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SAZH-TAF Report on FDI

Literature Review - Review of Investment Policies

The 1950s - 1970s

In the first twenty years after the independence of Pakistan, only three out of twenty-seven basic industries were state-owned (Khan et al., 1999). This means that the country was primarily dependent upon the private sector to bring in investment, foreign investment was restricted, as only locals were allowed to invest in the important sectors of banking and services etc. Through the Economic Reforms Order 1972, the Government started nationalization project and took over ten major areas such as cement, gas, public utilizes and heavy engineering. With the public sector being the leading driver of the economic growth in the era, “all foreign investment was, however, exempted from the purview of the nationalization.” (Khan et al., 1999)



The 1980s

The disappointing public industrial sector performance post-nationalization propelled the government to alter their approach. Thus, in the 1980s, the Government of Pakistan opted for a mixed economy. The industrial policy statement of 1984 put this approach in writing by giving both sectors equal weightage. Although, private sector investment was certainly encouraged, this policy was never enforced, and the public sector remained in control over the key industrial areas. There was also a clear focus on attracting FDI. In pursuit of the same, new policy measures were introduced, such as the liberalization of the exchange rate, creation of an Export Processing Zone (EPZ) in Karachi, and a one window facility.

 

To the government’s dismay, these incentives did not yield a boom in the inflow of FDI. This was because the country’s economy was still heavily regulated with measures such as “(i) significant public ownership, strict industrial licensing, and price controls by the GOP; (ii) the inefficient financial sector with mostly public ownership, directed credits, and segmented markets; and (iii) a noncompetitive and distorting trade regime with import licensing, bans, and high tariffs.” (Khan et al., 1999)



The 1990s

To attract higher FDI and circumvent the main hindrances faced in the 80s, the government subjected local investors to the same regulations as their foreign counterparts. A significant measure was eliminating the requirement for the state approval of foreign investment that was previously put in place by the Foreign Private Investment (Promotion and Protection) Act, 1976 except for certain industries, such as arms and ammunitions, high explosives, and radioactive substances etc. It became mandatory for every investor to obtain a No Objection Certificate (NOC) from the provincial government for location of their ventures. Additionally, both local and foreign investors were allowed to negotiate terms and conditions of payment of royalty and technical fees pertaining to projects with the government. Other investment incentives were also introduced such as “…credit facilitates, fiscal incentives, and visa policy.” (Khan et al., 1999)

 

Furthermore, the government set up Special Economic/Industrial Zones (SEZ) to boost foreign investment in export-specific industries. Similarly, they had the option of obtaining insurance protection for non-commercial risks through the Multilateral Investment Guarantee Agency (MIGA). All of these measures, cumulatively, led to an upward steady increase in Pakistan’s economic growth from 1994 to 1998. An example is FDI coming from foreign investors in the US, Europe, and Japan plus agencies like the World bank and Asian Development Bank in Pakistan’s power sector. “The 1994 Private Power Policy secured foreign investment of US$ 3 billion while the overall foreign investment in 1990-99 amounted to US$ 5 billion.” (World Bank, 2001)



The 2000s

The government in this time, having dealt with international tariffs due to conducting nuclear tests, tilted its foreign investment policy towards privatization. This was done through “…deregulation, fiscal incentives and liberal remittance of profits and capital.” (Zakaria, 2008) The goal was to promote foreign investment not only in technical and export-oriented industries but, all other key areas including agriculture and infrastructure. Some other new incentives were introduced such as local banks giving loan financing to foreign investors. In this era, the most FDI was directed towards the telecom sector, as after the privatization of “…Pakistan Telecom Company Limited (PTCL), liberalization of the sector to allow many private firms to operate, and the consequent competition among them led to an expansion of telecommunication infrastructure across the country.” (Inam 2006, Imtiaz and Khan 2014) From 2006-2007, the telecom sector was the recipient of approximately 35% of the total FDI inflows to Pakistan. In this time, the telecom sector was “…17 percentage points higher than that of the financial sector and 25 percentage points higher than the one in the oil and gas sector.” (Hashim et al. 2006; Latief and Lefen 2019).


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