Islamic Republic of Pakistan Business Guide
Introduction
Pakistan, officially the Islamic Republic of Pakistan, is a sovereign country located in South Asia and the Greater Middle East. It has a 1,046 kilometer coastline along the Arabian Sea in the south, and is bordered by Afghanistan and Iran in the west, India in the east and China in the far northeast. Pakistan is the sixth most populous country in the world and is the second most populous country with a Muslim majority. Its territory was a part of the pre-partitioned British India and has a long history of settlement and civilisation including the Indus Valley Civilisation. Most of it was conquered in the 1st millennium BCE by Persians and Greeks. Later arrivals include the Arabs, Afghans, Turks, Baloch and Mongols. The territory was incorporated into the British India in the nineteenth century. Since its independence, the country has experienced both periods of significant military and economic growth, and periods of instability, with the secession of East Pakistan (present-day Bangladesh).
Economy
Pakistan is a rapidly developing country which has faced a number of challenges on both political and economic fronts. Despite being a very poor country in 1947, Pakistan's economic growth rate was better than the global average during the subsequent four decades, but imprudent policies led to a slowdown in the late 1990s. Recently, wide-ranging economic reforms have resulted in a stronger economic outlook and accelerated growth especially in the manufacturing and financial services sectors. There has been great improvement in the foreign exchange position and rapid growth in hard currency reserves in recent years. The 2005 estimate of foreign debt was close to US$40 billion. However, this has decreased in recent years with assistance from the International Monetary Fund (IMF) and significant debt-relief from the United States. Pakistan's gross domestic product, as measured by purchasing power parity (PPP), is estimated to be US$439.7 billion while its per capita income (PCI) stands at $2,803. Despite clear progress, reports by the Asian Development Bank, the World Bank and the UN Development Program place the poverty rate in Pakistan between 23–28 percent. The CIA factbook places the poverty rate at 24% in 2006, and notes that levels have fallen by ten percent since 2001. Pakistan's GDP growth rates have seen a steady increase over the last 5 years. However, inflationary pressures and a low savings rate, among other economic factors, could make it difficult to sustain a high growth rate, according to some analysts.
The growth of non-agricultural sectors has changed the structure of the economy, and agriculture now only accounts for roughly 20% of the GDP. The service sector accounts for 53% of the country's GDP with wholesale and retail trade forming 30% of this sector. In recent times, the Karachi Stock Exchange has soared, along with most of the world's emerging markets. Large amounts of foreign investments have been made into several industries. The top industries in Pakistan are telecom, software, automotives, textiles, cement, fertilizer, steel, ship building, and more recently, aerospace.
Pakistan has accomplished many engineering feats such as construction of the world’s largest earth filled dam Tarbela, the world's twelfth largest dam Mangla, as well as the world’s highest international road: the Karakoram Highway. There are also half a dozen additional dams planned such as Kalabagh Dam, Diamer-Bhasha Dam, Munda, Akhori and Skardu Katzara.
In November of 2006 China and Pakistan signed a Free Trade Agreement hoping to triple bilateral trade from $4.2 billion (USD) to $15 billion (USD) within the next five years; Pakistan's annual exports in 2005 amounted to $15 billion (USD), and is poised to cross $18 billion (USD) in 2006 and $20 billion (USD) in 2007. Pakistan is also home to a thriving arms industry which exports $200 million (USD) annually, mostly defence equipment and arms to countries in the Middle East and South Asia, and its defence officials are hopeful that these exports will surpass $500 million (USD) a year within the next five years.
In keeping with its rapid economic development in recent years, Pakistan registered an economic growth rate of seven percent in the financial year 2006-07, the fourth consecutive year of seven percent growth. In its June 2006 Economic Survey global finance giant Morgan Stanley listed Pakistan on its list of major emerging markets in the world economy, placing it on a list of 25 countries displaying continued moderate to strong growth over a sustained period of time. The report noted "its economy has been growing quickly in recent periods and corporate direct investors have taken notice". Concurrently, highlighting the strides made on the economic front in recent times, Moody's Investors Service in December 2006 upgraded Pakistan's credit rating from B2 to B1, noting a "positive outlook"
In late March 2007, the Asian Development Bank "Outlook 2007" report predicted that strong growth would continue in 2007 and 2008 with growth rates of 6.5 to seven percent, with manufacturing, exports and consumer expenditure leading the way. Further progress was highlighted by news that the FDI for FY 2006/7 would touch $7 billion, eclipsing the targeted $4 billion. Telecoms, real estate and energy are major industries for FDI.
