Can budget FY25 unlock Pakistan’s investment potential?

Pakistan’s economy grew by less than 3 percent in the outgoing fiscal year 2023-24. This growth comes on the back of a somewhat decent performance in the agriculture sector where wheat and cotton crops performed relatively better this year. The industrial sector could not achieve its target and registered a mere 1 percent growth. A reason for reduced economic output has been the decline in investment-to-GDP ratio falling to a five-decade low of 13 percent. 

This low investment milieu cripples the prospects for infrastructure development, social sector improvements, and job creation. Both local and foreign investment are carriers of ideas, knowledge, and skills from one region to the next and this process also stalls when investor interest is at its lowest. 

Many have argued that the federal and provincial budgets, while presenting a crucial opportunity to reverse this trend has its limitations. Bold measures are needed to not only improve investor sentiment but also create fertile ground for domestic and foreign investments to flourish.

Pull-quote: Pakistan’s large and growing informal sector poses unfair competition to registered firms. 

- Vaqar Ahmed 

These bold measures rest with the National Economic Council and the Special Investment Facilitation Council. The SIFC’s establishment aimed to revitalize investment through improved coordination and streamlined procedures. While some progress has been made, attracting quality investment would require more.

Pakistan’s political environment continues to cast a long shadow. Investors seek stability and predictability, both of which are in short supply. A unified approach to economic policy, transcending political divides, is essential to promote a sense of long-term security for investors.

Beyond political instability, structural issues deter investment. Frequent changes in taxation policies create confusion and discourage long-term planning. A bias toward specific sectors stifles diversification and limits investment opportunities in other high-growth areas. Furthermore, a large informal sector undermines transparency and discourages formalization, further hindering investment inflows.

Pakistan’s current macroeconomic fundamentals fall short of regional benchmarks. This lack of competitiveness discourages investors who may choose to allocate resources to neighboring countries with more attractive investment environments and infrastructure endowments including energy resources.

Even with all these constraints, Pakistani politicians who will debate the budget soon have an opportunity to set things in the right direction. To start with, simplifying the tax code, reducing compliance burdens, and offering tax rates that incentivize investment, particularly in priority sectors including IT sector, can lure back local investors and send a positive signal to foreign counterparts.

Improve ease of doing business across all regions of Pakistan. Government initiatives to slash unnecessary regulations hindering businesses could involve reviewing all regulations, eliminating outdated ones, and simplifying complex ones. Overseen through a central body, the government could aim to reduce red tape and make the business environment more predictable.

Varying and inconsistent business regulations across provinces are a major hurdle for foreign investors. This patchwork of rules creates confusion, increases costs, and delays investment. Harmonization of regulations should be the top priority of the SIFC. 

The expenditure side of the budget has little room for expansion this year. However public investment is an important driver of growth and investing in quality infrastructure, not only creates jobs in the short term but also lays the foundation for attracting private enterprise.

Public investment through Public Sector Development Programme (PSDP) and provincial annual development programs (ADP) in high-end education and skills training equips the workforce with the capabilities needed to thrive in the age of AI and emerging technologies. A skilled workforce is a magnet for investors seeking a productive and competitive talent pool.

Attracting investment is not solely about reforming bureaucracies. Improving Pakistan’s trade competitiveness and regional connectivity can also significantly boost investments. Foreign investors are worried when their local produce in Pakistan cannot leave the country to reach neighboring countries including Afghanistan and India. Reducing trade barriers and improving transit trade with China, Central and South Asia can open new markets for Pakistani goods and services, making Pakistan a more attractive investment destination for firms seeking access to a wider consumer base.

Pakistan’s large and growing informal sector poses unfair competition to registered firms. Measures to incentivize formalization, through tax measures or otherwise, can encourage businesses to transition into the formal economy. This not only increases government revenue but also creates a more transparent business environment.

To sum up, political stability, demonstration of sticking to an economic reform roadmap, and opening for trade with neighbors and the region is important to reverse the declining investment trend. 

- Dr. Vaqar Ahmed is an economist and former civil servant. He is also a board member at KP Board of Investment & Trade.