EDITORIAL: The concept behind establishing the Special Investment Facilitation Council is fully supported as it not only attempts to iron out prevalent bureaucratic red-tapism long considered a major impediment to investment, be it local or foreign, but also in light of the growing menace of terrorism with August 2023 witnessing an 83 percent rise in terror-related incidents compared to the previous month.
Pakistan’s power corridors, inclusive of the outgoing government (comprising of over 10 political parties) as well as the military establishment, have engaged constructively with friendly countries - notably China, Saudi Arabia, the United Arab Emirates, with reports suggesting that Qatar too has indicated its interest - to invest over 30 billion dollars in Pakistan.
And while there is a national consensus that such large industrial projects like setting up refineries and ports, etc., cannot possibly become operational in the very short term, with a medium term ranging from a year onwards, thus the actual inflows in the current fiscal year (when the need for desired foreign exchange inflows is significant) may at best be no more than one-tenth of the amount pledged as and when contracts as opposed to the non-binding memoranda of understanding (MoUs) are signed.
A cautionary note based on lessons that should have been learned from the past is in order. First and foremost, the PML-N (Pakistan Muslim League-Nawaz) continues to cite massive energy projects established under the umbrella of the China Pakistan Economic Corridor (CPEC) as a major success in luring substantial foreign investment inflows into the country.
Ignored is the fact that the contractual obligations for CPEC projects were the same as those agreed with Independent Power Producers (IPPs) that were established during the Benazir Bhutto and Musharraf’s tenures – obligations that are being cited as one of the major reasons for the recent hike in tariffs to meet full cost recovery objective of the International Monetary Fund which, in turn, are fuelling socio-economic unrest on a scale rarely seen in this country.
The focus of the government must therefore be on improving the investment climate that would guarantee contracts with foreign investors that are in the short, medium and long-term economic interests of the country and its people and to achieve this objective the government must improve governance in all the poorly performing sectors, notably the energy and the tax sectors.
While implementing major structural reforms may take some will on the part of an interim government but by its very temporary nature (with its mandate strengthened by the outgoing parliament) it is uniquely poised to take unpopular decisions that no political government, civilian or military, has been able to take so far.
These decisions include reforming the tax structure through widening the tax net instead of burdening the poor through increased reliance on indirect taxes whose incidence on the poor is greater than on the rich, and rationalising subsidies to the power sector by revisiting the policy of countrywide uniform tariffs that benefit the poorly performing distribution companies over those with very low receivables.
The caretakers, selected by all major political parties with reported concurrence of all major stakeholders, must first engage with domestic players to get their voluntary agreement on slashing current expenditure before engaging with our international partners, bilaterals and multilaterals, to seek relief for the public in the August electricity bills.
There is an emergent need to curtail current expenditure that was inexplicably budgeted to rise by nearly 26 percent in 2023-24 compared to the revised estimates of the year past. Benazir Income Support Programme was only budgeted at 466 billion rupees in the current year against a total current expenditure of over 13 trillion rupees.
A study carried out by the IMF (International Monetary Fund) and uploaded on its website notes the following: “Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing host countries.
But recent work also points to some potential risks: it can be reversed through financial transactions; it can be excessive owing to adverse selection and fire sales; its benefits can be limited by leverage; and a high share of FDI in a country’s total capital inflows may reflect its institutions’ weakness rather than their strength.
Though the empirical relevance of some of these sources of risk remains to be demonstrated, the potential risks do appear to make a case for taking a nuanced view of the likely effects of FDI.
Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign.”
Previous administrations have implemented policies based on a set of dated theories and not on empirical evidence. It is hoped that instead of relying solely on the SIFC as the way towards development, better informed economic policy decisions are taken that would strengthen the enabling environment and ensure the success of the SIFC.
Copyright Business Recorder, 2023