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Foreign Direct
Investment in Pakistan
ANALYSIS
Current Situations
The Pakistan government is working hardto attract large scale FDI into the
country,including allowing foreign investors to holdunlimited equity and making
concertedefforts to project a positive country image.
´Federal Minister for Privatization andInvestment Dr. Abdul Hafeez Shaikh, saidthat
Pakistan has great potential for foreigninvestment in various sectors and, for thefirst time,
it would attract a foreign directinvestment (FDI) of $1 billion this year. Hesaid that
foreign investment in the countrywas increasing every year and in the lastseven months it
had touched the figure of$600 million which is higher by 50 percentcompared to the
same period of last year.µ
(Source: Business Recorder)
Most of this investment was in oil and gas,
construction,
real
estate
andtelecommunication sectors and was result ofpositive policies of the present
government.
Hafeez said that the image of the country isimproving internationally and its growth
rate,stable government and positive policies areattracting them to invest in this country.
Foreign investors should now come forwardto invest and avail the vast
opportunitiesavailable in gas, oil and other sectors inPakistan and get benefit of business-
friendlypolicies of the government.
An Overview
Developing countries by and large face agap between domestic savings and thedesired
level of investment. In case ofPakistan, for example, domestic savingsconstitute only 15-
18 per cent of GDP. Thisgap is to be filled by the inflow of foreigncapital. Foreign direct
investment (FDI) isarguably the most important source offoreign capital. In addition to
filling thesavings-investment gap, FDI yields a numberof advantages to the host country
includingtransfer of technology and managerial know-how, employment generation,
revenues tothe government, provision of qualityproducts to consumers, creation of
backwardand forward linkages, broadening ofindustrial base, and increase in exports.
In order to increase the level of foreign
capital
inflows,
developing
countriesliberalize their trade and investment regimeby relaxing governmental controls
andoffering a number of financial and tradeincentives like tax concessions and
tariffreductions. Though exceedingly important,the right level of foreign investment is
notenough. What also matters is the direction ofinvestment, that is, in which sectors it
is made.

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Having outlined the importance of FDI, let·sglance at foreign investment regime
ofPakistan. However, before doing this itseems appropriate to look at the level of FDIin
Pakistan during last one decade.
Total FDI inflows into Pakistan from 1995-96 to 2005-06 stand at $10.93 billion,
whichcome to $994 million a year. This of course isfar below the desired level. In 1995-
96,Pakistan attracted the (then) record $1.1billion FDI, which was mainly due
toagreements with Independent PowerProducers (IPPs).
However, the next year FDI registered asharp fall as the successive
government,repudiated agreements with IPPs. Thusensued a row between the
Government ofPakistan and IPPs, which severely affectedforeign investor·s confidence in
Pakistan.Pakistan·s decision to go nuclear in 1998prompted several countries to
imposeeconomic restrictions, which also reducedFDI inflows. The sudden freezing of
foreigncurrency accounts following the nuclearblasts increased the risk of doing business
inPakistan and severely affected FDI. The FDIlevel improved during last four
financialyears mainly due to consistent economicpolicies of the government. In 2005-06,
FDIcrossed the $3 billion mark for the first timeas the total FDI was registered at
$3.52billion. However, the source of nearly half ofthe FDI was proceeds from the sale of
stateenterprises.
As regards the direction of FDI, financial
services, telecommunications and the energy
sector have received the bulk of FDI. Themanufacturing sector, especially the all-
important textile sector, has received meagerFDI inflows. This also means that
Pakistanhas received very little export-oriented FDI,thus limiting the role of FDI as a tool
ofexport promotion.
(Source: Board of Investment, State Bank of Pakistan)
Coming to FDI regime of Pakistan, overpast one decade Pakistan has opened itseconomy
through
privatization
andderegulation and presently it has a veryliberal FDI regulatory regime. The
regulatoryframework for foreign investment consists ofthree laws: Foreign Private
Investment(Promotion & Protection) Act 1976;Furtherance and Protection of
EconomicReforms Act 1992; and Foreign CurrencyAccounts (Protection) Ordinance
2001. Takentogether, these laws protect FDI as follows:
One, there is freedom to bring, hold andtake out foreign currency from Pakistan inany
form. Two, fiscal incentives provided bythe government cannot be altered to
thedisadvantage of the investor. Three, theprivatisation of an enterprise is fullyprotected.
Four, no foreign enterprise can betaken over by the government. Five, originalforeign
investment as well as profits earnedon it can be repatriated to the country oforigin. Six,
equal treatment is provided to aforeign investor and local investor in termsof import and
export of goods. Seven, FDI isnot subject to taxes in addition to thoselevied on domestic
investment. Eight, foreign