Market Overview
The United States of America and Pakistan have a strong bilateral relationship based on a joint commitment to security and stability in the region. The United States alsocontinues to be Pakistan’s largest trading partner. During the fiscal year 2005-2006, Pakistan’s total exports were $16.45 billion out of which 26.9 percent were to the United States, whereas its imports during the same period were $28.58 billion, out of which 5.8 percent were from the United States.
Pakistan’s economic performance in fiscal 2006 (the year ending June 30, 2006) was strong, with GDP growth registering 6.6 percent after 8.6 percent growth the preceding year. With GDP growth averaging nearly 7 percent for the last four years, a strong export sector, and a stable currency, Pakistan is reaping the fruits of several years of stringent macro-economic adjustment. The government has tackled some of the most difficult economic reform issues, including Pakistan’s massive debt overhang. Pricing has been broadly deregulated, including in the energy sector, and import tariffs rationalized and broadly reduced. The central bank has been granted unprecedented autonomy and capital market prudential oversight has been strengthened. The present administration has focused on far-reaching structural reforms to privatize public sector organizations, strengthen public and corporate governance, liberalize external trade and has pledged to maintain an open and welcoming investment climate.
Currently, there are more than 61 firms registered with the American Business Council (ABC) of Pakistan. The ABC acts as the American Chamber of Commerce for U.S. businesses present in Pakistan. Some of the leading U.S. firms doing business in Pakistan include Citibank, Pepsi-Cola, Coca-Cola, Procter & Gamble, NCR, Pfizer, Abbot, Merck, Eli Lilly, Wyeth, NCR, Oracle, Microsoft, Cisco, Intel, Chevron (Caltex), AIG, 3M, IBM, Monsanto and several others. An additional 15-20 companies maintain a presence in the Pakistan market, while others operate through their franchisees or an exclusive local distributor. For example, McDonald’s, KFC, Dominoes Pizza and Caterpillar are represented through local partners.
ABC members play an important role in Pakistan’s economy. These companies have collectively invested over $1.0 billion in Pakistan and their cumulative annual revenue is around $2.0 billion. ABC members contribute a sizable amount to the national exchequer every year in the form of direct and indirect taxes. During the period 2005-2006, ABC members paid about Pak Rupees 35 billion ($583 million) in taxes, approximately 8 percent of the total tax collected by the Government of Pakistan. These companies are prominent corporate citizens as well; ABC members made contributions valued at over $69 million following the October 2005 earthquake in northern Pakistan.
Market Challenges
Principal competitors of U.S. businesses in Pakistan are European, Chinese, Japanese and South Korean firms. These countries often offer credit terms that can make it difficult for U.S. suppliers to compete. Pakistanis also believe that U.S. goods can be more expensive compared to those of competitors, and that U.S. firms often do not move as quickly as some competitors to meet demand. Potential investors in Pakistan face many of the same challenges that exist in other developing economies, such as inconsistent, sometimes contradictory policies and lack of transparency in decision-making. Pakistan is a diverse and challenging market requiring adaptability and persistence. Careful planning and patience are the prerequisites for success in this emerging market. U.S. firms that are willing to invest time to develop market presence should expect to be rewarded in the long-term.
Market Opportunities
With a population of approximately 162 million people and a rapidly growing GDP turnover of more than $130 billion, Pakistan continues to offer significant trade and investment opportunities for U.S. businesses. The following areas are expected to grow rapidly during the next few years: telecommunications, information technology, power generation (both thermal and hydroelectric), airport and ancillary facilities, oil and gas, franchising and construction.
