PM Shehbaz said in Riyadh that Pakistan is open for business. Is it?
https://arab.news/4m6mt
At the Future Investment Initiative Summit (FII), billed as 'Davos in the Desert’ held in the capital of Saudi Arabia, Riyadh, Prime Minister Shehbaz Sharif pitched Pakistan’s economy to investors, stating that it was open for business and offered opportunities in various sectors of the economy, especially information technology services, and clean energy. Discussing the challenges of the global economy, the prime minister said, “Technology is a great equalizer, which can cut through social, cultural and financial barriers, and empower those who are equipped to leverage it”.
Undoubtedly, technology offers the opportunity to leap frog development by not having to repeat all the different stages of industrialization that many of the high-income countries have had to pass through. An example of such rapid growth and opening opportunities has been witnessed in Bangalore, which is dubbed the Silicon Valley of Asia. India recorded USD177.7 billion in services exports during 2021-22 with the largest contribution coming from software and information technology-related services.
Pakistan’s exports of knowledge-based services, primarily related to information, computers, and telecommunication (ICT) have grown almost tenfold from $217 million in the fiscal year 2011 to $2.12 billion in 2021. At less than 7 percent of Pakistan’s overall exports, this is still relatively insignificant compared to India’s ICT exports which are almost 50 percent of the country’s total exports. Although it has a very small presence in the global value chain of ICT services, Pakistan enjoys latent comparative advantages of a sizable talent pool, cost arbitrage, and strong business linkages with Pakistani Americans, which have provided an opportunity for Pakistan to grow fast as it is doing recently.
Inviting investment for the installation of 10,000 MWs of solar power given the existing excess capacity in the power sector is problematic.
Javed Hassan
Pakistan has a youthful population with pockets that are increasingly tech-savvy. The country produces over 20,000 ICT graduates each year, helping to launch over 700 tech start-ups since 2010, the majority of which continue to be in business. It has the world’s third-largest population of almost 95 million with a working knowledge of English, a decent telecommunications infrastructure, and a thriving freelance industry that is ranked fourth globally in terms of the number of freelancers engaged in software development and technology. All this highlights the potential availability of a rich and growing talent pool that will greatly be aided if, as the PM has promised, the support infrastructure is effectively upgraded. The provision of Internet infrastructure, data centers, and other such facilities will help overcome constraints associated with the growing sector.
Pakistani Americans have led the expansion of the industry, building on their strong business ties in the US. Although exports are concentrated in low-value-added services within the Information Technology Outsourcing (ITO) and Business process outsourcing (BPO) segments, including freelancing, Pakistani individuals and firms have developed global competitiveness in a subset of emerging services, positioning themselves as potential leaders in technology fields. All these factors promise immense potential for the sector for foreign investors.
In his address to the FII Summit, the Prime Minister also stated, “I am leading from the front for the development of 10,000 MW of solar power, to meet Pakistan's peak load demand,” he said, adding that switching to renewable is crucial for economies like Pakistan which cannot afford to import oil and gas at exorbitant rates.” According to the Pakistan Economic Survey 2021–22, the installed electricity generation capacity reached 41,557 MW in 2022. Moreover, it is expected that a further 7000 MW of China-Pakistan Economic Corridor (CPEC) related independent power plants (IPPs), including four Thar coal-based IPPs of 3,300MW, that are at different stages of progress, will come onstream in the next few years. With a current peak capacity requirement of less than 28,000MW, the country already has excess capacity. The capacity payments on the IPPs will have to continue being paid for in precious foreign exchange even if for the portion that stands idle. Therefore, inviting investment for the installation of 10,000 MWs of solar power given the existing excess capacity in the power sector is problematic.
The Prime Minister is correct to focus on attracting foreign investment in the ICT sector since it helps boost growth and much-needed youth employment as well as provides Pakistan with the building blocks for a more sophisticated economy. While tech investors are known for their risk-taking appetite, they nevertheless want to see economic and political stability. It is therefore not helpful that the risk of default, measured by the 5-year credit default swap (CDS) recently spiked to a 13-year high of 53 percent. Similarly, the yield to maturity, or the returns, on Pakistan International Eurobonds maturing in 2024 rose to 90 percent suggesting a high probability of default on external obligations. Despite its immense potential, the rising likelihood of default diminishes confidence. In order to be meaningfully open for business Pakistan must first ensure economic stability such that the required return threshold for investing in the country is not prohibitively high.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
