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The Investment Promotion Strategy
(2020 — 2024)
Following the general elections in 2018, the new Pakistani Government led by Prime Minister Khan released a draft investment promotion strategy for the years 2020 — 2024. This new strategy was developed in conjunction with the World Bank and is designed to further extend the goals of, and build on, the lessons learned under the previous IPS.
In the preparation of the IPS 2020 – 2024, the Board of Investment (the agency responsible for attracting and managing FDI) conducted a thorough evaluation of all sectors which had initially been promoted by the Pakistani Government as part of its earlier strategy and reviewed the performance and competitiveness on quantitative and qualitative matrices. Following such review, the Board of Investment identified five sectors of the Pakistani economy which had performed exceptionally well and were ideally suited for FDI.
The following five sectors have been designated as priority areas:
- Automobiles and auto-part manufacture
- Food and beverage manufacturing
- IT and IT Enabled Services (ITeS)
This article examines the automobile and IT sectors in detail below.
Another core component of the IPS 2020 — 2024 is the internal reorganization of the Board of Investment itself, so as to provide a more effective and efficient means of facilitating foreign investment and implementing the goals of the IPS 2020 — 2024. Under the IPS 2020 – 2024, the Board of Investment will create region specific units for the purposes of its promotional activities. However, on account of the high importance of the China Pakistan Economic Corridor (CPEC) to Pakistani policy makers, the Board of Investment shall maintain a specific country-level focus on China, so as to allow for the continued expansion of economic ties with Chinese investors.
Additionally, the Board of Investment will revamp its internal structure, in order to be more transparent in relation to managing investor relationships, and will take overt steps to improve the standard of information available to foreign investors. It is understood that a lack of sufficient information has hindered investor referrals in the past and the Government has noted this issue. Lastly, the new strategy envisages a stronger monitoring and evaluation mechanism for better coordination between the Board of Investment and all stakeholders on the Pakistani side, as well as at the international level.
THE AUTOMOBILE SECTOR IN PAKISTAN
As mentioned above, the automobile sector in Pakistan is among the most competitive sectors of the economy and routinely records positive indicators. In the financial year 2018, the automobile sector achieved the highest level of production and growth in this sector, which is expected to continue after a variety of positive indicators and the entry of new players into the sector.
One such new entrant is the renowned Chinese automobile manufacturing company, Changan Automobile Investment (Shenzhen) Corporation, which entered the Pakistani market as part of a joint venture with Master Motors Limited, a group company of the leading conglomerate, Master Group, in 2018.Akhund Forbes Hadi was directly involved in this transaction in its capacity as Pakistani counsel to Changan.
In connection with this transaction, Changan recognized Pakistan as a strategic export base for right-hand driven automobiles and the company intends to export vehicles manufactured in Pakistan to markets as far afield as Malaysia, South Africa, and Indonesia. This transaction marks the first time that an international automobile manufacturer has invested in the country with a view to exporting Pakistani-assembled vehicles. The venture is estimated to be worth $100m.
The transaction is evidence of Chinese state-owned enterprises’ continued commitment to the Pakistani market and realization of the untapped potential in the country. On completion, this business arrangement is set to introduce new automobile models into the Pakistani market at affordable rates. This has had a significant role in re-shaping the status quo in the sector.
THE IT AND ITES SECTOR IN PAKISTAN
Another interesting area for Pakistan’s foreign investment regime is the IT and ITeS sector. The IPS 2020 – 2024 stated that this sector generates approximately $2bn annually for the country and has an average growth rate of around 30 per cent. The Government has placed the IT sector at the very core of its Vision 2025 targets and has also instituted the Digital Policy of Pakistan 2018, which stands to further bolster the role of the IT sector as a driver of economic growth in the country. The Board of Investment has anticipated that the sector will be worth about $25bn by 2025.
Under the Digital Policy of Pakistan 2018, the Federal Government has identified a series of proposals which it plans to introduce into law to allow, creating greater incentives for FDI in the sector. Some of the fiscal incentives in the pipeline extend to exemption of certain duties, a favorable taxation scheme, and the establishment of special operating zones specifically for IT sector-specific companies. In addition to the incentives available under the Investment Policy 2013, the IT sector also benefits from the exemption of tax on venture capital investment until 2024.
Most importantly, the Federal Government has also identified a need to legislate in order to implement IT-sector specific projects as effectively as possible. The overall state of the market for IT sector investments seems ripe for a greater level of involvement from foreign investors. This is evidenced by the exponential rise of companies like ‘daraz.pk’ (an online retailer) which was purchased by the Alibaba Group in 2018. Akhund Forbes Hadi regularly advises The Cheez Group, a Chinese e-commerce company, on its investments in the e-commerce industry in Pakistan.
In recognition of the wider role of e-commerce, the Ministry of Commerce has adopted a policy framework which has the goal of ensuring the ‘holistic growth’ of e-commerce in Pakistan by enabling a supportive environment and stable growth for such companies. The policy was designed with input from stakeholders from all segments of the wider e-commerce sector in Pakistan. It is the first of its kind and is likely to further boost the role of commercial activity and foreign investment in the IT sector in Pakistan.
While the Federal Government is still finalizing a number of policy proposals, the general indication is that the government is keen to enhance the scope of its engagement with foreign investors. Recent efforts by various institutions of the Pakistani State to stabilize the country have also borne considerable fruit. The Pakistani stock market has consistently been one of the strongest in Asia in recent years and is likely to benefit further from increased stability in the region.
The current government has been combating a complex array of economic problems and, in the short term, the fiscal and monetary readjustment has been difficult for some sectors of the Pakistani economy. However, it is anticipated that the recent devaluation of the Pakistani Rupee and a more export-driven economic policy will return Pakistan to a relatively stable economic position in the medium term.
While the exact policies and approaches are pursued by the current Pakistani government cannot be fully evaluated (as they are still developing in a number of areas), continued interest from internationally-renowned brands in investing in Pakistan signals the vast economic potential of the market for the coming years.
It is important to remember that Pakistan is a jurisdiction which remains dynamic for investment and concerted efforts are underway by various stakeholders to simplify procedures and improve the ease of doing business there, as evidenced by recent press statements from the World Bank in connection with its Ease of Doing Business 2020 study.