FDI isn’t the panacea for Pakistan’s economic troubles. But since everyone seems to be obsessed about it in the face of poor domestic savings and investments in a country that is still struggling with technology advancements, little wonder that the central bank’s latest State of Economy report ended up scrutinising the factors behind poor FDI in the country.
Some of the constraints highlighted in the central bank’s report can be fixed by modern day hacks that some other countries have successfully implemented. For instance, as Haroon Shariff, former head of Board of Investment, said in his talk at Pakistan Institute of Development Economics (PIDE) this week, one of the ways to give a sense of comfort to domestic and foreign investors is to set up the likes of Dubai or Qatar international financial centre where the local laws and rules do not apply. Similarly, Haroon added, is the case of special economic zones, which mustn’t be construed as a geographically bound concept in as far as price incentives are concerned, be it subsidy on utilities or tax cuts.
There are three other specific points that Haroon made that demand attention. One, that although trade and outward FDI by emerging economies have been increasing over time, Pakistan is still not placing its A-team in these countries and region, a team that is empowered and competent to get business or attract investment flows to the country.
Second, that Pakistani politicians and government officials like to talk big numbers and big projects, which the country’s administrative machinery doesn’t have the competence to deliver on. Instead, Haroon said, perhaps it is time to start focussing on smaller transactions – transactions the size of 50-150 million dollars – that can get the ball rolling and send a signal abroad that Pakistan is open for business. That seems like a plausible argument, albeit one wonders if smaller foreign investors would find attractive ROI in Pakistan, enough given costs stemming from difficult business environment and policy inconsistency that even the big boys struggle with.
Third, he rightly pointed out that economic reforms require smooth coordination across the provincial and federal governments and its myriad institutions and departments. For this, the federal government to coordinate with the political machinery as well. However, “the intensity of politics” has been so high over the last year “that the space for dialogue has shrunk”. This argument needs to be seen light of BR Research’s earlier notes that next the phase of growth of development may come from economic sectors (think: minerals, tourism, health & education, housing, agri & food value added) that lie in the provincial domain, but which require strong and efficiently working interprovincial coordination forums. (Read: Doing business: beyond World Bank rankings, Oct 28, 2019)
These are some of the areas of research that perhaps the central bank’s follow up evaluation of the factors beyond macroeconomics that constrains investments in Pakistan should focus on. One is tempted to add that the central bank or the institutions like PIDE should also analyse Pakistan’s various sectors and regions in terms of their absorptive capacity of FDI, a subject which the SBP’s latest report did briefly touch upon by way of its analyses of SMEs management practises and the issue of human capital at large. But a cross sectoral look analyses may provide more actionable insights for policy interventions.