to US$ 390.

Since 1947, when Pakistan came into being, we have experienced almost all forms of Government-elected, non-elected, parliamentary system. Presidential system, martial laws and semimartial laws, etc. and are now set on to the federal parliamentary form. The present Government is duly elected under the federal parliamentary form. We believe that democracy alone can bring political stability and social order leading to economic development and prosperity.

The Constraints

It is for the politicians to know the needs and ambitions of the people and set objectives and direction to change the lot of the people. To make it happen is the task of bureaucracy. Our bureaucracy is elite. They are selected on merit through competitive examinations and pass through arduous training and education. They possess a strong value system and sound work ethics. Whenever there has been a change of Government, it is they who have given continuity to the administration. They have, in fact, been our main thinkers, planners and doers. In a reunion of Harvard Business School there was a consensus that wherever bureaucracies were strong the economies were also found strong. Japan and France were named as examples of strong bureaucracies and strong economies. Bureaucracy has an important part to play and I dare say that the Pakistani bureaucracy has been playing its role well.

Despite a stable political system, a high class bureaucracy and abundance of resources, a satisfactory economic development cannot take place unless the country is possessed of talented entrepreneurs. No Government can do everything. Centrally planned and controlled economies have failed miserably. What Government can do effectively must be done by the Government and what the entrepreneurs must do must be left to them. There is no dearth of responsible entrepreneurs in Pakistan. They are as good as any entrepreneurs elsewhere.

Apart from entrepreneurial activities, Pakistani entrepreneurs are conscious of their social responsibilities as well. Several schools, colleges, universities and hospitals have been sponsored by them. The institutions like Hamdard University, Dawood and Adamjee Science Colleges and Habib and Crescent Schools are a class in themselves. I myself being a co-founder of the Lahore University of Management Sciences - LUMS, the first non Ismaili subscriber to The Aga Khan University and a founding member of Alshifa Hospital pride in that these institurin are comparable with any institute of excellence anywhere else. However, despite their best intentions and best efforts no entrepreneurs can claim to meet all the education, health care and other social needs of the community. Pakistani entrepreneurs can certainly claim as pace setters: their role is certainly laudable.

Joint Ventures

We in Atlas believe that whatever be the circumstances we must play our role in the development of economy of the country. The Atlas Group is engaged in Finance Services (investment, insurance, leasing and investment banking), manufacturing (automotive components, motorcycles and lead storage batteries), trading, farming and real estate. It has attracted foreign investment and has concluded four Joint Ventures with Japan, the first being with Honda Motor Company has 20% equity participation for manufacture of motorcycles. The Japan Storage Battery Company Limited with 20% equity for manufacturing lead storage acid batteries. The Bank of Tokyo has joint ventures with us in leasing and investment banking and has taken 20% equity in each of the companies. The Asian Development Bank is the first subscriber of 20% equity in the investment Bank. The Group equity has grown 3 times and sales 5 times with satisfactory record of earning and distribution during 1983-90. Some of the Group companies have been adjudged as |the best' by the Stock Exchange for their performance in overall management, profits and distribution.

The world scenario is changing fast. A new world order is emerging. Soviet Union and the Eastern Europe have already undergone a major change. Warm waters and rich oil resources are under the influence of America. Private initiative is recognized as the effective mens of economic development. Unionism has exploded. Communism is on its way out. Europe, America and Japan would no more be fighting against communism but instead they would be soon fighting among themselves on the economic front, striving for a greater share in the new markets in Soviet Union and Eastern Europe on technological supremacy.

Since its inception Pakistan has been an ally of America. The relationship has been based on the reality of mutual advantages. Keeping in view the new world situation Pakistan has to re-think and reframe its strategies and priorities so as not to lose its befitting link in the new world order.

Role of the Multinationals

Pakistan is at the hub of ancient civilizations of the world. It sits on one of most important trade routes of the world. It has always been a center for exchange of culture and commerce of South and South East Asia and Central Western Asia and Africa. Through our history we have developed deep relations with many European Asian and other countries. With the fast developing communication and opening of world trade and investment, we are well-placed to play a positive role in joint as well as competitive efforts for providing goods and services to meet the growing need of the world community. All said and done, Pakistan has tremendous scope for local as well as foreign investment. The multinationals operations in Pakistan have been a story of success, year after year. They have continued to expand and prosper. Those quoted on Stock Exchanges are regarded as |blue chips'. Their yield is one of the highest in the world. Repatriation of profit is no problem. Pakistani entrepreneurs have done even better. Textiles, cement, leather, sugar and carpet industries are examples of outstanding growth.

