Pakistan’s impressive economic performance in the past year has received a boost on the political front since General Pervez Musharraf’s government entered into peace talks with India aimed at resolving the long-standing dispute of sovereignty over Kashmir.

Pakistan and India have fought three wars over the territory since gaining their independence 57 years ago, and there are fears that the next conflict could bring mass destruction to the two nuclear powers.

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“We believe that this is a promising moment that is different from past attempts at normalisation with India,” says Maleeha Lodhi, Pakistan’s High Commissioner to Britain. “First, there is recognition in both countries that there are no military solutions to our outstanding differences. Also, we see the international community engaged and nudging the process forward in a way that we had not seen in the past.

“The US, EU and China are all involved in moving this process forward and engaging with both countries. The leadership on both sides has taken up the challenge and shown the political will to move forward. They are prepared to move beyond stated positions and have signalled flexibility at the initial stages.”

Stable prospects

Coupled with what Pakistan’s Prime Minister Shaukat Aziz sees as potential for 8% to 10% GDP growth, the rapprochement with India, along with stabilisation of the Afghan border following that country’s general elections, should bode well for Pakistan’s economic prosperity and attractiveness as a centre for foreign investment. Mr Aziz recently confirmed his confidence in the Pakistan success story by ending ahead of schedule the country’s loan programme with the IMF. “The begging bowl has been broken forever,” he said.

Pakistan’s economic progress recently received a fillip from rating agency Standard & Poor’s (S&P), which raised its sovereign rating by one notch to B+ to reflect declining debt and debt servicing burdens, as well as sustained economic progress. However, as S&P director Ping Chew points out, significant hurdles to foreign investment remain.

“The authorities are moving ahead with regulatory reform and improving the investment climate,” Mr Chew says. “Notwithstanding a difficult external environment, domestic political uncertainties, entrenched vested interests, and a lack of public support, the government has kept the extensive structural reform agenda mostly on schedule.”

Norwegian investor

One favourable development is the investment in Pakistan by Norway’s Telenor, which highlights the potential for domestic demand growth, says Mr Chew. Pakistan could also benefit from the end of the Multi-Fibre Agreement quota regime, which will level the playing field among textile-producing countries.

However, there are still substantial obstacles before FDI can be persistently attracted. In this regard, the government will have to address political and security concerns to restore investors’ confidence.

“Other impediments to investment – including red tape, lack of infrastructure, frequent power outages and the lack of legal safeguards for investment – will also have to be tackled,” Mr Chew says.

Dr Lodhi believes that fears of political instability are overblown and she encourages people to look at the bigger picture. “All of Pakistan’s economic indicators are not just up, but [have risen] in a manner that shows the strong economic fundamentals of the country and underscores continuity. This improvement is not some cyclical phenomenon, it is sustainable,” she says.

Liberal attractions

As Abdul Hafeez Shaikh, minister for investment and privatisation, points out, Pakistan’s liberal investment regime alone should prove a powerful magnet for attracting foreign investors. The government imposes zero restrictions on the movement of capital or remittance of profits and dividends. There is also a strong focus on investor facilitation to help overcome bureaucratic obstacles. The government has opened all sectors to FDI and allows investors to hold unlimited equity.

“We are also aggressively marketing investment opportunities, and to this end we have appointed some 30 investment counsellors and we are supporting a dialogue and exchange of ideas with business people round the world,” says Dr Hafeez Shaikh.

The government is also making efforts to project a positive country image. “Security is a legitimate but also a vastly exaggerated concern,” he says. “Our region is improving so the perception from outside is also bound to change. We are a country of 150 million so there will always be pockets of incidents, but it is important to highlight their isolated nature.”

The government is urging investors not to overlook Pakistan’s potential as an export base for a number of key industries, such as textiles, rice, leather garments, sporting equipment, fruit and vegetables, dairy products, fish farming and surgical goods.

“Export opportunities in Pakistan are significant and they are emerging very rapidly,” says Tariq Ikram, chairman of the Export Processing Bureau. “In these areas investors can leverage Pakistan’s good name and the improving political environment in the region.

