Pakistan’s economy has recovered strongly following the lifting of sanctions in 2001. Export earnings increased by a healthy 23% in 2005, while keener marketing helped drive up agricultural production. Most remarkable is that the bullish economy – which registered an 8.4% GDP hike in financial year 2004/05 – has been forged by higher industrial production. And behind this was investment by Middle Eastern companies. No wonder the Islamabad government is attempting to improve the investment environment to ensure continued support from large Arab companies.
Yet this influx is not enough on its own. “Investment is low in Pakistan when compared to overall volumes going into China and India,” one Japanese bank executive tells Emerging Markets. “Investment from the Middle East only brings capital, but not skills in production and manufacturing. The country needs to look further afield to fill this gap.”
SFA on oil
Saudi interest stems from a special financing arrangement (SFA) on oil imports, agreed in 1998 following the imposition of sanctions by many western governments after Pakistan’s controversial nuclear tests. The SFA allows Pakistan to import oil at a slightly lower rate and, more importantly, fixes the price for an extended period, helping businesses and consumers to consolidate their plans. Islamabad aims to build on this success with a new SFA covering all the Gulf Cooperation Council (GCC) countries. Commerce minister Humayun Akhtar Khan tells Emerging Markets that “if we sign that agreement, it will help us attract sizable investment from the Middle East.”
Over the past two years, further deals have been reached on improving the terms of Saudi/Pakistani trade, by reducing tariffs and introducing a double taxation agreement. In May, a delegation of Saudi politicians and investors toured Pakistan to assess the opportunities for recycling some of Riyadh’s excess oil revenues.
Saudi Aramco plans to increase its global refining capacity greatly, and a new refinery in Pakistan has been mooted as a likely option. Islamabad would welcome Saudi investment in improving the domestic gas distribution network while it prepares for the development of proposed gas pipelines from Iran and Turkmenistan.
New avenues
“We see avenues for greater Saudi investment worth billions of dollars in Pakistan,” Salman Shah, finance advisor to the office of Pakistan’s prime minister, tells Emerging Markets. “The additional Saudi capital will be flowing into Pakistan as a result of the increasing political and economic relations between the two countries.”
Shah is enjoying the upturn in Pakistan’s fortunes. Visiting Washington in April to finalize agreements with the World Bank and International Monetary Fund, he commented that there had been a time “when they were not even willing to lend you for one month and now we are talking about 30 years.” Shah attributed the change to Pakistan’s economic reforms and much greater investor confidence.
His confidence is shared. Referring to the high rate of economic growth, John Wall, World Bank country director for Pakistan, says: “If Pakistan can maintain this over a period of 10 to 15 years, it would become another Asian tiger.”
Last October’s devastating earthquake could restrict growth this year, and the physical recovery could take many years, but if the economic reforms really have created a more attractive investment environment, then it should not have a serious long-term economic impact.