Dr Kamal Monnoo
Are departing foreign investors implicitly questioning Pakistan’s willingness to undertake some key hard-nosed reforms? Ones that they opine are essential to realising their investments’ potential in Pakistan amidst an era of supply-chain constraints, especially in the South Asian and Persian Gulf peninsula? Or are they simply nervous about excessive governmental oversight and taxation, despite some unprecedented incentives on paper that, in many ways, are unique to Pakistan, in an environment where the bureaucracy has unbridled powers but the judiciary operates with little backbone? Or perhaps both?
Why these questions make good sense is that an initial analysis of the growth in corporate earnings for Q2, which ended in September, makes some pertinent revelations. Based on almost 30 results reported: a) median revenue growth is 21%; b) median operating profit growth is, on average, 31%; and c) median PAT growth is almost 30.5%. This is already on the back of a healthy performance in Q1, which ended in June. Yet, by all accounts, foreign industrial investors and foreign portfolio investors continue to exit the Pakistani market.
It is a given that Pakistan desperately needs capital to grow its economy, especially if the country is to fight poverty and post any type of meaningful growth. So, naturally, the continued flight of foreign portfolio investments is a point of concern.
One argument often given is that FPI managers (wherever they are) are rational people looking to maximise their gains and follow the money, as it were, in an objective manner. So, perhaps, thinking logically, given the rise in bond yields in the US and UK (another matter, though, is that they reflect the growing risk premium of US and UK sovereign paper), the already low relative attraction of Pakistan as an investment option has probably diminished further, especially when global and, more pertinently, our regional risks are worsening.
Further, the fact that Pakistan does not figure anywhere in investor choices involving AI, along with the steady depreciation of the rupee, could be additional contributing factors. Something that becomes even clearer if one looks at who actually gained or where these funds moved to.
So, between January and September this year, in dollar terms: 1) South Korea’s Kospi gained 72.4%; 2) Taiwan’s Taiex gained 64.5%; 3) Japan’s Nikkei gained 31.8%; and 4) India gained around 18.4%.
The trouble is that while there may be periods of attractive returns in Pakistan, what is truly required is to revisit policies based on mindlessly extracting taxes and correct the outdated mindset of boosting exports through currency devaluations.
Also, Pakistan seems to be caught in a no-man’s-land where, for financial investors, it is not cheap enough for real value gains but is not growing fast enough to attract growth investors. For manufacturing investors, it is neither competitive nor skilled enough to yield sustainable profits. We have seen that despite the current surge in corporate earnings, the beeline by MNCs to exit Pakistan remains unchanged.
We all know that each successive government in Pakistan over the last four decades has talked about reforms but never really adopted any of the key difficult ones, especially those that tend to be politically sensitive.
With an economy now quickly dismantling and both regional and global markets full of present and emerging challenges, it will be interesting to see whether the current team has the will and the mandate to correct course before it is too late!
The writer is an entrepreneur and economic analyst. Email: [email protected]
Courtesy
