Balancing policies for private sector growth

In the medium term, addressing Pakistan’s balance of payment problem requires a policy framework centered on facilitating private sector investment, both domestic and international. A stable political and economic environment is essential for long-term success. Both have been missing in Pakistan; and as a result of which, the country has been missing from the global value chains.

In the last three decades, no major green field manufacturing projects have been launched in Pakistan apart from power sector projects in IPP mode and urea/fertilizer plants. There are direct sovereign guarantees being offered in IPPs and the equity returns are ensured, while in case of fertilizer the raw material is being supplied at cheaper rates, offering protection against imports.

Very few examples exist of competitive investment in the services sector – banking and telecom in early 2000s. However, almost all foreign players who entered the domain have exited at a loss in dollar terms while profitable firms are struggling to repatriate dividends.

This implies that the overall macro landscape is not conducive for investment and that needs to change as high interest rates, lack of connectivity with the regional economic hubs, inefficiencies in the energy and other sectors, high formal and informal trade barriers, poor contract enforcement and other similar constraints keep investment at bay.

Recently, the government established Special Investment Facilitation Council (SIFC) to enhance investment climate by offering a single-window approach and improve ease of doing business, particularly for investments from friendly nations. However, this approach risks adding another bureaucratic layer, which may bring some projects forward but could hinder the private sector-led growth model.

Economic theory suggests that countries with weak institutions tend to specialize in low-value-added products. To address this, Pakistan needs to empower and strengthen its institutions rather than introducing additional layers that may further weaken them.

The focus rather should be on building competence and capacity in finance ministry, Planning Commission, and Board of Investment. The government doesn’t have the capacity to evaluate the economic returns on any investment, and the role of Planning Commission is confined to build politically motivated infrastructure.Then, regulatory institutions such as Securities and Exchange Commission of Pakistan (SECP) and Competition Commission of Pakistan (CCP) should be strengthened.

A private sector-led model thrives in a competitive environment with a level playing field. However, granting arbitrary powers to one body to provide incentives to selected investments disadvantages others, discouraging broader investment.

This approach may not align with the economic framework advocated by the International Monetary Fund (IMF), potentially raising concerns about fairness and equity. As a result, the upcoming negotiation of the next IMF programme may scrutinize the SIFC’s role.

Many large-scale investment projects now seek to go through the SIFC to gain an unfair advantage. Even viable market-based projects are drawn to it due to Pakistan’s challenging macroeconomic and political landscape, potentially overburdening the SIFC and undermining its original focus.

Existing businesses, especially foreign investors, seek to prioritize profit repatriation through the SIFC, leading to a loss of uniqueness in the incentives offered. Moreover, concerns about interference from accountability institutions such as National Accountability Bureau (NAB) and the judiciary deter investment, highlighting the need for structural reforms rather than patch solutions.

Without such reforms, future investments may come with strings attached, as investments from friendly governments often do. Sustainable growth relies on a vibrant private sector, driven by market forces and regulated by strong economic institutions.

The trend of wealth flight by medium to large business groups underscores the urgency of stabilizing and strengthening Pakistan’s institutions to encourage reinvestment and attract foreign partners. Relying on special bodies risks losing novelty over time and fails to address the root issues plaguing investment in the country.

Copyright Business Recorder, 2024