Archive | Pakistan

Pakistan Board of Investment

Posted on 05 October 2012 by Gaurav Malik

Pakistan symbolizes “the land of pure” and has been the centre of the great Indus Valley civilization dating back at least 5,000 years. The historical excavations of historical sites at Taxila, Harappa, and Mohenjo-Daro dating back to 3,000 B.C. speak volumes about its rich cultural heritage.

Pakistan is amongst the important emerging economies of the region, with a consumer base of 180 million plus.

Pakistan’s young population presents a strong investment case in the form of growing domestic demand. Pakistan is home to the 10th largest labour force in the world.

Pakistan is at the prime location in the heart of Asia with China as its neighbour in the north, India in the east and Iran and Afghanistan in the West. Pakistan’s ideal location gives her access to all the growing markets of the world. In order to capitalize on its strategic location, Pakistan has adopted liberal and investor friendly policies, broad features of which include; proactive facilitation, guarantees of equal treatment to both local and foreign investors, easy tariff structures and a liberal regime on repatriation of profits. These strategies have borne results with a record inflow of Foreign Investment of US $23billion during the last ten years. Recently, the volatile environment in the region and the global financial crises has affected these figures. However, the Government now plans to undertake further structural reforms in various sectors of the economy to attract investors. The effective steps taken by the GoP to address the militant insurgency were further able to attain foreign investors’ confidence.

Pakistan’s macro landscape has transitioned towards consolidation with the real GDP growth is 2.4%. The overall vision of the concerned departments is to regain macroeconomic stability and to attain GDP growth rate of 7% by 2012-13.

In Pakistan, the per capita income has grown at an average rate of 9% per annum during the last five years rising from USD669 in 2003-04 to USD1, 207 in 2010-11.

 Pakistan has the most liberal investment policy regimes and public-private partnership frameworks in the entire South Asian region.

Foreign investment in Pakistan is fully protected by following Acts:

  • Foreign Private Investment (Promotion & Protection) Act, 1976
  • Protection of Economic Reforms Act, 1992

Agriculture

Agriculture has been the main stay of Pakistan’s economy with a contribution of 20.9% to GDP in FY2010-11. Total cropped area in 2008-09 was 23.68 million hectares.

Livestock sector contributed 11.5% to GDP in 2010-11. The value of livestock is 6.1% more than the combined value of major and minor crops. Poultry meat contributes 19% to the total meat production in the country. Pakistan earned USD964 million from leather exports and a meagre USD188 million from meat exports.

The Federal Government has initiated mega projects worth PKR8.8 billion in livestock. Pakistan is the third largest producer of raw milk in the world with growth potential of 20% per annum in exports. However only a negligible quantity goes into processing due to lack of technical assistance, research institutes and weak infrastructure.

Manufacturing

Auto sales witnessed a substantial growth of 20% on yearly basis to 70, 460 units in the first five months of FY2012 as against sales of 58,784 units in corresponding period last year.

The auto industry was operating at 37% of its installed capacity of 273 thousand units per annum in FY2009 and it is expected that 20% growth in sales in FY2010 can easily be met through higher production by assemblers utilizing the existing capacity.

Pakistan has the second highest number of CNG-powered vehicles in the world with more than 1.55 million cars and passenger buses, constituting 24% of total vehicles in the country.

Investment in the automotive sector stood at USD70.2 million in July 08– April 09.

Total car sales in FY2011 were 101,532 units whereas 87,419 in FY2009-10. Total Motorcycles sales were 1,194,567 units in FY2010-11 against 1,006,008 in FY2009-10.

Declining interest rates regime adopted by SBP likely to induce increased market for purchases in the small-low income segments. The removal of 5% excise duty (passed on to the customers) will enhance sales growth. Fall in steel prices has massively reduced the cost of production of vehicles.

Electronics & Other electrical equipment

In FY2009 the market for electrical appliances and household goods was approximately USD1.4 billion and is expected to increase to USD2.1 billion by 2013.

Federal Excise Duty (FED) on electrical appliances increased by 15-20% during FY2008 in order to discourage import of electronic goods. Further in June 2009, GoP reduced duty on mobile phone sets by 50%.

Export of electronics was approximately USD143 million in 2008 and is projected to increase to USD947 million by 2013.

Support fund of PKR2.5 billion has been allocated for the engineering sector by the Federal Government in the Trade Policy 2009-10.

Pharmaceutical Sector

In 2008 the health care and pharmaceutical sector contributed 2.2% to the country’s GDP, with the pharmaceutical sector solely contributing 1% to GDP (PKR101.6 billion). Demand for pharmaceutical products has been growing at about 10%-15% a year over the past few years. There are 455 licensed pharmaceutical manufacturers in Pakistan and 29 multinational companies (MNCs). The remaining demand is met by 212 drug importers.

The industry is focusing on an Export Vision of USD500 million by 2013. In the meantime, exports are also likely to get a boost due to new regional and global opportunities.

Spending on health care and pharmaceutical products are expected to rise from PKR261 billion in 2008 to PKR424 billion in 2013. The export size of pharmaceutical industry is currently at USD101 million and has the potential to grow many folds to at least USD1,000 million.

