Pakistan
Country Overview
Introduction
Pakistan is a country rich in history, culture and
human resources. Today, Pakistan is also an
emergent market rich in exciting opportunities for
U.S. foreign direct investment. Pakistan also has
an ideal geographic location with immediate access
to the Central Asian Republics.
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.
Sources:
|
Click here | |