Pakistan as an investment destination for U.S. business

Country Evaluation

Pakistan is the South Asian country and was established in 1947. It shares border with India, Tajikistan, Afghanistan, Iran and China. It has a coastline spanning of 1,046 km with Arabian Sea. The country has highest peaks in the world that are K2 and Nanga Parbat of Karakorum and Pamir in the northern and western highlands of Pakistan. Islamabad, Lahore and Karachi provide the major by air gateways to Pakistan. India and Iran also provides the way to reach Pakistan by train.

There are several favorable characteristics that make Pakistan an ideal country for an international business. However, the country is facing imbalanced economic, societal and political conditions since independence due to which investors gets reluctant to invest in the country. This report reviews the favorable and unfavorable aspects of Pakistan for U.S. investors.

Investors need to consider various factors before making investment for an international business. First the investors assess the economic conditions of the host country from different scenarios. Evaluate the risks and opportunities relevant to the business. Moreover, make an analysis of the costs and profits.

Pakistan Current Economic Conditions

Pakistan is a developing country and its economy is the 27th largest economy of the world in purchasing power. However the country is still facing poor conditions due internal political disturbances and lack of foreign investments. During 2001-2007 the poverty levels reduced by 10% due to development spending by Islamabad. The economic conditions also got better during 2004-2007 because of GDP growth from 5 to 8%. The industrial and services sector brought positive changes to economy of the country but now electricity shortfalls are creating a big hurdle in the growth of the country.

Exports and Imports

Despite the global downfall during April to July 2012, Pakistan has well maintained its exports. There has come an increase in the exports up to 30% last year and 6% increase is expected this year. Overseas Pakistanis have eased pressures on economy and also strengthened reserves by unprecedented inflow of remittances. It is expected that remittances will cross up to $13 billion this year. Similarly, GDP is expected to grow 4% by this fiscal year and 6 to 7% growth in next 6 to 7 years.

US - Pakistan Business Council is optimistic about business opportunities in Pakistan even in presence of number of challenges. The American business leader has also expressed members' support for the economic relations and strong trade between the two countries. (Recorder Report, 2012)

The volume of exports has increased by $2.5 billion with the Afghan Transit Trade Agreement that has encouraged formal trade between Afghanistan and Pakistan. Efforts to Free trade agreements and preferential trade agreements are in progress to increase the trade with many other countries.

Imports during July - April 2011-12 have increased by 14.5%. The reason for this was high oil prices and so the import of fertilizers. Due to this the current account deficit remained at $3.4 billion. However, workers' remittances have helped a lot in maintaining current account balance.

The current situation of imports and exports in Pakistan is not as favorable for the U.S. investors since high oil prices and energy crisis has increased the imports. Moreover, increase in exports level is also not satisfactory. However, if the U.S. investors invest in electricity plants then it will highly boost the level of exports and imports will decrease too. So there are high opportunities in energy sectors. Once the energy problems gets resolved, there will be large number of opportunities will also open for other investors.

Exchange Rate Stability

Due to recent tension that prevailed between U.S. And Pakistan on NATO routes to Afghanistan, the foreign aid and investments to Pakistan decreased. This made a bad impact on the value of Rupee as well. The Rupee value depreciated down to 97 per dollar. It was 89 per dollar till January 2012. However, the value of rupee has increased with 94.50 per dollar in July 2012. During this period, the foreign as well as local investors were not taking interest in investments in Pakistan. However, since the NATO routes have been restored, the investors' confidence and economy has raised. The stock market has already shown improvement in foreign exchange reserves and it is now expected that the economy will move towards growth and recovery. (Mahmood, 2012)

The exchange rate of Rupee-Dollar is expected to stabilize once the economic conditions and supply demand rate will improve.

Foreign Direct Investment Policies

The foreign direct investment to Pakistan stood at $668 million during the period July-April 2011-12 whereas it made $1,293 million last year. The global financial crunch and the euro zone crisis were the reasons of low capital flows. However, oil and gas exploration remained at the top for the foreign investors making share of 70% in total FDI during July-April 2011-12.

