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Pakistan Reader# 625, 11 July 2023

Pakistan Investment Policy 2023: Three Preliminary Takeaways



Pakistan Investment Policy (PIP)

Ankit Singh

On 9 July, Dawn reported that federal authorities in Pakistan approved a new FDI policy termed as ‘Pakistan Investment Policy (PIP) 2023’ aiming to attract USD 20-25 billion over the next few years.
 
The FDI 2023 policy is the third in Pakistan after 1993 and 2013. The policy was developed in consultation with the World Bank, International Finance Corporation, and provincial and federal institutions. PM Sharif had formed a Special Investment Facilitation Council (SIFC) comprising army chief and provincial chief ministers.
 
According to Dawn, the policy ensures providing special protection to foreign investors, their physical assets and they will be allowed to their entire profit abroad in their own currency. The federal authorities expect to improve Pakistan’s economic complexity through the policy.
 
The following preliminary takeaways can be identified: 
1. Four Pillars
The PIP 2023 is not yet available in public domain, however, a summary has been circulated and news reports indicate that it is based on four main pillars: reducing the cost of doing business, streamlining business processes, facilitating ease of doing business through the creation of industrial clusters and special economic zones, and promoting greater convergence between trade, industrial, and monetary policies.
 
The authorities have removed the cap minimum equity requirement for foreign investments and policy has opened investment avenues in all sectors except for casinos, consumable alcohol manufacturing, arms and ammunition, atomic energy, high explosives, currency, and mining. Domains like food sector, real estate sector and textile sector will now likely witness competition from foreign investors.
 
The new policy allows leasing of land, development of real estate by foreign investors. In agriculture sector, foreign investors will also be permitted to hold a 60 per cent stake in agricultural projects and 100 per cent equity in corporate agriculture farming.
 
2. The State of FDI in Pakistan
According to SBP Annual Report-Statistical Supplement FY 22, power sector was predicted to receive maximum foreign investment (USD 737.6 million), followed by financial business (USD 405.3 million), oil and gas exploration (USD 195.3 million) and communications (USD 118.9 million). Together, the above economic groups constitute approximately 78 per cent of net FDI in Pakistan.
 
China was the biggest contributor to FDI in Pakistan at USD 531 million, followed by the U.S.A (USD 249.6), Switzerland (USD 146.2 million), U.A.E (USD 143.9 million), Hong Kong (USD 137.7 million), Singapore (USD 114.7 million) and Netherlands (USD 104.1 million). The FDI trends in the last four years also indicate that there has been drop in net FDI, as net inflows decreased by USD 628.6 million (19 per cent) between FY20 and FY22. FDI diminished sectoral wise as well, FDI in power sector decreased by 33.9 per cent, followed by other sectors. This means that FDI attractiveness is decreasing for Pakistan and hence the policy is timely if not late.
 
According to the World Bank, Pakistan’s GDP-to-investment ratio is projected to decrease from 15 per cent in 2020 to 13.3 per cent in 2024.
 
3. Current FDI ventures and projects
Despite a negative prediction of FDI inflow into the nation, some economic sectors have expanded the scope of FDI. Kingdom of Saudi Arabia (KSA) has invested half a billion dollars agriculture, defence production, information technology, mines and minerals. KSA has announced that it is assessing increasing investment in Pakistan up to USD 10 billion in the sectors like petrochemicals, power generation, and mining projects.
 
Last week, Minister of State for Petroleum, Pakistan shared that UAE has allocated USD 22 billion for exploring opportunities in information technology, agriculture and mining sectors. Observations from advertising industry have shown that real estate sector has already been opened for foreign developers with H&S Property and Mindwhiz Developers, both from UAE, booking properties and selling luxury homes in Lahore.
 
In conclusion, the FDI regime, does help in trickle-down effect through advanced technologies, standardization and accountability. However, Pakistan has an ambiguous legal and arbitration system with long resolution period. FDI investors will look at not just ease of entering but the ease of exiting. Assuming that Pakistan, like many other developing countries, has not much to offer in its previous trade integration model of economic development since covid pandemic and return of neo-populist policies. The recent FDI decision should bring back the confidence in its approach. This would mean that sustaining growth will be impediment on smooth economic diplomacy as well as imagining a change in composition of trade representatives in trade and investment decisions.

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