Can the PML-N, the first party in the ruling coalition, motivate and mobilize its political base of traders and industrialists to rise up, take risks and surprise the nation by investing more than before against all odds to prove that they have mastered their skills and demonstrate their confidence? in democracy and the future of the country?
If the elites so choose, they can tap into the vast pool of idle private funds earmarked for innovation, industry, productivity and competitiveness to accelerate the rate of capital formation, reduce import dependence, boost exports, create jobs and ensure higher GDP growth. So far, these floating funds in private hands are believed to be responsible for creating a real estate bubble and distortions in the commodity, currency and capital markets. These funds often land abroad and sometimes get lost in the air (housing fiasco in Dubai, etc.).
Without greater investment, it would be difficult for businessman-turned-Prime Minister Shehbaz Sharif and the ruling coalition to justify the removal of the PTI government (before their term ends in 2023) and the economic cost of the political turmoil in the current context. times globally. The electorate shows little pity for those who cause them misery. Moreover, it would be foolish to assume that Pakistani love for democracy is absolute or unconditional.
Most business leaders were furious and former occupants of key economic positions seemed diplomatic. Pakistan has one of the lowest savings and investment rates in the world. Over the past decade, this rate has fluctuated between 14 and 16%, except in 2017-2018, when it hit the 17% mark. In India and Bangladesh, the investment rate is about twice that rate.
FDI seeks the market, expects a quick return on investment at relatively low risk, almost never favors exports and results in a net outflow of capital. Also, how realistic is it to expect FDI when residents are not investing?
Shaukat Tarin, former finance minister, offered a measured response on the question of investment prospects keeping in mind the habits of Pakistani investors. Mildly critical of the chaos created by the early fall of the last government, he disliked the perpetuation of the culture of clientelism. “Investments increase with political stability and a long-term policy framework in place. In addition, we must work on our savings rate. The market distortions we create by offering undue benefits to rent seekers do not help the economy in the long run.
Salim Raza, former governor of the State Bank, attributed the low investment in desirable sectors to misplaced preferences. “A constant ‘leakage’ of our investment potential concerns non-productive land investments, commodity gambling and loans in the informal market. This results in a phenomenally high cash-to-deposit ratio, 42%, while hardly any country exceeds 20%, and developed countries, including China, are in low single digits.
Musadaq Zulqarnain, chairman of Interloop Ltd and associated companies, advocated for the rapid operationalization of special economic zones. “Mobilizing investment is a complex issue. First of all, Pakistan has not been able to have a balanced and sustainable long-term industrial investment policy which it needs apart from other things such as political stability. In addition, structural problems and inefficient energy infrastructure put a lot of pressure on production costs. Another problem is the lack of efforts to improve technical skills and labor efficiency as companies have to compete with tax-evading informal providers.
There is a huge negative incentive in the form of other investment options with the promise of huge immediate returns at zero or very low tax rates like real estate.
“On top of that there is a huge negative incentive in the form of other investment options with the promise of huge immediate returns at zero or very low tax rates like real estate. This makes investing industrial less attractive.As such, private capital is looking for special packages to compete with higher returns in other areas.All of these issues need to be addressed to stimulate capital flows to industry.
Ehsan Malik PBC CEO defended the private sector and criticized Prime Minister Shehbaz Sharif’s budget which penalizes successful businesses. “It is unrealistic to expect a high rate of investment in an environment of inconsistent policies, disproportionate tax burdens, lengthy bureaucratic processes, lack of affordable industrial land, difficulty in securing connections to public services, low labor productivity and a risk-oriented banking system – free loans to the government.
“It has been difficult to raise long-term capital other than through the recent Temporary Economic Refinancing Facility program. Development finance institutions do not exist. The listing of companies is no longer an incentive. The formation of groups to promote scale and broaden share ownership is discouraged by the double taxation of intercorporate dividends.
He lamented the glorification of foreign direct investment (FDI). “Most FDIs are in search of markets, hoping for a quick return on investment at relatively low risk. It almost never favors exports and results in a net outflow of capital. Also, how realistic is it to expect FDI when residents do not invest?
“Foreign investors have a choice of investment destinations. The long-awaited relocation of labor-intensive Chinese industry is heading to Laos, Cambodia, Vietnam and Ethiopia due to their comparatively more attractive environment and facilities. The current budget is certainly not conducive to large-scale investments”.
Several ministers at the head of economic ministries were contacted for their contribution. Their replies were not received on time.
Posted in Dawn, The Business and Finance Weekly, July 4, 2022