“If you look at Pakistan as a cotton growing country, this poses a huge opportunity for people who are closing down plants in the US and western Europe to move production to countries with a lower cost base. Pakistan has the inherent advantage of being the world’s fifth-largest cotton producing country. France is already here but there are at least four foreign companies that are in various stages of negotiation.”

Gem sector key

Mr Ikram singles out the fast-growing gems industry as another key area for investment to export.

“Pakistan mines and exports raw emeralds, rubies and other precious stones, but very little is cut and polished here,” he says. “We now allow foreign investors to come in and set up world class facilities for the export of finished gems in our Dazzle Park scheme.

“In the past four years there has been a lot of FDI in oil and gas, power and telecoms, among other traditional sectors, but we haven’t encouraged exports as aggressively.”

Saudi Arabia’s Al-Tuwarqi group has just invested $150m in a plant to manufacture and export one million steel billets a year. This will be built at Gwadar, the new port that is expected to reduce by 20% the cost and time of exporting to Afghanistan and the Confederation of Independent States.

Since 1999, when the current government came to power, Pakistan’s exports have soared by 44%. The country has achieved a greater degree of geographical diversification, and while the US remains its largest single importer, the EU is now a bigger market overall. Exports by value have risen by $3.74bn over the past four years to more than $12bn and 22% of this now comes from non-traditional sectors.

“This year we are hoping to achieve $14bn, a figure that should rise to more than $16bn next year and $30bn by 2009,” Mr Ikram says.

Realistic view

Minister of Commerce Humayun Akhtar Khan emphasises the importance of seeing the on-the-ground realities of Pakistan.

“The best advice I can give potential investors and businessmen is to actually visit Pakistan at the first opportunity, because seeing is believing,” he says. “The government has been pursuing a wide-ranging economic reform agenda involving privatisation, liberalisation and simplification of the regulatory framework to create a highly enabled business-friendly investment environment. As a result, Pakistan’s trade and investment regime is acknowledged as one of the most open and liberal in the developing world in general, and south Asia in particular.”

Continuity counts

Mr Akhtar Khan says the country’s investment environment is characterised by policy continuity and consistency, which has been enhanced by a fast-improving normalisation process with India.

This has been further strengthened by the recent signing of the South Asian Free Trade Agreement (SAFTA), which comes into effect in 2006.

“In this conducive environment, the Pakistani entrepreneurs and diaspora are heavily investing in existing industries and bringing in new investments in all sectors of the economy,” he says. “Buyer driven FDI in particular has an immense opportunity in Pakistan in traditional and core sectors like textiles and clothing, rice, leather footwear, and surgical and sports goods, as well as in new categories.”

Mr Akhtar Khan says Pakistan is following a two-pronged strategy whereby, on the one hand, the country is strengthening its established export and productive sectors, with a view to improving their competitiveness; on the other hand, the aim is to diversify trade and investment in new or non-traditional sectors.

Focus on engineering

“We regard the engineering sector to be very important and the Pakistani experience has so far been promising,” Mr Akhtar Khan says. “We therefore support the development of manufacturing facilities for auto parts, construction machinery, electronics and home appliances.”

The government is also emphasising chemicals, pharmaceuticals, and ceramic and sanitary ware, as well as shrimp farming for export.

“Those who are willing to take a risk now will be positioning themselves for more attractive premiums and benefits,” says Dr Lodhi. “Today we’re on the cusp of a very dramatic improvement in relations with India and we’re also seeing, after elections in Afghanistan, a stabilising situation in the neighbourhood. Many people have expressed concerns in the past that Pakistan is situated in a volatile part of the world and this is a rough and tough neighbourhood. But look at the dramatic change this neighbourhood is undergoing.

“If the future is about geo-economics, Pakistan is uniquely positioned to become an economic hub and powerhouse for the region,” says Dr Lodhi. “Pakistan can establish an economic nexus by bringing together the vast energy potential of central Asia, the proven productive capacities of south Asia and the enormous capacity in terms of market size of east Asia.

“What we’re looking at is a country that can be a bridge to three key economic regions. Those who are brave and bold in terms of business enterprise and who position themselves now will be able to reap huge dividends in the future.”