The American business community is a significant presence in Pakistan, with investments in the oil and gas, communications, IT and Telecom, Construction, Services, Food and Beverage and Power sectors.  American foreign direct investment in Pakistan stood at $326 million in fiscal year 2005-2006, compared to $238.4 million in the previous fiscal year.  In addition, the United States remains Pakistan’s single leading trading partner, as U.S. exports to Pakistan totaled $1.2 billion in 2005.

Many American Companies are already taking advantage of opportunities in Pakistan including AES, American Express, Boeing, El Paso Energy, Citigroup, Coca-Cola, DuPont, Johnson & Johnson, Merck, PepsiCo, Motorola, and Procter & Gamble.  In 2005, American investment in Pakistan represented 21 percent of the country’s $1.5 billion in total foreign direct investment.

Population and Other Demographics
As both a commercial and a labor market, Pakistan offers remarkable opportunities.  Its labor force of approximately 43 million with adjusted per capita income over $2,100 equates to a large pool of both consumers and workers.  Although there is a shortage of skilled labor, the government is currently mid-way through a program to open several new technical schools and universities that will help educate thousands of young Pakistanis.

Pakistan has a population of approximately 150 million citizens and Pakistan has a greater degree of urbanization than most of its neighbors.  As is common for developing countries, roughly 40 percent of its population is below the age of 15 and 55 percent are of working age.  This is in part the result of high population growth rates.  However, Pakistan has successfully reduced its growth rate from a high 2.9 percent in the late 1970’s to a current growth rate of approximately 2 percent. 

Culture, Language and Religion
Numerous languages are spoken in Pakistan and there is a diversity of religious, ethnic, tribal and caste divisions that impact all sectors of society.  Punjabi is the most widely spoken language but most upwardly mobile Pakistanis will speak the country’s official language, Urdu, as well as English.  There are numerous ethnic groups that are Muslim and together comprise 96 percent of the population.  In addition, there are several small minorities of Hindus, Christians and others. 

Politics
President Pervez Musharraf has led Pakistan since his military coup in October 1999.  Parliamentary elections held on October 10, 2002 resulted in no majority party emerging, though significant gains for Islamist parties were notable.  A new civilian government is seated, but remains weak.  Musharraf has retained his position as army chief and Finance Minister Shaukat Aziz became prime minister in August 2004.   The Parliament established a National Security Council that may institutionalize a permanent governance role for the army. There are concerns that Pakistan’s civilian democratic institutions have been weakened by these developments.

Economy
Pakistan’s economic structure is in transition from an agricultural base to a service and manufacturing base, which is reflected by the accelerating growth in services and manufacturing as a portion of total employment and GDP.  The Comprehensive Economic Revival Program launched in 1999 has reduced state intervention in the economy and Pakistan has achieved appreciable gains in economic growth and investment reform.

Unemployment and inflation are in check and exports are rising.  Tariff and non-tariff barriers have been reduced or eliminated.  Privatization has been forcefully pursued.  Steps to fortify corporate governance have also been taken.  Furthermore, Pakistan has made significant efforts to reduce its debt.

The Government of Pakistan has also been successful in controlling the fiscal imbalance through improved resource mobilization, privatization of loss-incurring public sector enterprises and strengthened public resource management at the national and provincial levels.  In addition, pricing has been broadly deregulated, including in the energy sector, and import tariffs have been significantly restructured and broadly reduced.  The Bank of Pakistan has also been granted unprecedented autonomy and capital market prudential oversight has been strengthened.  The Government of Pakistan has strongly focused on improved governance and has pledged to sustain an open investment climate.

Pakistan’s economy was remarkably robust in fiscal year 2003-2004 with a GDP growth rate of 6.4 percent, against an original target of 5.3 percent.  This higher growth was the result of an intentional growth-oriented monetary and exchange rate management, improved fiscal discipline, stable political environment and better relations with neighbors.  According to most estimates, Pakistan’s economy is expected to grow at around 6.5 percent in 2004-2005. 

FDI and Specific Sector Information
Pakistan’s investment policy is recognized as one of the most favorable in the region.  It has been characterized by its steady moves towards liberalization, deregulation and privatization.  The policy has been consistent, market-led and business friendly.  The business opportunities in Pakistan are manifold, and the country’s strategic location offers investors access to a tremendous market potential with the economies of Central Asia.

The Government of Pakistan is focused specifically on attracting investment in oil and gas, agriculture, information technology, textiles, food processing, SMEs and tourism.  The government invites foreign investment through a package of incentives including liberalization, privatization and deregulation.  Foreign firms are allowed 100 percent equity ownership in manufacturing investments, although the government does favor joint ventures which enjoy greater concessions on import duties and more generous tax benefits. 
Predictably, export oriented industries are afforded the greatest incentives.  There are no absolute official restrictions and the acquisitions of local firms and construction projects are subject to approval only by the local jurisdiction under which they fall.  A wide variety of industry and location specific tax incentives exist to encourage foreign direct investment. Foreign investment has also been facilitated by improvement in governance of public entities, improved creditworthiness, reduced tariffs, and the expectation of the continuation of the improvement in the business climate. 

