Business Environment Pakistan

7/27/2019 Business Environment Pakistan

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Business Environment: PakistanEuromonitor International14 December 2012


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Pakistans overall ranking in the World Banks Ease of Doing Business is better than key regional economies likeIndia and Indonesia. However, high levels of corruption, lack of clarity on regulations, political instability andenergy outages mar its competitiveness. Infrastructure is underdeveloped and the tax system is cumbersome butthere is a rising labour force and young consumer market whose potential can be tapped into by marketers.

SUMMARYIn the World Banks Ease of Doing Business 2013 report, Pakistan ranked 107th out of 185 countries, ahead of key

markets in the region like India (132nd) and Indonesia (128th) in the Doing Business 2013 report. Pakistanseconomic environment is not very stable for businesses mainly due to poor governance, high corruption and militarydominance. In addition, energy outages, flood damage in early 2012 and deteriorating security conditions areslowing the economy. As a result, foreign direct investment (FDI) inflows dropped from a peak of PKR339 billion(US$5.6 billion) or 3. 9% of total GDP in 2007 to PKR114 billion (US$1.3 billion) or 0.6% of total GDP in 2011.The tax system in Pakistan is complex and levies a number of small taxes on businesses and individuals while theinformation and communications technology (ICT) sector is developing and has potential for growth. However,household penetration rates remain low. In 2011, only 34.4% of households possessed a mobile telephone comparedto the Asia Pacific average of 74.3%.Pakistan has a rising labour force but illiteracy levels remain high causing skills shortages in many areas such astechnology, engineering, finance and accountancy. It is also primarily an agrarian economy with 44.5% of theemployed population employed in the agriculture, hunting, forestry and fishing sector in 2011. The consumer markethas not been heavily affected by the global economic crisis of 2008-2009, however almost half of total consumer

expenditure was spent on food and non-alcoholic beverages in 2011 suggesting that the market is relatively lessdeveloped.

OPERATING ENVIRONMENT

Political instability and corruption hamper business environment

According to Transparency Internationals Corruption Perceptions Index 2011, Pakistan ranked134th out of 183 countries and had amongst the highest levels of corruption in the region.In the World Banks Ease of Doing Business 2013 report, Pakistan ranked 107th out of 185 countries, a drop of threeranks from its Doing Business 2012 report out of 183 countries. The country ranks ahead of other key markets in theregion like India (132nd) and Indonesia (128th) in the Doing Business 2013 report. However, Pakistan performs

particularly badly in categories like getting electricity ranking 171st out of 185 countries, a drop of five placesfrom the 2012 report. Other categories like enforcing contracts and registering a property also had a ranking ofover 125th in the same report. Pakistan has suffered from energy crisis for years due to the gross mismanagement offunds and severe underinvestment in infrastructure. According to the IMF, energy shortages are the biggestimpediment to higher growth and a major factor behind macroeconomic imbalances. Enforcing contracts andregistering a property ranked poorly owing to the high costs involved.Pakistans economic environment is not very stable for businesses mainly due to poor governance, high corruptionand military dominance. In addition, energy outages, flood damage in early 2012 and deteriorating securityconditions are slowing the economy. Real GDP growth slowed from 6.8% in 2007 to 3.0% in 2011. The pace ofgrowth is not expected to accelerate much in 2012, with the real economy expanding by 3.4% before reaching 4.7%in 2013. Nonetheless, business confidence is surprisingly high about future prospects despite the challenging

business environment.Pakistans political instability has hampered businesses from venturing into the country in the past alternating

between periods of civilian and military rule. Terrorism is a problem in the country and is faced by a number ofinsurgents as a result of border tensions with India and the presence of Taliban-linked militants. The countrys triballands are under the nominal control of the army and paramilitaries but strong resistance continues from localtribesmen, supported by jihadists.

Chart 1 Ease of Doing Business Ranking 2012-2013


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Ranking out of 185 countries

Source: Doing Business, World BankNotes: (1) Regulations in Doing Business 2013 are measured from June 2011 until June 2012. The data for all sets of

indicators in Doing Business 2013 are from June 2011 until June 2012 (except for paying taxes data which refers toJanuaryDecember 2011). (2) Rankings are based on data sets across 185 countries. (3) Doing Business presentsquantitative indicators on business regulations and the protection of property rights that can be compared across 185economies. A high ranking means the regulatory environment is conducive to the operation of business.