During 1990-91 the GDP rose by 6.5%. The overall GDP growth was supported by an increase in agricultural value added of 5.1% and 6.2% in the large scale manufacturing sector. Major Economic indicators are:

2* Major Economic Indicators: Pakistan
Average Annual Rates of Increase (1980-89)
 GDP Industry Inflation Exports Imports
Pakistan (%) 6.4 7.3 6.7 8.5 4.2

Low & middle Income
Developing Countries (%) 3.8 4.5 53.7 5.4 1.4
OECD Countries (%) 3.0 2.2 4.3 4.1 5.1

Source: World Bank, World Development Report 1991)
 1991 1992*
Merchandise Exports $ Billion 6.1 7.2
 % Increase 23.0 20.0
Merchandise Imports $ Billion 8.7 8.9
 % Increase 9.6 2.5
Current Account Balance $ Billion - 1.8 - 0.8
 % of GDP - 4.0 - 1.5

Education and health care however have been some of the constraints in Pakistan as much as in most of the developing countries. Whereas it is basically a government responsibility, it is also a fact that education and health care have been mainly developed through private efforts notably in the developed world like in UK, USA and France. Then there are other fields lying wide open for investment like industrial and economic infrastructure, capital goods industry and hi-tech research and manufacturing which entails a longer gestation period and promise high returns. These include basic industry such as steel, electronics, electrical and mechanical engineering and automotive industry, pharmaceutical, chemicals telecommunication, power generation, dams, dockyards, highways and transportation, etc. In addition we need to expand vendor industry which is of great significance to this country.

From 1947 to mid 1990, however, the foreign investment has come only in 342 units, mostly small in size. In terms of numbers, the leaders have been the USA and the UK with investment in 79 units each. Germany in 30, and Japan and Switzerland in 23 units each. Other countries with relatively large investment during this period have been Saudi Arabia, Canada, Holland, China, Kuwait, Turkey, Sweden, Denmark and Czechoslovakia.

In terms of sanctions for foreign investment in Pakistan, the five year period from mid'85 to mid'90 has not been satisfactory. Total value of such projects was Rs. 37 billion, with foreign equity of about Rs. 4 billion i.e., on average Rs. 800 million a year or only US$30 million a year. Largest foreign investment component in the private sector sanctions has been in the chemical, pharmaceutical and fertilizer projects, followed by electrical machinery and appliances and food, tobacco and beverages sectors and oil, gas and electricity in the public sector. There were negligible sanctions in textiles, petroleum refining, cement, rubber products and metal products and service industries. There was no sanction for foreign investment in leather and footwear or paper and pulp sectors.

Future Opportunities

On the other hand, Pakistan's dependence on foreign aid has been far too long. This has been so despite the fact that studies have shown that foreign aid is very costly affair for the recipient countries in most cases. Many countries, with few notable exceptions, provide aid which is tied to source of procurement and bears relatively higher interest rates. It has been calculated that in many cases after dusting higher prices and interest rates, the net value of aid comes to negative. In my own research contained in my book*3. |Aid or Trade' which was adjudged as the best book of the year by the Writers Guild, I came to this conclusion as far back as in 1970.

Despite the facts that foreign investment was always fully protected and enjoyed high returns, it has been quite small till now. One reason might have been the cumbersome procedures for sanctions etc. causing delays and inconvenience and thus disenchanting the foreign investors or for that matter any investor. It is for these purposes that the Government of Pakistan has come out with specific measures to attract foreign investors. An extract from the "Economic Reforms" produced below clearly speaks for the intentions of the Government to facilitate foreign investment: *4 "Foreign and overseas Pakistanis are now allowed to make new, investments without any prior approval except in a few industries for security and social reasons for which domestic investors also require government approval (these are: arms and ammunition, security printing, currency and mint, high explosives, radioactive substances and alcoholic beverages).

Foreign investors can now own upto 100% of equity in a venture and can purchase equity in existing industrial companies on a repatriable basis.

Remittances of dividends and disinvestment proceeds no longer require the State Bank's permission (except for profits of banks, insurance companies, airlines and shipping companies which are governed by special procedures).

Access to borrowings by foreign companies has been greatly liberalized: no restrictions on foreign borrowing where no Government guarantee is required and much fewer where it is; all restrictions have also been removed on domestic borrowing for fixed investment. They have also been removed for working capital borrowing for those who export more than 50% of their output; others can borrow upto their equity.