Notwithstanding the Government of Pakistan’s pro-investment stance, FDI activity remains relatively modest.  In fiscal year 2004 (the accounting year ending June 2004), FDI flows into Pakistan amounted to approximately US $949.4 million, a 19 percent increase compared to the corresponding period the previous year.  Principal sectors attracting investment are oil and gas exploration, petroleum refining, financial services, textiles, trade and construction. The United States accounted for approximately 25 percent of the foreign investment in 2004, while UK, United Arab Emirates, Japan and Saudi Arabia were also substantial contributors. 

Oil and Gas
The Government of Pakistan attaches a high priority to the energy sector.  Significant opportunities exist for foreign companies in every aspect of the oil and gas sector in Pakistan. Some investment opportunities in the oil and gas sector include offshore and onshore exploration, production, refining, gas import and exports, pipelines and storage. Pakistan’s Petroleum Policy states that up to 100 percent foreign equity is allowed, investment has no limit, while capital, profit and dividends are allowed. 

In early 2000 an ambitious, pro-market, reform program was implemented.  As a result, the sector has changed dramatically over the past three years. The government has encouraged private firms, including foreign companies to develop domestic production capacity. Pakistan’s demand for natural gas is expected to rise substantially in the next few years, with an increase of approximately 50 percent by 2006.

As part of the country’s privatization process, the Government of Pakistan is setting up a Gas Regulatory Authority and the Petroleum Regulatory Board, which will separate out government functions from state-owned companies to be privatized.  In October 2004, the Privatization Commission of Pakistan announced the sale of a 51 percent equity stake in National Refinery Limited.  Other upcoming Privatization Transactions include: Oil and Gas Development Company Limited, Pakistan Petroleum Limited, Pakistan State Oil Company Limited, Sui Northern Gas Pipelines Limited, and Sui Southern Gas Company Limited.

Information Technology
The Pakistan telecom sector offers tremendous opportunities to foreign investors.  In August of 2000, the government of Pakistan approved the National Information Technology Policy, which defined the role of the Government as an enabler to an IT based future economy.  Pakistan is working towards a rapid expansion of training facilities for IT manpower.  Pakistan hopes to generate human resource development through strengthening of IT institutions; increasing infrastructure development; and improving efficiency and transparency in Government as it relates to the IT sector.

Recently, the Government of Pakistan has taken measures to encourage foreign direct investment in the IT sector.  The aim is to make the sector financially attractive and to simplify the investment process to open up the opportunities in Pakistan’s IT sector.  Some of the measures taken over the last year and half include: reduction in bandwidth rates, a 15 year income tax exemption and 50 percent income tax rebate on income of IT professionals.  In addition, software exporting companies are allowed to retain 35 percent of their earnings in foreign accounts and no import duty on computers and computer parts.   Investment opportunities in the IT sector include those dealing with call centers, cell phones, e-commerce, software and IT Parts. 

Agriculture
Pakistan’s economy is primarily dominated by the agricultural sector, which comprises approximately 24 percent of GDP, employs half of the total labor force and generates a substantial portion of the country’s foreign exchange earnings. Agricultural production provides basic inputs for key industries, including textile and sugar.  Pakistan’s agriculture sector has vast potential in the fields of fisheries, fruit, vegetables, livestock, dairy and meat processing, corporate farming and forestry.

The agricultural sector is primarily composed of small owner operated farms located within the fertile Indus River Basin as well as small forestry and fishing operations.  The government is firmly supporting the nascent agribusiness industry in Pakistan with several investment incentives.  These include the allowance of 100 percent foreign ownership with no investment minimums, duty free equipment imports and free remittance of capital and profits.  In addition, there is ample access to arable land and a well developed transportation network. 
 

Minerals and Mining
Pakistan has a great potential in metallic minerals like copper, gold, silver, platinum, chromites, iron, lead and zinc.  There is also a vast potential of multi-colored granite, marble and other fine stones with high quality for export purposes.  Currently, approximately 50 minerals are under exploitation, coal is the major one, while rock salt and other industrial and construction minerals follow in importance. 

The value addition in this sector is concentrated in limestone, coal, gypsum, sulfur, crude oil, and natural gas. There is a great opportunity for multinational companies to invest in this sector, resulting in vast benefits for the economy and the investors in the long run.
 

