Five reasons to invest in Pakistan, according to the official website of the Board of Investment include; geo-strategic location, population and workforce, economic outlook, investment policy and special economic zones.
World over, special economic zones are typically a means to attract foreign direct investment into an economy. Export Processing Zones are an off shoot of this concept and there are a handful of EPZ in Pakistan in Karachi, Gujranwala, Sialkot and Risalpur. In Pakistan, SEZ refers to zones that facilitate industries that target the domestic market.
Manufacturers in the export processing zones are thus allowed concessions on imports of machinery and inputs so they may export their output from Pakistan. For this purpose, the EPZs are legally outside the purview of Pakistan Customs. The only proportion of their sales that falls within Customs purview, are sales in the domestic market.
Now lets move on to the SEZs. The Special Economic Zones Act was promulgated on September 13, 2014. Although its rules were devised later in the same year, the legal possibility has yielded no mentionable results on the ground so far. And the hurdle is seemingly, a legal lacuna.
That Act relies on similar legal verbiage as the EPZ Act, so it declares SEZs outside the territories where Pakistan Customs functions. As a result, all domestic sales by companies in the SEZs would be considered imports to the country. The result would be pricey propositions for local buyers and hence, lack of competitiveness in the local market.
Proponents of SEZs, including business groups with prospective foreign partners contend a simple fix; declaring the zones within jurisdiction of Pakistan Customs. Purportedly, there is agreement from Finance Minister Ishaq Dar and other key government stakeholders, to make the necessary change. However, the fact remains that so far, words are all we have and no change has been made to the law.
The real question is about intent. What does the Government of Pakistan hope to accomplish with the SEZs? If the purpose of the zones is a one-time exemption on import of machinery, for manufacturers who then sell in Pakistan; a stroke of the pen can set that in motion. In fact, in its current form it may entail perks on imported raw materials as well.
Within the region, Indonesia, Malaysia, Philippines and India have successfully implemented SEZs to gain precious foreign exchange. In all these countries, the perks are primarily extended to export-oriented industry. In India, the Special Economic Zones became law in 2005. Since then, exports from the SEZs have risen to a quarter of India's total exports.
The criticism around SEZs globally, has been that they function as cheap labour camps, where domestic workers are exploited. Interestingly, the SEZ Act of Pakistan does not offer immunity from labour laws. So to that extent, it is mindful of the interests of domestic population.
Just because the world or peers in the region have used SEZs primarily for exports, does not necessarily mean that Pakistan should do the same. There is a huge domestic market with vibrant demands; needs and wants. Much may be gained by domestically manufacturing the scores of consumer goods that are hitherto imported in the form that facilitates off-the-shelf sales.
Whether the SEZs are the best way to do that while promoting national interest; is one for Parliament to judge. But treating the output of SEZ firms as imports will certainly not accomplish it. Our policies declare our intentions. If a policy is incomplete or ineffective, it reflects similarly on the intentions of the government. Pakistan can ill afford that stance towards investment and industry.
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