Pakistan ranked 124th out of 144 countries in the World Economic Forums Global Competitiveness Index 2012, adrop from 118th out of 142 countries from the 2011 ranking. This is the second lowest ranking in the Asia Pacificregion, ranking ahead of only Nepal (125th) in 2012. In comparison, India and Indonesia ranked 59th and 50threspectively in the same year out of 144 countries.Corruption is a major problem in Pakistan with low levels of government accountability. According to TransparencyInternationals Corruption Perceptions Index 2012, it ranked 139th out of 176 countries amongst the highestcorruption levels in the region. According to Transparency International there has been no improvement incorruption levels despite the existence of anti-corruption bodies such as the National Accountability Bureau and theFederal Investigation Agency.

Chart 2 Global Competitiveness Index in Selected Countries 2012-2013

Ranking out 144 countries

Source: World Economic ForumNote: The Global Competitiveness Index measures the microeconomic and macroeconomic foundations of national

competitiveness, taking into account 12 subjects - Institutions, Infrastructure, Macroeconomic stability, Health andprimary education, Higher education and training, Goods market efficiency, Labour market efficiency, Financialmarket sophistication, Technological readiness, Market size, Business sophistication and Innovation.

GOVERNMENT REGULATION AND TRADING ACROSS BORDERS

Deteriorating investment environment


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According to the Doing Business 2013 report, it cost US$660 to export a container and US$705 toimport a container in Pakistan compared to the South Asia average of US$1,603 and US$1,736 percontainer respectively.Political instability along with the global economic crisis in 2008-2009 has caused a deteriorating investmentenvironment in Pakistan. FDI inflows dropped from a peak of PKR339 billion (US$5.6 billion) or 3.9 % of totalGDP in 2007 to PKR114 billion (US$1.3 billion) or 0.6% of total GDP in 2011. This is significantly lower thanregional peers like India and Indonesia where FDI inflows amounted to US$31.6 billion and US$18.9 billionrespectively in 2011.Despite this, there are several investment opportunities and the government has made an effort to attract investments.

Foreign investors are permitted to hold 100% of the equity in industrial, agriculture, horticulture, livestock, service,infrastructure and social sectors although this is subject to certain conditions.Pakistans infrastructure is improving but still remains undeveloped. Pakistan ranks 116th out of 144 countries in theinfrastructure subcategory of the Global Competitiveness Index 2012-2013 report, behind regional peers like India(84th) and Indonesia (78th) but ahead of Bangladesh (134th). It had a ranking of over 100 out of 144 countries in itsoverall quality of infrastructure, quality of electricity supply and mobile and fixed line connectivity in the samereport. The country faces severe power shortages and according to the World Bank in 2008, transport sectorinefficiencies cost the economy between 4.0-5.0% of total GDP each year. It also suggested that the government willneed to invest almost US$1.0 billion per year in the 2008-2013 period on new infrastructure to narrow the gap ininfrastructural development. In this regard, the government recognises the need to improve and expand itsinfrastructure services by promoting public-private partnerships.The country has a liberal trade policy and has been a member of the World Trade Organization since 1995. It has

bilateral and multilateral trade agreements with many nations and international organisations. It is part of the South

Asian Free Trade Area (SAFTA) agreement (including Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan andSri Lanka) and the ChinaPakistan Free Trade Agreement. In January 2011, the European Union (EU) was alsoconsulting with its members on trade preferences for Pakistan. This Autonomous Trade Preference (ATP) schemewas expected to start by the end of November 2012. Under the ATP scheme, 75 types of Pakistani goods,

predominantly textile items, are set to gain duty-free access to the EU market.According to Doing Business 2013, Pakistan took 8.0 documents, 21.0 days and cost US$660 to export a containerwhile it took 8.0 documents, 18.0 days and cost US$705 to import a container. The cost to export and import percontainer is significantly lower than the South Asia average of US$1,603 and US$1,736 respectively. South Asiasaverage time taken to export and import a container was 32.0 days and 33.0 days respectively, while the number ofdocuments required was 8.0 in the case of both in the same report.

Chart 3 FDI Intensity and FDI Flows 2006-2011

US$ billion / % of GDP

Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and WorldEconomic Outlook/UN/UNCTAD/national statistics

Note: FDI refers to foreign direct investment.

