Catalysing Private Investment in Pakistan - Leveraging the CPEC Opportunity

This study entitled ‘Catalysing Private Investment in Pakistan: Leveraging Chinese Investment in CPEC’ aims to provide guidance to policy-makers on addressing the fundamentals issues, which have resulted in the low investment rate in Pakistan. The study relies on making comparisons of key indicators with Pakistan’s peer economies while also focusing on highlighting the hurdles faced by Chinese investments, mobilized under the China-Pakistan Economic Corridor (CPEC) framework.

A confluence of structural as well as institutional impediments, combined with adverse political and internal security developments since the 1990s have lowered the interest for investing in Pakistan. However, there have been sporadic opportunities since the mid-2000s for Pakistan to induce greater private investment and attract efficiency-enhancing FDI, but an absence of strategic clarity and planning has hindered taking full advantage of these openings.

Pakistan’s FDI-seeking approach has been un-targeted and too general, and needs to be revamped into a more nuanced, two-tiered policy. The current strategy is liberally allowing inward FDI seeking domestic market opportunities without prioritising high-priority areas such as the export sector, advanced (including additive) manufacturing, value-added agriculture, and electronics among others.

More recently, CPEC has afforded Pakistan a unique opportunity to galvanise private investment and FDI, and transform its economy. China is now the largest source of inward FDI in Pakistan cumulatively since 2015, accounting for over 30 per cent of the total, with an investment value of US$ 7.2 billion. However, despite the high volume of inward FDI from China during CPEC Phase I, Pakistan has attracted a relatively modest share of around 5 per cent of China’s outward-FDI in BRI countries since 2015, with power generation and infrastructure projects accounting for a large share. The investment interest and momentum from CPEC Phase I does not appear to have carried over into Phase II as yet, or into the manufacturing sector. So far Pakistan also does not appear to have been able to successfully leverage CPEC to catalyse domestic private investment, non-CPEC Chinese investment or attract non-China FDI.

Private investment and FDI overall face generic constraints, such as a weak macroeconomic environment and institutional framework, policy instability, inconsistent and ‘predatory’ tax enforcement on formal firms, and energy challenges. Furthermore, Chinese investors face some specific concerns. These pertain to accumulation of large payment arrears, especially in the power sector, inconsistent tax treatment, de facto exchange controls, inordinate delays in licensing approvals, lengthy and cumbersome procedures for obtaining utilities, an inflexible visa regime, and security challenges.

Pakistan should aim for ‘high quality’ investment that provides access to export markets, technology and capabilities, while furthering economic transformation in the FDI-targeted sectors. At the same time, addressing generic, long-standing weaknesses in Pakistan’s investment environment that affect all investors, foreign as well as domestic, is paramount. Setting up Special Economic Zones, even well-functioning ones, should not be the end objective of investment policy, but an element of a broader industrial policy.

The “macro” issues which are holding back private investment in the country, and whose resolution can unlock substantial investment potential, are well known. These pertain to policy inconsistency, political instability, poor infrastructure, low labour productivity, a high effective burden of taxation and regulatory compliance, and a lack of inter-government and inter-agency coordination. A comprehensive roadmap for broad institutional and structural reform in the economy is needed more than ever.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 94) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness.