In a context where global foreign investment increased by 10.9% in 2013, in particular in Europe (+25.2%) and in Latin America (+17.5%), FDI flows to developing economies reached a new high of US$759 billion. However macroeconomic fragility and policy uncertainties are driving investors to caution.
In 2013 FDI reached only USD 900 billion, with the telecommunications sector remaining the primary recipient of the FDI in Pakistan, followed by the financial and the energy sectors. However, FDI's flow remains very low due to different factors: lack of security, political instability, poor condition of its infrastructures, the non-respect of intellectual rights, the arbitrary administration of laws and regulations, the administrative resistance (federal and provincial) to open up its economy.
According to the UNCTAD report on world investments, the potential attractiveness of Pakistan for investments is lower than India, its neighbour, but equal to Sri-Lanka and Bangladesh. However, performance in terms of actual reception of FDI is poor and this situation will not improve because the country has a very negative image on the international level, since it is considered a rear base of Islamic terrorism. Since 2011, Pakistan's relationship with its foreign partners has worsened, which bodes poorly for the possible growth of FDI.
Despite this, many cooperation and equipment agreements have been signed recently with China, especially in the sectors of energy and defense. Turkey, Saudi Arabia, Iran and the Gulf countries are the other major investors in Pakistan.
Information on the 2013 FDI influx in this region can be accessed in the Global Investment Trade Monitor published in January 2014 by the United Nations Conference on Trade and Development (UNCTAD).
|Pakistan||South Asia||United States||Germany|
|Index of Transaction Transparency*||6.0||5.0||7.0||5.0|
|Index of Manager’s Responsibility**||6.0||4.0||9.0||5.0|
|Index of Shareholders’ Power***||6.0||9.0||5.0|
|Index of Investor Protection****||6.3||5.0||8.3||5.0|
Source: Doing Business - Last Available Data.
Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action. **** The Greater the Index, the Higher the Level of Investor Protection.
|Foreign Direct Investment||2011||2012||2013|
|FDI Inward Flow (million USD)||1,326||859||1,307|
|FDI Stock (million USD)||20,916||23,125||27,589|
|Performance Index*, Ranking on 181 Economies||127||-||-|
|Potential Index**, Ranking on 177 Economies||50||-||-|
|Number of Greenfield Investments***||30||18||23|
|FDI Inwards (in % of GFCF****)||5.0||3.0||4.1|
|FDI Stock (in % of GDP)||9.9||10.7||11.6|
Source: UNCTAD - Last Available Data.
Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country's Share in Global FDI Inflows and its Share in Global GDP. ** The UNCTAD Inward FDI Potential Index is Based on 12 Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D, Education, Country Risk. *** Green Field Investments Are a Form of Foreign Direct Investment Where a Parent Company Starts a New Venture in a Foreign Country By Constructing New Operational Facilities From the Ground Up. **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped.
A high degree of corruption exists in the country, especially in the areas of government procurement, international contracts, and the taxation system. Pakistan is not a signatory to the OECD Convention on Combating Bribery.
Other weak points are poor infrastructures, lack of procedural transparency, political pressures, and FDI restrictions in some strategic sectors.
The Government has also set up special export oriented zones called export-processing zones (EPZs), in order to encourage foreign investments. Some of the incentives offered to EPZ investors include exemptions from all federal, provincial and municipal taxes for export-destined production, exemptions from all taxes and duties on equipment, machinery and materials, and access to Export Processing Zone Authority "one window” services.
The government also offers incentives to Export-Oriented Units, which are stand-alone industrial units allowed to operate anywhere in the country but have to export 100% of their production.
However, the government has set ceilings for certain strategic sectors, for example agriculture and certain social sectors. In addition, foreign investment into some sectors is forbidden because of national security reasons.
For more details, you can consult the BOI Pakistan's website (Council for investment) and the Privatization Commission of the Ministry of Finance and Economic Affairs.
However both foreign and domestic investors are restricted to establish and own business enterprises in the following five industrial sectors which are of national importance: arms and ammunitions, high explosives, currency/minting operations, non-industrial alcohol, and radioactive substances.
Foreign investment in an existing Pakistani company essentially follows the same regulations as that for new ventures. Any purchase of shares by a foreign investor would require such investment to be registered with the State Bank of Pakistan so as to enable the entitlement of foreign investment similar to that of a new venture.
There are no minimum or maximum limits imposed on the age of individual investor ownership in a public limited company. However, in accordance with the Companies (Issue of Capital) Rules 1996, the sponsors shall at all times retain 25% of the capital of the company.
Acquisition of more than 10% stake in an insurance company should get prior approval from the SECP.
Similarly, in case of transfer of 5% or more shares of any bank or financial institution by foreign investors, the permission of the State Bank of Pakistan is required.
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Last Updates: October 2014