TAX ENVIRONMENT

Complex tax system but incentives in energy sector


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According to the Doing Business 2013 report, the total tax rate in Pakistan amounted to 35.3% oftotal profits compared to the South Asia average of 40.2%.The tax system in Pakistan is complex and levies a number of small taxes on businesses and individuals. In 2012, thecorporation tax stood at 35.0%, unchanged from the previous year. There are certain incentives and exemptions,

particularly for the alternative power generation sector. In addition, profits from electricity power generation projectsset up with Pakistan may be exempt from tax in certain cases.According to the Doing Business 2013 report, the total tax rate in Pakistan amounted to 35.3% of total profitscompared to the South Asia average of 40.2%. However, the total time taken per year for an enterprise to prepare,file, pay or withhold its taxes and contributions stood at 560 hours per year compared to the South Asia average of

311 hours per year.Pakistan also levies a goods and sales tax that stood at 16.0% in 2012, a drop from 17.0% levied in 2011. In addition,a federal excise duty is also charged on certain goods and services. Labour taxes and contributions amounted to15.1% of total profits according to the Doing Business 2013 report. This was lower than neighbouring India (18.2%)

but higher than Bangladesh, which had no labour taxes in the same report.The country has a large informal sector and as a result tax payments are quite low, which eats into the governmentstax revenues, increasing the government deficit and stifling economic growth. The cost of tax evasion was estimatedat around PKR1,900 (US$21.7 billion) in 2011 by a renowned economist in the country.

Chart 4 Total Tax Rate and Number of Hours to Prepare, File Returns and Pay Taxes in SelectedCountries 2011

% of total profits / hours per year

Source: Doing Business, World BankNotes: (1) Total tax rate measures the amount of taxes and mandatory contributions payable by the business in the second

year of operation, expressed as a share of commercial profits. The taxes included are profit or corporate income tax,social security contributions and other labour taxes paid by the employer, property taxes, turnover taxes and othersmall taxes (such as municipal fees and vehicle and fuel taxes). (2) Doing Business paying taxes data refers toJanuaryDecember 2011.

TECHNOLOGICAL INNOVATION

Developing ICT sector

Total expenditure on research and development (R&D) increased by 14.1% in real terms over the2006-2011 period to reach PKR89.7 billion (US$1.0 billion) or 0.5% of total GDP by the end of theperiod.Pakistan has a developing ICT sector with potential for growth. However, household penetration rates remain lowcompared to regional averages. In 2011, only 6.7% of households possessed an Internet enabled computer while34.4% of households possessed a mobile telephone compared to the Asia Pacific average of 25.6% and 74.3%respectively in the same year.In 2012, Pakistan ranked 102nd out of 142 countries in the World Economic Forums Networked Readiness Index,ranking significantly below regional peers like India (69th) and Indonesia (80th) but above Bangladesh (113th) in thesame year. The Networked Readiness Index (NRI) measures the propensity for countries to exploit the opportunitiesoffered by information and communications technology.


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The government initiated the National ICT R&D Fund set up in 1984 under which the government has mandated thata certain percentage of gross revenue generated by all telecom service providers be allocated to development andresearch of the ICT sector.Total expenditure on research and development (R&D) has increased by 14.1% in real terms over the 2006-2011

period to reach PKR89.7 billion (US$1.0 billion) or 0.5% of total GDP by the end of the period. As a share of totalGDP, spending on R&D is on par with regional peers like India where total expenditure on R&D stood at 0.8% oftotal GDP (or US$14.6 billion) in 2011. Government funds expenditure on R&D has been the largest contributortowards total expenditure on R&D each year and stood at 85.0% of total expenditure on R&D in 2011, followed byhigher education funds expenditure at 11.9%. There was no business enterprise funds expenditure on R&D in

Pakistan.

Chart 5 Total Expenditure on R&D by Category 2006-2011

% of total expenditure on R&D

Source: Euromonitor International from EUROSTAT, UNESCONote: R&D refers to research and development.

LABOUR AND EDUCATION

Rising labour force but illiteracy remains high

Labour productivity in Pakistan has been rising steadily from US$2,530 per person employed in2006 to US$3,802 per person employed in 2011, not significantly impacted by the global economiccrisis of 2008-2009.Adult literacy rates are rising but at a meagre pace. In 2011, Pakistan had an adult literacy rate of 55.6% of the

population aged 15+, up from 54.2% in 2006. Government expenditure on education grew by 27.0% in real termsbetween 2006 and 2011 to reach PKR58.3 billion (US$676 million) or 1.6% of total government expenditure by theend of the period.The government of Pakistan recognises the need to promote education and literacy levels. The Ministry of Educationhas set up several organisations to further this aim. For example, the Higher EducationCommission was set up to

facilitate higher education in the country by improving quality, access and relevance of education. As per PakistansEducation Policy 2009, around 7.0% of the 17-23 age group have access to higher education in Pakistan and thecommission aims to increase access to higher education to 10.0% by 2015. The number of people in highereducation is increasing at a rapid paceup by over 50.0% between 2006 and 2011. However, there is a surplus ofgraduates due to lack of employment opportunities.Pakistan faces skills shortages particularly in the information and communications technology (ICT) sector, aviationsector, finance and accountancy as well as engineering and infrastructural industries. This is partly due to the lowerliteracy levels in the country and in part due to emigration of skilled workers in search for better work opportunities.