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currency accounts are fully protected and
they cannot be freeze.
(Source of facts & Figures:Foreign Currency Accounts
Ordinance 2001)
Pakistan business strengths are investor-friendly policies allowing 100 percent
foreignequity, protection to private investment,remittance of profit, royalty and
technologyfee, zero import duties on raw materials forproduction of export, large and
growingdomestic
market,
well-establishedinfrastructure, skilled, qualified and costeffective manpower, regional
hub in view ofgateway to Central Asian Republics andstrong links with Gulf region and
South Asia.
There is huge potential of investment of Rs594.4 billion in engineering industry
inPakistan against existing Rs 289.8 billion inthis sector including potential in
Automotive& Agriculture Implements of around Rs110.3 billion, against existing Rs 65.3
billion,Rs 26 billion in heavy machinery againstexisting Rs 17.5 billion, Rs 13 billion
inConsumer Durables against Rs 9.5 billion, Rs21 billion in Surgical & Cutlery
againstexisting Rs 15 billion, Rs 251.5 billion in Steelagainst existing Rs 83.5 billion and
Rs 172.6billion in others against existing Rs 99 billion.
As regards investment policy, all economicsectors including the service sector are opento
FDI. Foreign equity up to 100 per cent isallowed. No government sanction is requiredfor
setting up an industry in terms of field of
activity, location and size except in case offour sectors relating to national security.Under
the deregulation policy, governmentcontrols on business activity are beingrelaxed. To
avoid double taxation on incomeearned by foreign investors, Pakistan hasconcluded
agreements with 51 countries.The list includes nearly all the developedeconomies.
However, one area in theregulatory regime needs a lot ofimprovement is the protection of
Intellectualproperty rights (IPRs), particularly copyrights.Despite bringing copyright
legislation inconformity with international copyright laws,the government has not been
able to curbpiracy. This increases the cost of doingbusiness in Pakistan.

Factors affecting FDI in Pakistan

Let·s turn to social, economic and politicalfactors that have bottlenecked the growth
ofFDI in Pakistan. Take political uncertaintyfirst. Political instability has been endemic
inPakistan. During 1990s four governmentsand parliaments were dismissed and
threegeneral elections held towards the close ofthe decade, the civilian set-up was
replacedwith a military regime. Furthermore,whenever a civilian government was in
office,speculations of its sack were ripe. Politicaluncertainty increased the risk of
doingbusiness in Pakistan and decreased itsattractiveness as a market for investment.
Frequent changes in government alsomade continuity of policies difficult. In ourcountry
there is a tendency on the part of agovernment to undo the policies of its

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predecessor. The row between the NawazSharif government and IPPs has already
beenmentioned. Policy aphorism also begetsuncertainty and increases the
investment risk.
Another important factor is law and order.During last one decade, Pakistan has
beensubject to twin menaces of religiousextremism and ethnics, which have taken aheavy
toll on our economy. Ironically ethnicviolence ran rampant in Karachi, Pakistan·sbusiness
capital. There were several incidentsof murder and kidnapping for ransom. Oflate,
Pakistan has faced a series of suicideattacks in different parts of the country. Acouple of
years back, the president had anarrow escape in two incidents occurred inthe same place
in a heavily guarded area.
The fourth factor is lack of human capital.Workers are widely regarded as the
principalasset of a firm and the capital source of itscompetitive advantage. That is why
there isso much emphasis in developed countries onhuman resource development.
In Pakistan however development ofhuman capital has been given a short shrift,which is
responsible for low workerproductivity. While making investmentdecisions, MNCs take
into account bothworker productivity and wages. In Pakistanwages are low but
productivity is also low.
Infrastructure, including rail, road andtelecommunication network, and price
andavailability of utilities is another area thatneeds a lot of improvement. Cost of water
and power for business consumers inPakistan is higher than those in otherneighboring
countries like India and China.
Infrastructure is also not up to the mark.Poor infrastructure and high cost of
utilitiesincrease the cost of doing business andmake a country a less attractive market
for FDI.
Last but not least is the cultural factor. Anoverwhelming majority of existing orpotential
MNCs in Pakistan are western. Thepeople of the West have a lifestyle differentfrom us
and want to continue that whilestaying here. However certain self-righteouspeople want
to impose their own values onforeigners and thus meddle into theirpersonal private lives.
Nothing irks theseforeign investors and managers more thanmeddling into their personal
lives.
In sum, to increase FDI, apart from creating
an investor-friendly regulatory regime, thegovernment will have to improve law andorder
situation and pursue consistentpolicies. Political stability, human resourcedevelopment
and cultural tolerance are alsoof capital importance