In the fifth year of stability, the government is in search of growth. One basic ingredient for growth is investment—and that too in productive, preferably export-oriented, sectors. However, investment cannot be mathematically increased without a corresponding increase in savings, and there is no real focus on this.
Moreover, whatever investment is taking place—or could take place—is not primarily flowing into productive sectors. The question is how to correct this course. The government is trying to provide incentives in silos without undertaking meaningful economic reforms. These may attract some investment in a piecemeal manner but are unlikely to change the overall picture.
One incentive the government has recently announced is an increase in the interest-rate subsidy for exporters. The first measure is an expansion of export financing schemes, under which exporters will have access to up to Rs1.5 trillion—up from Rs1 trillion—at an interest rate of 8.5 percent. The second is a long-term export growth financing scheme, offering a fixed rate of 2 percent for the first two years and 5 percent for the remaining eight years. The third is a rebate on incremental exports.
The government is also trying to privatise electricity distribution companies in the hope that overall industrial tariffs will come down. Tariffs have already declined from their peak, while the addition of renewable energy has diluted costs, which are now significantly lower than they were in 2022.
All these nudges would help and may result in sporadic investment but change on a larger scale cannot be achieved without addressing the fundamental economic issues. One is the need to rationalise taxation, as excessively high rates are discouraging capital formation. At the same time, overall tax collection must improve, as persistently high fiscal deficits will prevent interest rates from declining and continue to crowd out private investment. This cannot be achieved simply through expenditure cuts, as spending is required for development, security, education, and health.
That is a long haul.
However, one low-hanging fruit is to adjust the currency and keep the REER below 100—compared with 106.4 currently—to encourage investment in export-oriented sectors beyond the traditional industries. This could also help the SBP reduce interest rates. Both lower interest rates and a competitive currency are conducive to investment in export-oriented sectors and could help develop new export segments. However, the government appears determined to maintain the currency at its current level, which will continue to boost imports and make exports expensive. Patchwork measures cannot compensate for an overvalued currency.
Security conditions, which are deteriorating in certain parts of the country, are also making investors wary of making long-term commitments. Some are even questioning political continuity because of the growing number of attacks in different areas. This issue must be addressed, as maintaining a rigid stance may keep investors at bay.
In a nutshell, attracting sizeable investment requires equally sizeable changes. A range of policy issues must be addressed, including regionally competitive energy prices, lower interest rates and maintaining the REER below 100.
Without these measures, the incentives offered by the government remain less attractive than those provided by some states in India and China, including electricity at five cents per unit, wage subsidies, low interest rates for capital investment and export-duty drawbacks, to name a few.
Pakistan does not have the fiscal space to match these incentives and will continue chasing investment by attempting to replicate one incentive or another. The need is to look at the bigger picture and solve the underlying puzzle.