Hope is not a strategy to secure investment

Hope is not a strategy to secure investment

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With foreign direct investment at a historic low, claims by Pakistani officials that Gulf countries, including Saudi Arabia, are ready to invest billions of dollars in the country can only be welcomed. But before intentions can translate into reality there is serious work to be done. Hope is not a strategy. There are, after all, many reasons why significant domestic and foreign investment has not materialized for several years now.

At 13% of GDP total investment is stagnant and the lowest in the region.  FDI is a mere 0.4% of GDP. Overall investment in fact plunged to its lowest level in half a century in the fiscal year ending in June 2024. A variety of factors are responsible for this. Political uncertainty and turmoil of recent years have taken an obvious toll. So has Pakistan’s macroeconomic instability with repeated financial crises that have driven the country to the brink of default and necessitated IMF bailouts. The security situation, eroding infrastructure and chronic power shortages have hardly helped to create a favourable investment climate. As has lack of certainty and consistency in economic policies. A business environment of heavy and discretionary regulations has been a major constraint. The disconnect between federal and provincial agencies in regulating business activities remains an unresolved problem that discourages investment.

There are a host of other factors and policies that also deter investment. They include the state’s inordinately large presence in the economy, in mostly financially haemorrhaging  state-owned enterprises, which creates an uneven playing field for the private sector. Protectionist trade and exchange rate policies also act as a disincentive. Heavy government borrowing from banks to finance large fiscal deficits have crowded out private investment by sharply limiting credit to business firms. Credit to the private sector has been plummeting over the years. It has fallen from 29% of GDP in 2008 to 13.8 in 2021.

If a combination of these factors dampen investment it is obvious what needs to be done. Appointing a plethora of government committees is not the answer. They will only address interconnected issues in silos. In any case, the solutions are already out there, long known, never implemented. Endlessly appointing committees in effect means postponing decisions.

To begin with, greater official focus on attracting FDI seems to imply a lower priority to promoting private investment at home. Mobilization of domestic resources should have equal if not higher priority. The first order of business should be to generate domestic investment because that will encourage foreign investors, who often look for local business partners. One of the key challenges here is to redirect domestic investment mostly taking place in real estate to productive sectors of the economy, that can spur growth and create jobs. The budget made a start albeit a modest one by raising the capital gains tax on real estate investment. But more needs to be done to reallocate domestic resources.

Promoting investment requires a coherent and consistent multi-faceted strategy that is able to address political, macroeconomic, security, infrastructure and skilled workforce issues.

Maleeha Lodhi and Ahmad Junaid

Sustainable economic growth after all is not possible without substantial private investment. Recent government initiatives include the creation of the Special Investment Facilitation Council (SIFC) and the National Economic Transformation Unit. However, what is needed is a comprehensive investment strategy that involves sectoral focus, regulatory and trade reforms, infrastructure development, financial sector improvement and workforce enhancement. The aim should be to integrate local businesses into the global supply chain. A detailed plan should target high-growth sectors that can drive innovation and product diversification.

Creating a favorable business environment is crucial. This involves reducing the cost of doing business, digitizing processes and ensuring a robust legal system to protect property rights and enforce contracts. Pakistan ranks 108 out of 190 countries in the ease of doing business. This has to change because the present regulatory regime is burdensome and complicated and disincentivizes investment.

The tax regime also needs to be simplified and made predictable to build investor confidence. Investing in education and vocational training is vital to develop a skilled workforce tailored to high-tech and export-oriented industries.

While the government has to create an enabling environment, the private sector too has to step up to the challenge, come out of its comfort zone and invest in new products, technology and innovation. It  has yet to take advantage of globalization and gain access to advance technology. It needs to shift away from its inward orientation as well as diversify exports and markets. This means looking beyond local markets and seeking to integrate with the global economy.

Promoting investment requires a coherent and consistent multi-faceted strategy that is able to address political, macroeconomic, security, infrastructure and skilled workforce issues as well as offer the right mix of policy incentives. Above all it needs to create the perception among investors that Pakistan is a safe and predictable country to invest in.

- Maleeha Lodhi is former Ambassador to the UN, US and UK. Ahmad Junaid is Dean of the Karachi School of Business and Leadership.

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view