India Pakistan Trade Unit - Pakistan

Despite some negative perceptions among the international, including European, public, Pakistan has shown remarkable political and economic developments since the late 1990s when the country was on the verge of bankruptcy. With a rapidly growing population of about 150 million, Pakistan is a major country, recognised by the international community, and is one of the most important actors in the Islamic world.

Based on its geographical location Pakistan has close political and economic relations with the Middle East, Central and South Asia. It is the main gateway to Central Asia and supplier to the Emirates. Economic integration with South Asia has been less effective in the past due to the strained relations with India on the Kashmir issue. However, recently notable steps have been taken by the South Asian Association for Regional Co-operation (SAARC), of which Pakistan is a member, to establish a South Asian Free Trade Area (SAFTA), including India.

Politically, despite some reservations from the European Union about the last presidential and legislative elections, Pakistan has been moving towards democracy. Based on the experience of the last thirty years, it is hoped that the present administration and its successors will continue to pursue the sound economic reform policies initiated by President Musharraf. By the end of 2003, an agreement between President Musharraf and the main opposition Islamic Parties helped to resolve a serious impediment to the functioning of Parliament. It is hoped that soon the European Union as well as the Commonwealth of Nations will recognize Pakistan as a full-fledged democracy.

The main consequence of these macro economic successes has been an increased liquidity in the country and the subsequent lowering of interest rates to a single digit for prime borrowers, from rates as high as 17% to 18% a few years ago. This has enabled higher profits for most businesses, followed by an exceptional boom on the stock market.

Also, banks have aggressively marketed consumer finance to the emerging middle class, allowing for a consumption boom (more than a 7-month waiting list for certain car models) as well as a construction bonanza.

The Central bank has carefully managed the incoming "hot money" so that inflation remains under control at less than 3% per annum.

Overview of the Economy and Foreign Trade

Pakistan's economy is still very dependent on agriculture. The sector contributes 25% to GNP but employs nearly 50% of the labour force. Industry contributes approximately 18% to GNP and services about 50%, of which wholesale and retail trade account for 15%, and transport and communication for 10%. As a result of the importance of the agricultural sector, climatic conditions and water resources have a significant impact on the yearly economic performance. Over the period 2000 to 2003, GNP growth has increased from an average of 3% per annum to nearly 5% in fiscal year 2003.

The industry is concentrated in the Karachi area, as well as in Punjab, around Lahore, Sialkot and Faisalabad. Other cities such as Quetta, Multan, Hyderabad or Peshawar also present some industrial activity but cannot compete with the former as far as the quality of the business environment is concerned

The size of the domestic market has been increasing at a high rate based on a growing middle class, presently estimated at 7 million, with a Purchasing Power Parity of USD 7000.

The volume of foreign trade has been increasing since 1999; in 2003, total import value was USD 12 billion, approximately 1 billion higher than total exports.

Imports are dominated by petroleum and derivatives as well as machinery and equipment.

The largest export sector of Pakistan is the textile and apparel sector with nearly 70% of the total exports, the balance is made up of cereals (mainly rice), miscellaneous manufactured goods (mainly toys and sports goods), chemicals, food and fish products and scientific instruments.

The European Union is the single largest trading partner of Pakistan and during fiscal year 2003, the share of Pakistani exports to the EU markets was in excess of 30% of Pakistan's total exports. The exports to the EU market this year grew by more than 22% over the previous year. Pakistan enjoys a reasonable trade surplus with the EU. Growth in exports to the EU was primarily due to the enhancement of 15% in the textile quota and therefore, an increased market access for Pakistani exports from January 2002.

Chances for a substantial growth of intra-regional trade are high. In January 2004, the South Asia Free Trade Agreement has been signed, with the Free Trade Area expected to become effective in 2006. In a similar vein, bilateral trade between Pakistan and India is expected to gain momentum after tariff cuts were agreed on at the end of 2003.

Foreign investment in Pakistan

A number of large international companies have been operating successfully in the country for the last twenty years or more. However, no significant new entrants have come recently. The main multinationals in the country are in oil and gas exploration and production, electrical engineering, and the pharmaceutical, food, and chemical industries.

European and American companies have not shown much interest in privatisation to date. Most export credit agencies in EU Member States (with the exception of Hermes in Germany) do not cover Pakistan risk (October 2003), except on a case by case basis.

Despite this, inward foreign direct investment (FDI) has increased significantly in the fiscal year 2003 to USD 800 million, a large part being linked to privatisation. Major investors in the country come from the UK, the Middle East and the US, each contributing 25% of FDI. China has traditionally had a strong presence in the country, mostly through infrastructure development and supply of low cost goods and equipment. China accepts differed payment risks through large suppliers' credit, up to ten year duration. It is certainly a country which has a long term strategy regarding its investments, and European Investors may have to compete with Chinese investments in Pakistan.

The recent improvements in the economy and the business environment have been recognised by international rating agencies such as Moody's and Standard and Poor's (country risk upgrade at the end of 2003). Provided the positive trend is maintained, Pakistan presents numerous and significant opportunities for investments aiming both at using Pakistan as an export base and at tapping an emerging market with a rapidly growing middle class.

