Investment faces a downward trend in Pakistan – State of Economy Annual Report 2018-19

The investment remained less in comparison with other emerging and developing economies.

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A Pakistani stockbroker reacts as monitor share prices during a trading session at the Pakistan Stock Exchange (PSX) in Karachi on December 3, 2018. (Photo by RIZWAN TABASSUM / AFP)

 

 

It has been quite long since direct investors came to Pakistan, despite improvement in some economic indicators, a very liberal trade and investment regime and a big market.

While mentioning this in its Annual Report 2018-19 on the State of Economy issued last week, the State Bank of Pakistan (SBP) questioned:

“What explains this persistent underinvestment – both domestic and foreign – in Pakistan in spite of a liberal trade and investment regime and a large market size?”

Both local and foreign investments in different sectors of the economy, like industries and agriculture, etc. have dropped, mainly over the course of the past two years, when the national economy slowed down.

In the last four decades, investment in Pakistan has dropped 3.3%, the rate dropped to 15.4% in the fiscal year ended June 30th, 2019, compared to 18.7% in the 1980s and 1990s.

The investment remained less in comparison with other emerging and developing economies, and it has been facing a decrease for the past many decades.

Pakistan it the only country in Asia with falling growth potential:

“According to the World Bank’s estimate, the persistence of current investment growth rates will make it extremely challenging for the country to reach the middle-income status in the coming three decades – the required rate is at least 25% as against the current rate of around 15%,” – the SBP said in the report.

As per industrialists, this decrease is due to two reasons. First, the massive hike in benchmark interest rate (7.5% points to 13.25%) and secondly, the devaluation of rupee against US dollar (net 47.5% to Rs. 155.65).

But, officials of the central bank do not agree with this. As per them, the investment-to-GDP ratio, specifically in the private sector, has remained constant during the low-interest rate regimes in the previous eight years.
They said that the low investment was due to structural issues, like the cumbersome processes for setting up of new industries, taking into consideration the acquisition of power, gas, water connections, and land, taxes, corruption, and bribery.

A representative of foreign investors said that the decrease was due to the failure of government officials to market the potential projects, which would then motivate foreign investors to invest big into the country.

This came, despite the improvements in factors like stability of rupee-dollar parity and drop in current account deficiency, etc. other than these, availability of water and electricity has also improved in these recent years.

As per SBP, inconsistencies in the country’s investment policies, bilateral treaties, and laws increase the chances of disputes among the state and investment enterprises.

While talking about the private sector, SBP stated that the inactivity in small and medium enterprises (SME) is another big reason for the decreased amount of investment activities in Pakistan.

Similarly, the bad state of human capital development, dysfunctional institutional and operational infrastructure, etc. leave the system deprived of facilitation and attractiveness.

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