Privatization
Over the past ten years Pakistan has privatized nearly $2 billion in state owned enterprises, most of them to foreign investors.  The Privatization Commission is currently listing more than a dozen companies available for sale including oil and gas, financial services, construction and utility concerns. Despite the Government of Pakistan’s strong commitment, privatization has been slow and hampered by limited investor interest due to regional tensions and weak global economic environment. 

The Government of Pakistan intends to spend 90 percent of privatization proceeds for debt retirement and 10 percent for poverty alleviation.  A focused privatization policy has been developed and the privatization law enacted recently is expected to introduce transparency and give legal protection to contracts.  The privatization policy will be based on sector reforms and transaction restructuring especially in the financial and energy sectors.

The government is benefiting from World Bank technical assistance in the privatization effort, and has hired several foreign financial advisors to assist.  The Government of Pakistan and public-sector unions have agreed on a modest relief package for employees of divested state-owned enterprises but more needs to be done on this front to absorb employees that are laid off from government companies.

The Government of Pakistan is accelerating the privatization process during 2005.  It is privatizing such public sector enterprises as: Pakistan State Oil Limited, Pakistan Telecommunications Company, Habib Bank and Karachi Electric Supply Corporation.

U.S.-Pakistan Bilateral Investment Trade Negotiations
The Trade and Investment Framework Agreement (TIFA) signed in June 2003 between the U.S. and Pakistan provides a forum for both countries to examine ways to expand bilateral trade and investment. Specifically, the TIFA creates a Joint Council that considers a wide range of commercial issues and promotes principles that underpin the two nations’ trade and investment relationship.

The first council meeting under the TIFA was held at the office of United States Trade Representative (USTR) in Washington in September 2004. The Minister of Commerce of the Islamic Republic of Pakistan, Humayun Akhtar Khan, met with U.S. Trade Representative Robert B. Zoellick and announced at the conclusion of their meeting that both countries will begin negotiations on a bilateral investment treaty (BIT).  Issues relating to market access for Pakistani products in the US market were also discussed. The two sides agreed to continue to work towards strengthening bilateral trade ties.

Officials from the U.S. Department of State and the Office of the U.S. Trade Representative met with the Secretary of the Pakistani Board of Investment and his delegation in London in February 2005 for the first negotiating session for the BIT.  They also met on May 10 - 12 in Islamabad for the second negotiating session.  Both delegations had a chance to examine the draft text in detail, making progress and reaching informal agreement on several issues.  Both teams are expected to meet for another round of negotiations in Washington this summer. 

Financial Institutions and U.S. Government Financing Agencies 
The international financial institutions and U.S. Government financing agencies play a very important role in promoting foreign direct investment in Pakistan.  Programs and projects sponsored by international financial organizations provide opportunities for foreign direct investment to developing countries. 

The Asian Development Bank (ADB) has been working with the government of Pakistan to develop a plan that would provide risk guarantee insurance to prospective foreign investors.  The ADB has been planning to offer this insurance to counter the negative perception problem that Pakistan faces.  The objective is to provide risk guarantee insurance due to terrorism and to encourage foreign direct investment in Pakistan. 

The International Finance Corporation (IFC) has launched an initiative in Karachi to train bankers on lending to small and medium enterprises.  The intent is to create long-term local capacity for the transfer of knowledge in lending capacity to Pakistan's banking sector, which should promote sustained private sector investment in Pakistan. 

U.S. sanctions against Pakistan that had been previous impediments to foreign direct investment were lifted after September 11, 2001.  The Overseas Private Investment Corporation (OPIC) insurance and financing service became accessible for commercial transactions in October 2001.  Since then, OPIC has offered financing and political risk insurance in Pakistan which helps generate foreign direct investment opportunities. 

After September 2001, the Export-Import Bank of the United States (Ex-Im) began to process a limited number of transactions, including a loan guarantee to support the export of three Boeing airplanes to Pakistan International Airlines (PIA).  In March 2004, the Ex-Im Bank also expanded financing opportunities for U.S. exports to Pakistan’s public sector. In March 2005, the Ex-Im Bank announced that based on risk rating changes made by the U.S. Interagency Country Risk Assessment System (ICRAS), it has opened for short and medium-term programs in the private sector of Pakistan.

Furthermore, the U.S. Trade and Development Agency (USTDA) provided a grant to fund a feasibility study for the construction of a desalination plant in Karachi, Pakistan.  The USTDA is also sponsoring an orientation visit in May 2005 to familiarize a delegation of Pakistani officials with U.S. policy and practices in the area of oil spill response and recovery, including oil spill prevention standards, rapid response procedures, and the implementation of a National Response Plan.  The visit will provide an opportunity for Pakistani officials to meet with U.S. suppliers, national associations, and federal agencies such as EPA and Coast Guard.

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