 Industrial Sector

Industrial sector contributed 25.8% to Pakistan’s GDP in 2010-11. The sector mostly imports machinery, usually reconditioned, either in part or full. Import of plant & machinery currently has the second highest share in Pakistan’s import bill, after petroleum products. Major sectors using industrial machinery are textile, cement, engineering, construction and fertilizer.

Power generating machinery worth USD1,035 million has been imported in Pakistan during FY2011. Pakistan imported textile machinery worth USD3.18 million during July – November 09.

Great opportunity exists for manufacturers of power generating units (both industrial & commercial), due to the increasing power shortage currently prevailing in Pakistan.

 Textile sector

The textile and clothing industry has been the main driver of Pakistan’s exports for the past 50 years in terms of foreign currency earnings and job creation. 75% to 80% of total cotton and synthetic production is exported in the form of yarn, fabric, readymade garments, bed wear & made ups. Pakistan is the fourth largest producer of cotton and third largest user of cotton. The sector’s contribution to total exports has averaged nearly 60% during the last six years and declined to approximately by 53% during FY2011. Textile Sector contributed 9.5% of GDP and 3.8% employment of total labour force. During FY11, the sector benefited from recovery in retails sales in advanced economies and increased price differential in local and global yarn prices. Investment of about USD7.5 billion has been made in the textile industry during the last ten years (1999-2009).

Pakistan has emerged as one of the major cotton textile product suppliers in the world market, with a share of world yarn and cotton fabric trade of about 30% and 8% respectively. Although the GoP has directed efforts to diversify exports as well as the industrial base, the textile sector remains the backbone of industrial activity in the country.

The five-year Textile Policy 2009-14 offers approximately USD1billion cash subsidy to the textile and clothing sector to boost exports. It plans to boost textile exports to USD25 billion from the current USD17.8 billion by 2014.

Under the new policy, the textile industry has been exempted from load- shedding. It will also enjoy priority in gas allocation like the fertilizer sector. An amount of PKR2.5 billion has been allocated to make export refinance to be available at 5%.

Telecom & IT Sector

The telecommunication sector contributes 3% to the country’s GDP. Pakistan IT exports exhibited a 5-year CAGR growth of 35% and amounted to USD184 million in FY2009 against USD154 million in FY2008. At the end of October 2009 the total tele-density reached 62.4%, with the cellular sector having the leading share followed by Fixed Local Loop (FLL) and Wireless Local Loop (WLL). The cellular companies operating in Pakistan had subscriber base over 100 million at the end of FY2011.

Telecom sector in FY 2011 contributed over PKR 116.9 billion to national exchequer whereas Telecom revenue shows all time high PKR 363 billion (boost of 5.4%) and investment in telecom USD 493 million.

 Internet usage continues to grow and usage subscription was close to 19 million internet users at the end of 2009, with penetration levels at 10.6%. Telecom sector attracted over USD 79 million worth which is 5% of total FDI in Pakistan.

Pakistan is the first country in South Asia to implement Mobile Number Portability (MNP), with over 1.14 million subscribers having availed the facility since June 2009 due to the implementation of the MNP project.

Rate of FED on telecom services is reduced from 21% to 19% in order to reduce the cost of service.

Reduction in loyalty and license fee by PTA and adoption of simple and liberal licensing policies provide ample opportunities. Availability of new SIM cards at cheap prices will further enhance demand for cell phones, whilst the availability of second hand phones on cheap prices will increase the demand for SIM cards.

Based on data provided by PTA, there is still room to penetrate further in the low cellular tele-density areas of Baluchistan and KPK.

There are strong growth prospects in broadband services with only less than half a million broadband subscribers in Pakistan as compared to over 80 million subscribers each in China and US. There are about 19 million users of internet in Pakistan with many still using dial up connections. Based on growth prospects, Pakistan ranks fourth in terms of broadband internet growth globally, supported by proliferation of local and foreign companies into the market and the decline in tariffs.

Power-generation sector

The existing power deficit has been a key blockage for industrial and commercial activities since demand for electricity grew by 6% during FY2003-09 without a corresponding addition to the supply grid during FY2011.

The current supply shortage has been estimated at 8,500MW (megawatts) with frequent electricity outages experienced country-wide in FY2011 whereas demand of electricity growing at over 10% per annum. 67% of Pakistan’s electricity generation is tilted towards thermal power generation with power plants operating at a reduced capacity utilization of 34% presenting opportunities for investment in plant machinery.

Pakistan enjoys abundance in coal resources estimated at over 185 billion tones, including 175 billion tones identified at Thar, in the Sind province. Only 18% of total gas reserves have been discovered in the last decade.

The GoP is offering increased incentives to the private sector for the task of developing independent power producers (IPPs) and rental power projects (RPP).

The GoP guarantees 15% USD IRR along with passage of all expenses to the consumer and 17% for hydel generation. Thus providing predictable multi-year and long term tariff.

Further, in order to tap the mass reservoir of coal reserves at Thal, GoP is considering offering USD indexed IRR of 20-21%.

