The 2021-22 budget represents a major opportunity for Pakistan’s economy to accelerate out of the Covid-19 pandemic by encouraging home-grown enterprise at the same time as attracting foreign investment.
Foreign Direct Investment (FDI) has been a constant priority for successive governments. Total FDI in 2019 rose by 30% compared with the year before to US$ 2.2 billion, which is good news as investment creates jobs and increases prosperity for our country. As the fifth most populated country in the world with a strategic location, coupled with the fiscal incentives available and the safeguards provided to protect investment and the repatriation of dividends and profits, it is easy to see why foreign investors should be interested in Pakistan.
Once foreign investors have taken the step to invest in Pakistan, it is important to make sure they remain satisfied, that they are able to grow and keep remitting profits back to their home country. They can threaten to leave or stop planned investments if they don’t like existing or proposed government policies. It takes a strong government not to be swayed by such threats, be they implicit or explicit, and it makes foreign investors much more influential than domestic investors, whose threats to disinvest would be much less credible.
As the weight of foreign interests in the economy and in tax revenue increases, economic governance begins to favour foreign over domestic investors, and the problems this causes can be severe. We see an example of this in the tobacco sector, which has for many years been dominated by two foreign companies. Their products are household names and their grip on the sector is so strong that FBR relies on them for over 95% of the federal excise revenue from tobacco sales. Despite that, the largest of the two managed to increase its profits by 23% during 2020, a year in which most other companies suffered greatly from the effects of the pandemic. It did so by raising the prices of its most expensive products at the same time as benefiting from a zero increase in taxation.
Meanwhile, domestic investors in the sector struggle to get a foothold in the market as the federal excise duty system guarantees high profit margins even though cigarettes in Pakistan are among the cheapest in the world. This makes it attractive for multinationals to sell internationally known brands at cheap prices. When domestic brands are sold at similar prices, they simply cannot compete.
It is imperative that government shows regard for the hard work and commitment of domestic investors and to level the playing field between them and foreign investors. Domestic investors must be availed similar protection as their ability to generate prosperity and tax revenue for the country is just as great, if not greater. And where fiscal reform is necessary to achieve this, such as in the tobacco sector, then the government must not hesitate. This coming budget is the time to act and to strengthen the fabric of Pakistan’s economy.