Recommendations for potential investors

To limit the risks inherent in all business activities, medium sized investors from Europe are advised to:

select a reliable partner, with an obvious long term interest in a partnership, to help understand the local environment;
target a sector where Pakistan has a specific advantage, and to plan for a long term investment;
bring into the project a distinct and permanent advantage, such as a new technology, process, know how, brand, design or marketing ability;
ascertain that at least 75% of the output is exported, gaining therefore sufficient foreign currency income to service the foreign investment, while the local market, still small, shall only become significant over time.

It is worth noting that finance is not at present an area where Pakistani businessmen are looking for help or support from overseas partners. As discussed above, further to an improved macro economic situation, the country is liquid and many business groups are flushed with funds, eagerly looking for business opportunities and know-how.

High potential Sectors for Foreign Direct Investment

Textiles and garments

In the textile and garment sector Pakistan has a definite competitive advantage, further enhanced by the disappearance of the Multi- Fibre Agreement by the end of 2004. Despite its successes and its recent spate of investment in state of the art machinery, the industry still needs know-how and processes to improve the quality of its products, as well as design, fashion and marketing development.

This sector has been divided into the different stages of production, such as spinning, weaving, knitting and finishing, dyeing, etc. while the major groups usually cover all stages of the product cycle. Most products are cotton based with emphasis on the first stages of production like yarn, cloth and fabrics. Only recently has the country entered into the more added value production of garments. The particular emphasis on bed linen and towels is worth noting, given that it is the subject of an anti dumping review by the European Union.

Based on the competitive advantages of this sector in Pakistan, and the liberalising of international trade after the end of the Multi-Fibre Agreement by the end of 2004, there should be opportunities for a mutually beneficial co-operation between Pakistani business groups and European investors.

Food processing and packaging

Opportunities in the food processing and packaging industry (especially dairy products, fruits and vegetables, fish and sea food), based on a very large agricultural sector and a large and expanding fishing fleet, are primarily related to upgrading of the underdeveloped collecting, processing, packaging and distribution system.

Obvious export markets are the Middle East, South and Central Asia as well as Europe and the USA if the present phyto-sanitary constraints can be resolved. The local emerging middle class should also provide an outlet for well processed and packaged food in the medium term. The impression from the authors is that investment in this sector should definitely be long-term, in view of the necessity to organise the supply chain as well as the distribution network in a rather primitive environment, be it in the fruit, vegetable, dairy or fishing sectors.

Also, a major part of the sector depends on the packaging industry, including carton boxes, tin can, or freezing processes, which are still underdeveloped

Light engineering and automotive parts

The light engineering and automotive parts industry should also provide opportunities, as far as they are backed up by export markets. Based on an infant automobile industry still protected by high tariffs and dominated by Japanese assemblers, the existing automotive supply industry is in dire need of technology improvements. Similarly, there is a great demand for machinery and equipment linked to the textile and garment sector, such as industrial dryers, cooling fans, spinning needles, etc.

Last but not least, the electrical and engineering sector linked to power generation and transmission is expected to face a strong and growing demand in coming years. However, this sector has been targeted only as a third priority sector mostly based on the competition which is already present from technology sourced from other Asian countries, such as Japan, Korea, Taiwan and more importantly China, which appears to be a main trading partner for Pakistan as well as a potential investor in this sector.

Other sectors

Other sectors have been identified as worthy of consideration by foreign investors, but are more limited in size. The following niche sectors have been identified:

Surgical instruments

This sector exports 95% of its production, mostly to the USA and the EU. It represents a turnover of about USD 150 million per annum and consists mostly of metal instruments. This industry is concentrated in Sialkot, north of Lahore, making it one of the significant clusters for such production worldwide. The technique is mostly based on forging and metal finishing for which cooperation with European firm with the proper know how might be required.

Marble production

Marble is used extensively by the domestic construction industry, and part of the production is exported, mostly to the Middle East. Mining and production sites are spread more or less over the North and East of the country. The production represents about USD 25 million per annum. The main drawback of this industry is the absence of sophisticated techniques: mining through explosives which do not allow the production of large slabs of marble and implies important wastage. The industry is definitely interested in acquiring know-how, as well as the proper slicing equipment to improve the quality of its products. The main drawback for a foreign investor would be to find the right partner in an industry which is made up of a number of small enterprises.

Gems and jewellery

This sector, based on vast resources of rough semi precious stones is still in the infant stages. The official export of rough stones represents about USD 5 million per annum, while no stones are cut locally yet. The government is trying to develop a stone cutting industry and has created three training institutes.

IT (call centres, service centres, software development, etc.)

It may be surprising that this sector has so far not been developed in Pakistan, especially when compared to its large neighbour India. At present there is no such industry in Pakistan, despite the opening of a few call centres by financial institutions or some overseas Pakistanis from the USA. Also, some incubators have projects in the animated video games sector. However, the government has recently launched initiatives to promote the industry, through the development of IT education and training.