Chart 6 Number of Higher Education Students and Adult Literacy Rate 2006-2011


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000 / % of population aged 15+

Source: Euromonitor International from UNESCO/national statistics.

In 2011, the total economically active population in Pakistan stood at 55.4 million. The official unemployment rateof 5.8% of the economically active population in the same year masks the presence of a large informal sector. Theyouth unemployment rate stood at 8.8% of the economically active population aged 15-24 in 2011. The age group of15-19 years and 20-24 also had the highest number of unemployed people at 668,900 and 624,400 in the same year

as many young people work in the informal sector are unpaid family workers, or casual wage workers.Pakistan remains an agrarian economy with 44.5% of the employed population employed in the agriculture, hunting,forestry and fishing sector in 2011. This was followed by employment in manufacturing (13.2% of employed

population in 2011) and community, education, health, social personal services, public administration and defence(13.1%). The agriculture, hunting, forestry and fishing sector also witnessed the biggest growth in employment, upfrom 43.4% of the employed population in 2006.Labour productivity, in Pakistan has been rising steadily from US$2,530 per person employed in 2006 to US$3,802

per person employed in 2011, not significantly impacted by the global economic crisis of 2008-2009. However, thisis lower than peer economies like India where productivity of labour stood at US$4,497 per person employed in2011.

Chart 7 Employment by Industry 2011

% of total

Source: Euromonitor International from International Labour OrganisationNote: Undefined sectors refers to activities not adequately defined elsewhere in the other categories.

CONSUMER LANDSCAPE

Basic necessities dominate spending


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In 2011, the largest consumer segment in Pakistan was young adults aged 18-29, accounting for23.5% of the total population.Consumer spending in Pakistan has grown moderately despite the global economic crisis of 2008-2009 but remains

below regional averages. Between 2006 and 2011, consumer expenditure per capita increased by 4.7% in real termsto reach PKR78,871 (US$914). In 2012, it is forecast to rise by 3.2% before slowing to 2.2% in 2013 in real termswith spending on transport and hotels and catering expected to witness the fastest growth.Lower levels of spending suggest that the bulk of overall spending is on basic necessities. Almost 50.0% of totalconsumer spending was toward food and non-alcoholic beverages in 2011. As a result, only 30.9% of total consumerexpenditure in Pakistan was spent on discretionary items (everything except food, non-alcoholic beverages and

housing) in 2011, a level that has decreased from 35.2% of total consumer expenditure in 2006.Pakistans average disposable income per capita grew by 3.8% in real terms between 2006 and 2011 to reachPKR81,999 (US$950) by the end of the period. This level is lower than per capita annual disposable income in peereconomies like India (US$1,249) and Indonesia (US$2,081) in 2011. With slow growth in income, consumers have

been dipping into their savings to meet basic expenditure needs and as a result, the savings ratio in Pakistan haddipped from 6.3% of disposable income in 2006 to 3.7% of disposable income in 2011.In 2011, the largest consumer segment in Pakistan was young adults aged 18-29 accounting for 23.5% of the total

population. By 2020, young adults will continue to be the largest consumer segment accounting for 23.0% of thetotal population. This young demographic will have a certain extent of spending power, as they are either singles oryoung married couples living in nuclear families presenting opportunities for marketers of consumer goods.

Chart 8 Consumer Expenditure by Type 2000-2020

US$ per capita

Source: Euromonitor International from National statistical offices/OECD/EurostatNotes: (1) Data for all years is in fixed constant US$; 2015 and 2020 data refer to forecasts. (2) Other goods and services

refers to consumer expenditure on Alcoholic Beverages and Tobacco, Clothing and Footwear, Household Goods andServices, Health Goods and Medical Services, Transport, Communications, Leisure and Recreation, Education,Hotels and Catering and Miscellaneous Goods and Services.

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