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Pakistan urged to remove bottlenecks restricting FDI

A study completed by Foreign Investment Advisory Services (FIAS) a joint service of International Finance Corporation (IFC) and the World Bank suggested that 79 per cent investors identified land acquisition and site development regulation as barrier to investment in Pakistan.

The report was launched yesterday at a seminar jointly organised by the Board of Investment and FIAS. It said a survey conducted by FIAS suggest that 57 per cent respondents identified financial regulation, 53 per cent tax administration, 38 per cent business registration and 30 per cent labour regulation. Of these, 49 per cent respondents termed land acquisition barrier as 'severe', followed by 40 per cent financial regulation, 51 per cent tax administration, 41 per cent business registration and 36 per cent labour regulation.

The report said policy improvements in Pakistan were real but incomplete. It said in spite of continued international reports to the effect that Pakistan's business environment is not an enabling one, FIAS findings are of a business environment in transition, with many policy improvements but with many remaining business unfriendly legacies.

The main challenge for Pakistan is to keep up with reforms that are rapidly accelerating in many developing countries. It has been estimated that levelling up Pakistan's investment climate indicators to China's level would raise the average annual sales growth of Pakistani businesses by eight per cent and raise employment growth by three per cent.

"Policy uncertainty in Pakistan remains a critical factor in investment patterns". One of the top barriers to investment is that of policy uncertainty. This is in part due to a lack of strategic policy coherence in recent reforms. The culture of SROs, notifications and NOCs has created an uncompetitive business environment with a de facto form of "special and differential treatment" for enterprises with government access.

At least two per cent of corporate operating costs are devoted to "speed money" commonly known as bribe.

The report said administrative barriers pose a real threat to market competitiveness. Pakistan's informal sector remains an estimated 34 times larger than the formal sector, suggesting an incentive to avoid regulatory costs.

It said a joint task force of the SECP and CBR found that there is growing deregistration of companies and an increase in the number of sole proprietorships and partnerships. While the SECP has data on 48,000 registered companies, in 2004 just 21,500 of these had a NTN and only 13,000 filed tax returns. FIAS said legislative reforms are required in Pakistan. It said the recent efforts have been relatively successful and have demonstrated government commitment to strengthening the investment climate. Nevertheless, considerable room for legislative and regulatory exists, particularly at the provincial level. "This is in contrast to the widely held belief in Pakistan that the problem is merely one of implementation rather than legislation", the report said. Moreover, the country's additional administrative, institutional and regulatory implementation weaknesses could compromise any successes on the economic policy and legislative fronts. As the experience of Southeast Asian economies, like Indonesia's, in the late 1990s amply illustrates, first tier policy improvements are insufficient to sustain economic development unless reforms are deepened.

Furthermore, Pakistan's administrative barriers to investment stem from weak government service delivery to the business community. The civil service is virtually on a poorly designed, quota driven recruitment system. Also there is virtually no performance-based compensation. There is insufficient public sector transparency and intradepartmental information sharing.