Transportation sector

Although the quality of roads generally improved in 2008 due to facilitation by National Highway Authority’s (NHA) planed to invest USD5.36 billion in the sector. This plan benefited from a USD900 million multi-tranche loan from the ADB. However, in FY2011 10% of roads were destroyed due to floods. The cargo business generated PKR 6.4 billion in 2010-11 as compared to PKR 4.98 billion in FY2009. Cargo capacity increased by 8.8%.

Civil Aviation Authority (CAA) will develop the International Airport in Islamabad and make it operational by the end of 2013, which is expected to cost PKR37 billion.

CAA will construct the New Gwadar International Airport with the total estimated cost of PKR7.5 billion being financed under the

The construction industry of Pakistan had a total value of approximately USD3.6billion in 2009 and this value is expected to rise to around USD4.2 billion by 2012.Total GNP value of the sector was USD 4.4 billion in FY2011.

Karachi, the largest city of Pakistan, currently has a requirement of 500,000 additional housing units per year, in order to cater demand for the ever growing population.

Rising level of urbanization inclined to increase from 34.9% in 2005 to 50% by 2035, as estimated by the United Nations, provides ample development opportunity in the sector.

 

Mining & Quarrying sector

Mineral potential of Pakistan though, recognized to be excellent is inadequately developed as its contribution to GNP in FY2011 stands at 4.8 billion in comparison to 4.1 billion in FY2010 .

The Mining and Quarrying sector had a GNP total value worth USD 4.8 billion in FY2011. During FY 2011, the mining and quarrying sector has contributed 2.4% of GDP and has growth rate of 0.4% in comparison to 2.2% in FY 2010.

Financial Services Sector

The size of the country’s financial sector, which includes Banks, Non- Bank Financial Institutions (NBFIs), Microfinance banks (MFB), Central Depository of National Savings (CDNS), the insurance sector and financial markets, in terms of assets, has increased to PKR8.2 trillion by end-June 2009 from PKR7.1 trillion at end December 2007.

The banking sector posted profit before tax of PKR77 billion for FY2011 in comparison to PKR83 billion in September 2008.

The banking sector’s expansion has been helped by the privatization drive in the 1990s and strong FDI, averaging USD4 billion during 2004-11. Approximately 81% of the sector’s assets are now in private hands.

Net Domestic Credit extended by the banking sector increased slightly from PKR 5,231.9 billion in FY2010 to PKR 5,612.3 billion in FY2011.

Currently the banking sector comprises of the following: 5 public sector commercial banks, 4 specialized scheduled banks, 23 private local banks, 6 foreign banks, 8 microfinance banks, 6 Islamic banks and 8 Development Financial Institutions.

Education sector

According to Pakistan Social and Living Measurement Survey 2010-11, the overall literacy rate (age ten years and above) is 57.7% (Male 69.5%, Female 45.2%) , with 73.2% in urban areas and 49.2% in the rural.

The trend of investment on education in terms of GDP has been on the lower side with 2.50% & 2.47% in the years 2006-07 and 2007-08 respectively, and was estimated to be 2.10% during 2008-09. The primary cause is considered to be the financial constraints in the given economic situation.

The GoP approved the new national education policy in September 2009 which suggests raising the annual budgetary allocation for the sector to 7%of the GDP and increasing literacy to 85% by 2015.

Tourism sector

The tourism sector has been given the status of an industry in Pakistan and holds great promise for prospective investors.

Pakistan has a blend of beauty and historic sites, ranging from the peaks of Karakorum to the historic civilization of Mohenjo-Daro. Pakistan enjoys a long water coast of the Arabian Sea in its southern region.

There has been considerable merger and acquisition activity in the recent past. The concentration of M&A activity has been observed in the financial services and telecom sectors Key M&A transactions during 2004-09.

Orascom Construction Industries’ stake in Cement Laflarge S.A 69% Pakistan Cement Company Limited. Pure Terephalic Acid divested by Chemical KP Chemical Corporation 75% AkzoNobel Tameer Microfinance Bank Financial Services Telenor Pakistan 51% PICIC & PICIC commercial Bank Limited Financial Services Tamasek through 74% stake in NIB 100%

Saudi Pak Commercial Bank Financial Services International consortium comprising 86.55% (now Silk Bank) Bank Muscat SAOG, International Finance Corporation, Nomura European Investments Limited & Sinthous Capital Cresent Commercial Bank Financial Services Samba Group 68.4% (now Samba Bank) Union Bank Financial Services Standard Chartered Bank 95.37.

Arif Habib Bank Limited Financial Services Suroor Investments led by 60% Mr. Hussain Lawai Bosicor and associated companies Oil & energy Abraaj Capital & Bosicor 40% & 60% (now Byco Petroleum & Byco Chemicals Corporation Limited respectively Pakistan Limited)

Karachi Electric Supply Corporation Power generation Abraaj Capital 35.8% Pakistan Telecommunication Company Telecom Emirates Telecommunications 26%

Limited Corporation – Etisalat Paktel Telecom China Mobile 100% Lakson Tobacco Company Limited Tobacco Philip Morris International 97.62%

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