Investment Opportunities in Pakistan

9/25/2012 Karachi University Business School

Najam ul Hassan

An Overview:
Pakistan is a developing country and its economy is the worlds 27th largest economy based on its purchasing power. However, the country remained impoverished due to internal political disturbances and negligible foreign investment, since independence. With rise in development spending by Islamabad, the countrys poverty levels reduced by 10% from the year 2001 to 2007. The economy grew between 2004-07 due to rise in GDP from 5 to 8%. This was largely due to development in industrial and services sector irrespective of severe electricity shortfalls. However, the year 2007 witnessed a lot of political and economic instability leading to depreciation of Pakistani rupee. The growth of the economy was affected once again during the 2008 global economic recession. The period 2008-10 will always be recalled as one of the most turbulent years in Pakistans economic history in this regard. Amid this period several records were broken not in terms of decline in development but rather in increased double figure inflation, highest decline in investment, lowest rate of savings, drastic reduction in rate of employment, and record height in corruption. During this period 100 index and its capitalization market endured a decline of more than 12%. The current account gap and trade gap have been recorded at 16.2 of GDP in 2009-10 highest ever. Continuation of this trend in economic sector can emerge as single most undermining factor for economic nonplus. Trade deficit also remained a record high on account of decline of textile industry in Pakistan. Productivity crisis in manufacturing sector was another addition in this record. Oil crisis, emanating water predicament; all these factors accelerated Pakistans coarse towards economic devastation adversely affecting all sectors. The electricity and gas load shedding cause a rapid decrease in production which has also reduced the export order. Continued load shedding and unpredictable energy supply is constraining activity in, especially the energy sensitive sectors with the risk of potential output losses and cost price pressures in the immediate horizon. As a consequence of load shedding and rise in the electricity and gas tariff the textile production capacity of various sub-sectors has been reduced by up to 40 per cent. The cost of production has also risen due to instant increase in electricity tariff. Due to load shedding some mill owners use alternative source of energy like generator which increase their cost of production further. Due to such dramatic situation the capability of Gas load-shedding continues in Punjab and NWFP. Due to this situation 60 to 70 per cent of the industry have been affected and is unable to accept export orders coming in from around the globe. Textile industry had already endured over 45 days of gas disconnection over a period of four months, causing extraordinary production losses and badly affecting capability of the industry. Today the low income groups and the poor are highly concerned and worried about the socio-economic substitutes as there is no silver lining for them. The rising unemployment is now compatible in the minds of every individual.

A berief look to Pakistan Textile Sector shifting to Bangladesh: The main reasons behind the shifting of textile industry to Bangladesh are not electricity and gas outages and power tariffs in Pakistan, but the preferential treatment of Dhaka in the European Union (EU) and the US, says Textile Minister Makhdoom Shahabuddin. Bangladesh is a privileged country as it has been counted among least developed nations by the EU and US. It has been given facilities and its textile sector has been sponsored and supported financially by the big economic powers. Over 40 % Pakistan textile units relocated to Bangladesh and around 200000 power looms have been shifted to Bangladesh, in the last five years.

SWOT ANALYSIS OF PAKISTAN INDUSTRIAL SECTOR: STRENGTH: Pakistan being an agriculture country, many raw materials are availabe indoors which can cater different sectors. High urbanization rate which can induce investors to invest in urban regions. Located in the heart of Asia, Pakistan is the gateway to the energy rich Central Asian States. Huge amount of caol reserves which are alternate to produce electricity, thus making an edge to fulfill countrys whole demand.

WEAKNESS: High inflation rate being the barrier in investments. Shifting of industries from Pakistan to neighbours. High production cost, due to energy crisis for which no economies of scale is obtained. Depreciate in Pakistan currency and higher input costs.

OPPURTUNITIES: High demand of fashion and apparel products. Low wages rates as compared to competitive countries. Making rail projects with India and China may increase trade and exploit oppurtunities. Forestary and Travel can be catered in Northern Areas of Pakistan, which will have feasible business oppurtunities. SMEs sector can be catered to boost up semi-urban and urban employment.

THREATS: An investor always seeks lucrative benefits, they may invest in China or Bangladesh because they make Goods at low production cost giving high quality standards as compared to Pakistan, causing Pakistan to decline in manufacturing sector. Political instability, law and order situation being the always manace of Pakistan. Foreign investors may persuade Pakistans neighbour countries, instead of Pakistan.

The World Bank recognized Pakistan, 105th rank in Ease of doing Business, while the 90th rank in starting a Business in the world, in its annual Doing Business report.

Key reasons to Invest in Pakistan:

Geo-strategic Location: Located in the heart of Asia, Pakistan is the gateway to the energy rich Central Asian States, the financially liquid Gulf States and the economically advanced Far Eastern tigers. This strategic advantage alone makes Pakistan a marketplace teeming with possibilities. Trained Workforce: A large part of the workforce is proficient in English, hardworking and intelligent. Pakistan possesses a large pool of trained and experienced engineers, bankers, lawyers and other professionals with many having substantial international experience. Economic Outlook: Pakistan is one of the fastest growing economies of the world having touched a GDP growth rate of 8.4% in 2005. Today Pakistan has over 170 million consumers with an ever growing middle class. Foreign Direct investment has risen sharply from an average of $300 million in the 1990s to over $3.7 billion in 2008-09. Fiscal deficit has declined from an average 7% of GDP in the 1990s to around 3% in recent years. And FOREX reserves have increased from $3.22 billion in 2000-01 to $11.6 billion in June 2009. Investment Policies: Current investment policies have been tailor made to suit investor needs. Pakistan's policy trends have been consistent, with liberalization, de-regulation, privatisation, and facilitation being its foremost cornerstones. Financial Markets: The capital markets are being modernized, and reforms have resulted in development of improved infrastructure in the stock exchanges of the country. The Securities and Exchange Commission of Pakistan has improved the regulatory environment of the stock exchanges, corporate bond market and the leasing sector. Whilst the Federal Board of Revenue has facilitated structural reform in tax and tariffs and the State Bank of Pakistan has invigorated the banking sector into high returns on investment.