The article discusses investment trends in Pakistan and whether the 2017-18 budget will promote local and foreign investment. It notes that both local and foreign investment declined from 2013 to 2016. While total investment as a percentage of GDP has increased, the contribution to GDP growth has declined over the past two years. The budget does little to address major barriers to investment like high corporate taxes, regulatory costs, and infrastructure issues like power outages. More reforms are needed to improve the business environment and incentivize both domestic and foreign investors if investment levels are to increase substantially.

1. Pakistan Today Islamabad, Web Edition, May 31, 2017
Will budget 2017-18 promote local and foreign investment?
By Syed Shujaat Ahmed
AMONGST the key signs of
business enterprise growth is
said to be the ability to
increase level of investment
both from locally and abroad;
capacity to export and ability
of employing greater levels of
human and financial
resources. Unfortunately the
case of Pakistan was opposite
from expectations as decline
was observed in local and
foreign investment from 63 in
2013 to 35 in 20 16.
If one is to look into previous
trends of investment as
percentage of GDP there has
been improvement in terms of
total investment but on the
parallel side investment's
contribution in GDP is very
much low.
In terms of total investment as
percentage of GDP, it can be
observed that there had been
increase over the period with
possible reforms strategy
(National Doing Business
Reforms Strategy 2016) but it
didn't proved to be significant.
Such reforms steps didn't
proved to be encouraging for
public investors due to high
cost of compliance with tax
and regulatory regime at
federal, provincial and local
level which is preventing
firms to grow. Beside high
cost of compliance, weak
enforcement of rules of
competition and higher sunk
costs faced by businesses in
entering and exiting markets
is also not allowing new
investors in small and large
scale manufacturing and value
added sector in agriculture
and livestock to grow. It was
because of these factors
investment's contribution in
GDP growth declined over the
past 2 years (2015-16 and
2016-17). These factors also
influenced existing investors
and prevented them from
growing which also hinders
investment's contribution to
GDP in the long run.
As it can be viewed that
public investment as
percentage of GDP stood low
in comparison to private
investment because of
hesitance which is mostly
related to ease of doing
business as major hindrance.
It can be viewed from (figure-
2) that current government
only got able for a positive
increase in public investment
from 3.17 percentage points
in 2013-14 to 4.28 percentage
points in 2016-17. This low
growth can be attributed to
various factors e.g. circular
debt and consistent power
outages.
Similarly there has .been
found 12.2 percent increase in
inflows of foreign direct
investment In comparison to
fiscal year 2015-16. Majority
of investments in this regard
are coming through CPEC
projects resulting in China's
contribution to stand at 36 per
cent of the total inflow of FDI
followed by Netherland with
23.1 per cent and France with
8 per cent being major
contributors.
Looking at this investment
overview of Pakistan during
previous fiscal years, If one is
to look at the conventional
determinants of investment
these may include cost of
capital, trade openness, tax
and regulatory regime,
enabling infrastructure
including energy, ability of
state to enforce contracts,
financial intermediation, and
security. Pakistan thus seems
to have made some progress
on: improving security out-
look, perceptions regarding
improved economic growth;
owing primarily to China
Pakistan Economic Corridor
(CPEC), keeping interest rates
low in turn allowing private
sector credit to increase,
however the progress on other
indicators seem slow.

2. Budget of 2017-18 has
nothing to offer for both local
and foreign investors in the
long term as far as the taxes
are concerned, with corporate
tax ranging to 30pc from 35pc
in the previous year which is
still on the high for investors
who are or tend to invest here.
Similarly, an increase in
number of years for tax relief
will not be encouraging for
both public and private
investor.
There has been no significant
step taken for improvement in
starting a business, where
energy is one of the primary
indicators. In budget 2017 -
18, where government has
proposed 401 billion PKR for
power sector development,
including investment of317
billion PKR to be undertaken
by WAPDA, only focuses on
projects like LNG based
power terminals, Nelum
Jhelum hydro power project
and Tarbela hydel power to be
more specific. There has been
no significant allocation for
improvement of quality and
efficiency of energy sector.
Factors which should be
included in this regard for
efficient and quality energy
are introduction for systems to
reduce number of days from
starting of application to
installation of system and
quality of services including
outages, restoration,
regulation and
communication.
For coming years more
dependence is on investments
in infrastructure and energy
related projects with little
efforts being done towards
improved innovative
investments e.g. only Rs 500
million has been allocated to
Innovation Challenge Fund
with special focus on use of
technologies and SMEs.
Besides, this innovation
challenge fund, for access to
finance by introducing fund of
3.5 billion under risk
mitigation facility for SMEs
in SBP.
The steps which are offered in
current budget has very little
to offer for investors in terms
of reforms which will help in
easing the cost of doing
business. Only incentives
offered is for new companies
which are entering in the
market in the form of tax
relief for very short period of
time (3 years). This budget
didn't offer anything for
improving the cost of
compliance which can help
investor to step up and
sustain. Similarly nothing was
offered in the form of cost of
entering the market due to
additional tax measures which
also goes down to district
level. As can be seen from the
budget and monetary policy
document is concerned only
lowering the interest rate will
not serve the purpose. This
lowering of interest rate has
only increased the private
sector credit resulted in very
low growth of investment as
percentage of GDP over the
period of 4 years. As this
budget only played around
with the number on tax and
tax relief, to promote local
and foreign investment there
should be a reduction in
number, rate and type of
direct taxes. Likewise budget
didn't high-light the balance
in tax contribution by
different sectors of the
economy. This balance is
needed to alleviate the
manufacturing sector from
what comes out as an
unjustified burden of taxes as
income from agriculture and
services sector re- mains out
of the tax net. This budget
should have proposed a
careful review of taxation on
inputs to provide relief to
major sectors like agriculture
where farmers are also subject
to GST and customs duty. For
the case of industry, a level of
playing field for SMEs need
to be in shape and steps
should be taken for
encouragement of SMEs by
provision of exemptions and
preferences in the tax code
with no offers in this budget.
This budget should have also
looked into administration of
revenue authorities. Fear of
intrusion by authorities
prevents private sector entities
from declaring all of their
activities and even fear to
enter the market and invest.
Syed Shujaat Ahmed is
associated with Sustainable
Development Policy Institute
as Researcher and is one of
the co-author of report on
Social Enterprise.