Daily Times

This paper highlights the key determinants foreign investors must explore before initiating a business venture in Pakistan. It also addresses the significant steps the Government of Pakistan has taken to accelerate the country’s economic diversification, global integration, and improvement in human welfare by way of Foreign Direct Investments (“FDI”). However, what begs the question is whether the recent outbreak of Corona Virus 2019 (“COVID-19”) shall result in a decline in FDI in Pakistan?

Pakistan has a relatively friendly legal environment for FDI which, coupled with an improvement in law and order, has made the country a suitable candidate for international investors in the industrial and manufacturing sector; however, corruption remains a major hurdle to foreign investment. Nonetheless, a legal regime to govern, regulate and protect foreign investors in Pakistan exists in the form of the Protection of Economic Reforms Act 1992 (“PERA”) and the Foreign Private Investment (Promotion and Protection) Act1976 (“FPIA”). Under these laws the Government of Pakistan provides protection of fiscal incentives for setting up industries and offers a shield to the foreign investors against the government from acquiring their investments. The investors are free to bring, hold or take out foreign exchange within or out of Pakistan in any form and are given immunity from inquiry from the Income Tax Department. The earnest efforts of Pakistan are evidenced from the fact that the banks are ordered to maintain complete secrecy in respect of foreign currency accounts whereas, the State Bank of Pakistan (“SBP”) shall not impose any restrictions on deposits or withdrawals. In tandem with these incentives, the Government of Pakistan is obligated to accord equal treatment to the foreign private investments.

Despite facing a myriad of challenges in the form of political instability, rising security concerns and stagnant economy,the investment outlook has improved. Pakistan’s FDI has increased by 289.0 USD million in February 2020, compared with an increase of 223.1 USD million in the previous month. With respect to this growth, the Secretary General of Overseas Investors Chamber of Commerce and Industry, Abdul Aleem, remarked that, “The pending rupee devaluation was one of the biggest concerns of foreign direct investors. Now when Pakistan has addressed the concern, it has regained foreign investors’ trust on the country”.

Significantly, Pakistan was ranked 108th out of 190 countries in the World Bank’s Doing Business Report 2020where it was also acknowledged as one of the countries with the most notable economic improvement. While China dominates foreign investment due to China Pakistan Economic Corridor (“CPEC”), other countries such as Netherlands, Norway, Turkey, Hong Kong and Italy have shown interest in the oil, gas, energy, financial business and telecommunication sectors of Pakistan. In the fiscal year July- February 2020 (“FY2020”), the oil and gas industry alone attracted 177USD million whereas financial business, power and communication sectors received 194.7 USD million,575.6 USD million and 471.8 USD million respectively.

Chinese inflow in Pakistan was approximately 696.5 USD million in FY2020, with respect to CPEC, power projects and the telecommunications industry. Malta’s inflows are at 148.2 USD million in the eight-month period of the year 2020 whereas, Norway and Hong Kong’s investments amount to 288.5 USD million and 105.8 USD million inFY2020 respectively. Furthermore, in the FY2020, the FDI by different countries are as follows; UK 90.9 USD million, USA 60.5 USD million, Hong Kong 108.5 USD million, Switzerland 41.2 USD million, Netherlands 73.5 USD million, Japan 47.3 USD million and Itlay 36.6 USD million.

The above-stated figures reflect the government’s endeavours topursueFDI attraction policy with the guarantee of equal treatment between foreign and local investors and a whole series of tax incentives. The country has financial and logistical support from the United States and the International Monetary Fund (“IMF”).What’s more is that, Pakistan offers a number of tax incentives for the establishment of industrial units in certain specific sectors; energy, ports, highways, electronics and software.Pakistan has also set up special export-oriented zones called export-processing zones, in order to encourage foreign investment. Over and above that, profit or capital remittance shifts are made without any stipulations by routing the same from scheduled commercial banks in Pakistan without repeated approval from theSBP. According to the SBP data, foreign investment in government securities such as market treasury bills and Pakistan Investment Bonds have reached $1.839 billion, compared with $0.1 million a year ago.

Pakistan follows a generous Investment Policy 2013(“Policy”) framework whereby facilitation is its keycornerstone. Amongst other incentives, the Policy provides a good return on investment of about 30%. The Federal Board of Revenue (“FBR”) does not question the source of investment and only inquires whether the investor has paid the requisite income tax on that specific investment. All sectors and activities are open for foreign investment unless specifically prohibited. There is no minimum requirement for the amount of foreign equity investment in any sector and no upper limit on the share of foreign equity .Foreign investors in any sector shall at any time repatriate profits, dividends, or any other funds in the currency of the country from which the investment was originated. What’s more is that, the foreign companies in compliance with the Companies Act 2017, and other applicable laws of Pakistan do not require any separate approvals for their investments, with the exception of a few businesses. The Board of Investment (“BOI”) of Pakistan has instituted an online registration procedure for foreign companies entering and operating in Pakistan which serves as a notification to the Government of Pakistan of the presence of the investor and guarantees the investor to entitlements specified in the Policy.

Additionally, by virtue of the Investment Promotion Startegy: FY 2020-2024 (“Strategy”),the BOI will focus on five priority sectors i.e. “auto and auto part manufacturing,” “food and beverage manufacturing,” “information technology,” “logistics,” and “textiles” for the development benefits typically associated with FDI projects. Through these sectors, the BOI will try to establish linkages between FDI and domestic suppliers, service providers, and joint venture partners and shall measure its success or failure in its pursuit of FDI on a yearly basis.