Pakistan has liberal investment policies on repatriation that made it ideal for the foreign investors from different scenarios. For example, foreign direct investors can enjoy remittance of royalty, technology and franchise fee is permissible for projects in agriculture, international food chains, infrastructure, and social services franchises. Secondly, there is minimum share of Pakistani partner in a joint venture. Thirdly, FBR also do not inquire the investor about the source of investment. Fourthly, foreign investors do not need to take permission from Government on investment in industrial project. Foreign investors can avail many other advantages on investing in Pakistan. (Masood, 2010)

The easy going FDI policies of Pakistan makes it an ideal country for U.S. investors since there are no strict laws and policies for the foreign investors. Moreover, there are opportunities of high return on investment in big projects like oil, gas and energy plants.

Taxation Policies

Pakistan applies zero-corporate tax policies for the foreign investors that make it easier for them to establish their business. However, majority investors are of the opinion that major hurdles are not the policies set by the country but the corruption, instable economy, terrorism activities and energy crisis are the central problems. Many foreign investors went through bad experiences of investment in Pakistan. The zero corporate tax policies first attracted the foreign investors but later on they were trapped in negative tactics of extorting taxes by corrupt leaders. (Dawn, 2012)

Labor Market and Employment

The higher percentage of Pakistan's population is of youth thus acting as the productive asset for the country. As according to the labor force survey of 2010-11, there were 57.2 million people in labor force out of which 53.8 million people were employed. Pakistan is making efforts to develop equitable, efficient and rights-based labor force market. Currently the wage rate is quite low as compared to the developed countries. So it provides cost benefit to the foreign investors. Moreover, there is high rate of unemployment in the country so it would not be easier for the foreign investor to hire skilled worker at minimum wage rate.

Transport and Communication

The current situation of transport is not quite well. Pakistan Railway and Pakistan International Airlines are going through crisis. However, the Cabinet Committee of Restructuring has approved the restructured framework for Pakistan Railway. The Government has allocated Rupees 6 billion for repair of trains and freight operations. Moreover private sector has also started running a passenger train.

The telecom sector is booming in the country and has made 68.3% increases in April 2012. The electronic media industry has gone through U.S. $2.5 billion investment.

Environment

Pakistan has faced number of drastic environmental conditions since few years. The earthquake and floods have recently made the country to go through tough conditions. The country is still facing deforestation and degradation of Water and Air quality, loss of biological diversity and climate change impacts. However, the Government has started projects to improve capacity or concerned institutions to deal with the environmental degradation. The situation of access to drinking water in Pakistan is quite impressive. An average of 87% population has an easy access to drinking water. Sanitation facilities have also improved. (Pakistan Economic Survey, 2012)

Cultural Complications

Urdu is the national language of Pakistan. However, the ministry of education of Pakistan has made English a compulsory subject at schools. So, the U.S. investors do not have a problem of communication. The ethnic and religious groups are strong in Pakistan. So the investors have to strongly take care of the customs and religion.

Social and Political Stability

Pakistan is facing the political instability since long period. It is due to instability that the country experiences increase in unemployment, poverty, poor economic conditions, and low private investment. The country's relations with international world are also deteriorating due to corrupt Government ruling and instable political situations. Since, foreign investors have lost confidence over the Pakistan's economy and its economic managers.

The social and political conditions are still very poor in the country and investors have no positive expectations that whether the future Government would be able to bring economic growth for the country. (Khan, 2012)

Conclusion

Pakistan has developed a potential market for the foreign investors since it provides cheap labor, tax incentives, good return on investments, and liberal investment policies. However, the economy, political conditions and energy crisis are the big factors that have made the investors to think number of times before investing in Pakistan. There are high opportunities for foreign investors in Pakistan if these major issues get resolved. The U.S. investors must think to invest in the services and industrial sectors. Since, Pakistan is highly in need for industrial investors and so there are chances of high returns in these sectors.