Restrictions on the underwriting of shares by foreign bank's branches have been greatly liberalized.

Controls on the operation of foreign currency accounts by non-residents during their stay in Pakistan have been abolished.

There is no limit on equity ownership, employment of foreign nationals, technical fees or royalties. Foreign exchange has been further freed. Rupee has been made fully convertible. Stock Exchanges have been opened without any let or hindrance.

Mr. Saleem Habib who has been elected as President of the Overseas Investors Chamber of Commerce and Industry for successive four terms has aptly described this in his address to the Management Association of Pakistan an extract from which is reproduced below:


"The focus of Dereg and Privatisation measures announced so far is on liberalizing and supporting economic activity in the private industrial sector. Investment sanctions have been virtually abolished for both domestic and foreign investors. Reductions have been made in the non tariff barriers and maximum tariffs. The Government has also announced a program to privatise public enterprises, and already, we have seen implementation of this program..................Financial reforms have been stepped up including the auction of Government securities. Restrictions have been removed on holding of foreign currency accounts and transfer of foreign currency. Shares can be freely owned and transferred to foreigners."

Earlier, Dr. Habib in an address at the World Economic Forum at Geneva *6 Switzerland, declared that no multinational as a member of his Chamber had lost money in Pakistan. They are making profit more and more, year by year and repatriate profits freely. There are over 200 members of the Overseas Investors Chambers of Commerce and Industry.

Present Investment Climate

Japan has been the single largest donor country to Pakistan in the last few years. Pakistan has been the largest beneficiary of The Asian Development Bank after Indonesia in the past few years. World Bank has been quite willing to assist. With free foreign exchange and market mechanism the Pakistan market has become more attractive. There has been a boom on the stock market. Capital market capitalization which stood at Rs. 48.6 billion in 1989-90 rose to Rs. 68.44 billion in 1990-91. It was Rs. 53.89 billion in January'91 and has risen to Rs. 92.00 billion (on 10th November'91). On average two companies are being floated on Stock exchanges each week. The Pakistan Fund of $23 million floated by the Citibank and managed by Morgan Grenfell has been fully subscribed and invested. Credit Lyonnais Growth Fund is in the offing. Some other such enquiries are pouring in regularly. Foreign exchange is pouring in individual accounts. It was US$ 650.0 million in the last 6 months. Price index in the stock market that was 283.49 in June'90 moved to 509 by 4th November. Average yield of the capital market is *7 9.1% against the UK *8 4.7% and Germany's 2.2%.

The Government seems eager to ease constraints at present more than ever before. Denationalization and privatization programme has been initiated on massive scale. All foreign exchange restrictions have been removed. Government priority agenda is dismantling of state capitalism. Various committees have been appointed for resource mobilization, deregulation of controls and increasing productivity of money, men and machines. About 85% of investment allocated in the next plan is in the private sector. Our Government is determined to create the desired infrastructure. Privatisation is in its full swing. It will give a tremendous impetus to the economic growth of the country. Pakistan thus offers perhaps the most attractive terms in the third world for foreign investment.

World Peace Through World Trade

Let us make today a new beginning for stronger business relations of Pakistan with the rest of the world. Let us come closer and work together for our mutual advantages. Let us look forward to learn from each other in marketing, production, productivity, quality and planning through active interaction. You will find it rewarding to come and invest here and live and work with us, produce and sell here and buy and export from Pakistan. Your operations here will strengthen our political, economic and cultural relations with your countries and contribute to world peace and prosperity as all of us work to add value to and enhance our resources. This is the natural necessary outcome of successful business enterprise and management: Let us work together for |World peace through World trade. [Graph omitted]

1*The Daily Muslim, 4th January'84: "Less Infrastructure and more Controls". 2*Exerpt from Financial Times dated November 6, 1991. 3*Aid or Trade By Yusuf H. Shirazi, published by Shirazi Investments Limited Karachi, Pakistan 1970. 4*Economic Reforms - November 1990-September 1991, Ministry of Finance and Economic Affairs, Government of Pakistan. 5*Address by Dr. M.S. Habib at MAP Seminar on 16th October'91: Business Climate in Pakistan. 6*Dr. M.S. Habib's address at World Economic Forum on Pakistan - Geneva: 29-30 September |91. 7*Business Recorder dated 1st November'91. 8*The Economist 12th October, 1991.
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Author:Shirazi, Yusuf H.
Publication:Economic Review
Date:Nov 1, 1991
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