Money matters

In the first week of March, Pakistan’s main commercial centre of Karachi came to a virtual standstill after an attack in Abbas Town left 45 people dead. Militancy has many faces in the country, a fact to which the economy is not oblivious.

Then there are structural issues such as corruption, ballooning national debt and problems with infrastructure. These are all well-known facets of a country often at the centre of world news.

Perception and reality

A lot of noise comes out of Pakistan, but not all of it is relevant to questions that matter to investors outside — will my money be safe, and will it grow? The answer to the latter is a resounding yes.

It would be tough to find a sector in the country where inflation-adjusted returns do not considerably outshine those in developed economies. Nadeem Naqvi, Managing Director, Karachi Stock Exchange (KSE), boldly came out at the end of January and claimed the KSE-100 Index could grow by 25 per cent within days if law and order was sorted out in Karachi. Since his lofty statement, the index has grown by about 9.5 per cent over a two-month period even though the law and order situation remains disrupted. In a similar situation, over the same time frame last year, it grew by 17 per cent.

Concerns about the safety and growth of capital are inextricably linked. While there remain doubts about safety, returns are at a premium. Although if elements of the economy that compromise safety were to subside, the growth rate would improve and perhaps further enhance returns. The dynamics of the risk reward trade-off in Pakistan are therefore unique, with a potential upside in either scenario depending on where you invest. As far as the general safety of capital is concerned, it has less to do with terrorists and more to do with the long-term viability of the state, the regulatory framework it provides for the economy, and its own ability to remain a solvent paymaster.

The macro picture

The Asian Development Bank recently reported that Pakistan will need up to $9 billion (about Dh33 billion) to avert a balance of payments crisis. India faced a similar situation in the early 1990s, and was able to provide the IMF with several tonnes of gold against a loan. While Pakistan may not have the reserves to collateralise an amount that is almost equal to its annual tax revenue, this does not necessarily negate the likelihood of some form of agreement. The government needs to show initiative to lenders that specific policy changes will be undertaken. In 2008, the IMF granted Pakistan a $11.5-billion loan on the condition that tax loopholes would be closed.

However, according to a report by The Economist, Pakistan is wedged between Ethiopia and Afghanistan as one of the most inefficient tax collectors in the world, with tax revenues equating to about 9 per cent of GDP. President Asif Ali Zardari recently suggested a tax amnesty of about $400. Though a tiny amount, to some it is not a bad idea, on the basis that something is better than nothing.

Restricted federal revenues end up getting squeezed by growing costs, and the government ends up borrowing from the Central Bank to bridge the gap. The budget deficit now stands at more than 8 per cent of GDP. The result is more inflation. Earlier this year, the Pakistani rupee crossed a major landmark when, for the first time ever, a US dollar equated to 100 Pakistani rupees. The currency has devalued about 10 per cent on the previous year and the implications for inflation are staggering — a real GDP growth rate of just over 3 per cent last year is an eye-opener in a country where the borrowing rate is in double figures.

A weakened currency is not necessarily a bad thing if it is part of a trade-related strategy, Japan being a point in case. A decision has to be made, however, either to tweak monetary policy to bring down inflation or to adapt to a cheaper rupee by freeing up trade. Not enough is being done on either front, despite progress in the opening of economic borders with India.

Building things

Real estate has always been an area of significant growth in Pakistan, and the entry of some foreign players has assuaged fears investors have about regulatory protection. Emaar already has developments in the pipeline. Malik Riaz, a prominent local developer, recently signed an agreement with an Abu Dhabi-owned construction entity to undertake work on an expansion project that could eventually be worth $45 billion. This includes the construction of another “world’s tallest tower” in Karachi.

The ambition the agreement demonstrates is representative of the competitive landscape of the country’s real estate sector. Two of the biggest business groups in the UAE, Al Ghurair and Giga, have also entered into a joint venture to develop two iconic projects in Islamabad, one being the 32-floor World Trade Center, and the other a luxury high-rise. Returns in Pakistan’s real estate sector remain among some of the most attractive in the region.

The energy question

A well-recognised fact — one reiterated by the IMF recently — is that the single largest economic concern facing Pakistan pertains to energy. The industrial sector has suffered heavily from power cuts implemented by the state in order to deal with mounting cyclical debt. Independent power plants set up by private companies sit unused. Pakistan’s power production capacity is almost 20,000 MW, while its demand is only about 15,000 MW. The state still falls short of providing the population’s electricity requirements by about 15 per cent.

The problem is one of management and policy. The Chairman of Pakistan’s Water and Power Authority (Wapda) recently claimed the blackouts would continue until 2018 — an optimistic estimation by most accounts. On the flip side, there are efforts being made to counteract the problem. President Zardari was recently in Iran to sign an agreement for the $1.3-billion Pak-Iran gas pipeline. New facilities have been built in the country’s southern ports to facilitate LPG and LNG imports. USAid has allocated hundreds of millions towards alternative energy projects. If Pakistan is successful in resolving a problem that runs as deep as the energy crisis, the world should have confidence in its ability to sort out the rest of its issues as well.

— Special to GN Focus