Politics is likely to weigh heavily on investment decisions of companies and businessmen in 2018 in Pakistan because of worsening political strife and threat of protests by certain opposition parties and religious groups ahead of the upcoming elections.
However, economic analysts and businesspeople say economic growth prospects proffered by improved energy supplies and security conditions, as well as new business opportunities opening up under the multibillion-dollar China-Pakistan Economic Corridor (CPEC) initiative will keep new investments coming in despite political uncertainty.
“Despite concerns, the industry believes the political situation will improve and uncertainty will ease in the next several months the government will complete its term and the elections will be held on time,” argues Saad Hashemy, chief economist and director research at Topline Securities.
This means investors will largely start returning to the market and companies will begin implementing their expansion plans as the country moves towards the new elections.
Syed Nabeel Hashmi, a leading auto parts manufacturer and exporter, agrees. “Indeed, political changes do affect investment decisions because businesses like stability. But I think the lull in investment in the first half of 2018 is not going to break the growth momentum,” he says.
“I think the elections are going to generate a lot of economic activity, and create new business opportunities and jobs. Unless there is widespread political disturbance and violence, I see the economy and private business grow pretty fast in 2018, despite it being an election year,” he says.
Triggered by disqualification of ex-prime minister Nawaz Sharif by the apex court in a corruption inquiry linked to the leaked Panama Papers, concerns about the premature dismissal of the PML-N government and possible delays in the next polls had deepened.
This was because of the two-week-long lockdown by a religious group on changes in the oath of elected public representatives and the last-minute refusal of PPP and PTI to support the delimitation bill.
Ever since, the protest sit-in has been called off, the delimitation law passed and fears about future of government dissipated.
Even if the country’s exports have slowed down and fallen by almost a quarter in the last three years, Hashmi feels that domestic demand continues to rise rapidly.
“From auto, steel and cement to food, white goods and pharmaceuticals, you know, there is double-digit growth everywhere,” he says. “Our GDP is growing by almost 7.5%-8% due to increasing domestic demand if we also take our large undocumented economy into account.
No domestic market-based investor or company focused on consumer market can ignore this trend and stop investing in capacity enhancement, no matter what the political conditions in the country are.”
Quratul Ain Irfan, vice president of a pharmaceutical company, says the overall economic outlook for 2018 looks promising, with the CPEC taking shape and reduction in energy shortages.
“Pakistan’s economic outlook is quite bright. Cement, steel, chemicals, food, pharmaceuticals and consumer durables should do well despite election-related political activities,” she says.
The share of consumption in Pakistan’s GDP has increased to nearly 94%, up from around 90% during the last 10 years, according to the State Bank of Pakistan. But the investment-to-GDP ratio has edged up only slightly to around 15% despite a substantial increase in import of machinery and credit for fixed investment during the last couple of years.
Ehsan Malik, chief executive officer of the Pakistan Business Council (PBC) that represents the country’s large local and foreign companies, agrees that market-based firms have been investing in capacity expansion as domestic consumption has grown pretty fast over the years.
But he cautions that the “economy will remain on the edge as our consumption is high and mostly import-reliant.
The demand has far surpassed (domestic) supply (on the back of rising household income in rural as well as urban areas, and the projects under the corridor initiative) and is being met with imports.
It is because our failure to develop a strong, efficient manufacturing base that our exports remain weak and we have sought 12 bailouts from the International Monetary Fund in the last 30 years”.
Analysts like Azfar Akseer, chief executive officer of Akseer Research, do not expect any new major industrial project being launched in 2018.
Though he says the steel, cement, food, automobile and consumer appliances companies that have already announced their expansion plans will stick to their investment plans and timeline.
“As far as new greenfield investments are concerned, I think local and foreign investors will wait for the announcement of the incentives for the Special Economic Zones (SEZs) under the CPEC before making any meaningful investments in manufacturing. And I don’t see that happening any time soon, at least not before the elections,” he says.
Malik does not feel that any local or foreign investor will, in the near to medium term, invest in export-oriented sectors like textiles. “Our exports are down because we have become uncompetitive in the world. Most of the foreign investment (excluding Chinese investments under the CPEC) has been made in existing businesses focused on the domestic market.
“No job is created and no export dollar earned. In fact, this kind of investment will add to pressure on the external account once investors start repatriating profits. Unless the government implements meaningful governance, regulatory, policy and tax reforms, the chances of stimulating investment in the export-oriented sectors will remain a distant dream and we will continue to borrow money to pay our bills,” he says.
With the new auto policy finally in place, a lot of investment is being injected into the industry - courtesy the new and reputed brands entering the Pakistani market. The volume of 500,000 units per annum, projected in the new policy, seems quite possible by 2025. Especially with reference to passenger cars and light commercial vehicles, the overall expansion and growth of the automobile market will offer customers a wider choice.
Having said that, we believe that there should also be a focus on localisation and transfer of technology. That will help save foreign exchange for Pakistan and allow the sale of Pakistani vehicles at competitive prices. That is where the true growth of the industry lies.
As part of our focus on localisation, the Indus Motor Company (IMC) made an investment in the press shop and engine assembly after which we locally assemble engines. Recently, we have invested $40mn in a debottlenecking project in our paint shop to enhance capacity.
In the coming years we are looking at plant expansion so that we can cater to the brimming demand for vehicles in Pakistan. The volume of imported cars is a hurdle for the local automobile industry and acts as a deterrent for new entrants.
In order to cater to the huge demand for vehicles in Pakistan, new players must be encouraged to enter Pakistan at this point. Additionally, the regulatory duty on auto parts cancels out many of the benefits of the auto policy, which is a hurdle for the industry.
Any policies established must be sustained in the long run in order to be truly effective. Only then can the industry attain new heights.
The size of the local pharmaceutical market is around $3.5bn. Local manufactures comprise 65% of this share and the multinationals account for the remaining. The market size can easily exceed $5bn by 2020. But the industry is currently struggling due to a lack of chemical industry in the country, poor governance, lack of compliance with standards and electricity shortages.
It also complains that strict regulatory control on prices of about 900 active ingredients creates distortion in the market and impedes effective supply to end consumers. Around 15 Pakistani companies have diverted their investment into different countries. If Pakistan was receptive the same people would have invested here. For the future the government needs to change the following things to turn the tide: regulate the quality of medicine, not the business.
If industry outputs are being fixed, then the government needs to fix the inputs as well, as happens internationally.
In Pakistan this is not the case therefore in the upcoming year we can expect drug prices to go up because imports of raw materials have become even more be expensive, in some areas going up by 100%.
There will also be industry closures, but since closures in the pharmaceutical industry are done very quietly, we find out when everything’s been sold and the company’s shut down. And if these things are addressed we feel the industry can go in a positive direction.
Politics is likely to weigh heavily on investment decisions of companies and businessmen in 2018 in Pakistan because of worsening political strife and threat of protests by certain opposition parties and religious groups ahead of the upcoming elections. However, economic analysts and business people say economic growth prospects proffered by improved energy supplies and security conditions, as well as new business opportunities opening up under the multibillion-dollar China-Pakistan Economic Corridor (CPEC) initiative will keep new investments coming in despite political uncertainty.