It is to be appreciated that, Pakistan has signed Double Taxation Treaties with 52 countries which enables foreign investors to claim tax credit in their home-country in respect of corporate taxes paid in Pakistan. For the purpose of avoidance of double taxation and prevention of fiscal evasion the Islamic Republic of Pakistan entered into various Conventions with the United States July 01, 1957,with Netherlands on income on 24th March 1982, with Portugal on 23rd June 2000, with the Swiss Confederation on 21st March 2017 and with Japan on 23rd June 2008 amongst others. Moreover, the Economic Coordination Committee has approved of simplification of taxation for investment in government securities promoting greater interest in investments.

We cannot ignore the fact that, to promote infrastructure financing in Pakistan, the SBP has issued Prudential Regulations for Infrastructure Project Financing with the aim of assisting banks and Development Finance Institutions(“DFIs”) to develop expertise for financing of infrastructure projects, essentially by evaluating the intrinsic cash flow generating ability of these projects. Besides conventional infrastructure financing, banks/DFIs are also encouraged to adopt Islamic mode of banking to develop infrastructure products as it is very conducive to infrastructure financing. Five major banks i.e. Muslim Commercial Bank Limited, Habib Bank Limited, United Bank Limited, National Bank of Pakistan, and Allied Bank Limited are involved in project financing in Pakistan. Principal agencies of finance are now available in Pakistan in the form of joint stock banks, co-operative banks, industrial corporations and to a very small extent the money lenders.

Appreciably, Pakistan encourages the inevitable investment disputes to be amicably settled through internationally recognized principles of Arbitration/Alternate Dispute Resolution mechanisms which are acceptable to all the parties. Former Chief Justice Mr. Saqib Nisar stated that, “smart courts will be set up in the form of commercial courts which would decide matters related to the CPEC and Foreign Direct Investment (FDI) on mediation / ADR techniques on a fast track basis, thus providing quick redressal to investors, which will help Pakistan reassure and give confidence to foreign investors in Pakistani courts”.

To defend investment claims and restore the investors’ confidence the Government of Pakistan has enacted The International Investment Disputes Act on 2011. Pakistan is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 whereby, foreign arbitral agreements and awards are now enforceable except for rejecting the same on the grounds set forth in the Convention.

Despite the afore-stated efforts of the Government of Pakistan, we cannot ignore the fact that the recent outbreak of COVID-19 has led to significant economic deficits with a shrink in the FDI worldwide. According to Asian Development Outlook (ADO) 2020the economic growth in Pakistan is expected to reduce to 2.6% whereas, inflation is projected to accelerate to 11.5% in FY2020.

The Un Report on 1st April 2020, warned that,” the adverse effects of prolonged economic restrictions in developed economies will soon spill over to developing countries via trade and investment channels”. The IMF has announced that the world has entered into a recession as bad or worse than in 2009.Meaning thereby, that Pakistan shall expect less FDI in the FY2020 due to this sharp decline in global economy with an estimated economic loss of PKR1.3 trillion. In words of UNCTAD Secretary-General Mukhisa Kituyi, “…things will get much worse for developing economies…”. Indeed, COVID-19 shall prove to be catastrophic for Pakistan due to high capital outflows, lost export earnings and currency depreciations.

As seen from the numbers above, although Pakistan has seen a growth in FDI, it was primarily due to the fact that the outflows of FDI were less than the inflow. Having said that, as anticipated by the UNCTAD, the outflows of capital in the developing countries shall see a rise which will ultimately result in a backwards shift in FDI with respect to Pakistan. On account of this, there will surely be an overall ripple effect causing disruptions in our foreign market.

With that being said, Aleem stated that, “The virus will not have a lot of impact on foreign investment because the inflows are long-term commitments.”He also acknowledged that the ongoing projects shall continue to attract investment. To further support his comment, it is be pointed out that although the largest source of FDI i.e. CPEC, is affected only temporarily the construction of CPEC will be back on track of development following the immediate preventive measures to be taken to curtail the spread of COVID-19 in Pakistan. Already, twenty-two energy and transportation infrastructure projects have been initiated where ten special economic zones have also been approved.

Quite notably, the preventive measures undertaken by Pakistan are further strengthened by the provision of a USD $200 million package by the World Bank with the aim of assisting Pakistan in instating effective and timely action against COVID-19. By the same token, the Pandemic Response Effectiveness Project (“PREP”) shall assist the poor and vulnerable sections of Pakistan to cope during the pandemic. Illango Patchamuthu, the World Bank Country Director for Pakistan, expressed optimism in the following words, “PREP will …. make available resources to support cash transfer through existing arrangements to the poor and vulnerable. We will continue to partner with Federal and Provincial Governments to ensure effective implementation during these testing times.”

In essence, the potential for achieving socio-economic stability and continuing to attract FDIs in spite of COVID-19 remains favorable for Pakistan. As rightly pointed out in a UN report that it is, “the first pandemic in history that could be controlled. The bottom line is, we are not at the mercy of the virus”.

The writer is an Associate Advocate, LL.B (Hons) from University of London