A new emerging market

IN the aftermath of the 2008 financial crisis in the US and, later, in Europe, global economic
growth was generated mainly by the so called emerging markets, especially China, Brazil,
Russia, India and South Africa. Today, growth in the emerging markets is either negative,
stagnant or slower. Some fear this may halt the weak recovery in the US and Europe and
even lead to another global recession.

Such fears are overdrawn. Chinas reduced annual growth rate of 7pc is still the highest in
the world. India too is growing, although its claim of a 7pc growth rate is a bit of a fudge.

Another reason for optimism is that several of the so-called frontier markets such as
Vietnam and Pakistan are growing or could grow at rates of 6pc and over. Pakistan, in
particular, after several years of stagnation, has the potential for rapid growth due to the
confluence of several factors.

First, relative political stability. Despite its mishaps, there is a general consensus now
that the current government is likely to be able to serve out its term, unless it makes
serious political mistakes.

To make Pakistan a prime investment destination, the government must address two critical
challenges.
Second, improved security. Although the job is not yet fully done, Pakistans fight against
terrorism has succeeded in reducing violence. The Zarb-i-Azb operation has cleared most
frontier areas and big cities of terrorist groups and political gangs. And, despite the ongoing
ceasefire violations along the LoC, most analysts discount the danger of a war between
nuclear-armed Pakistan and India.

Third, macro-economic balance. Lower oil prices, large remittances, monetary discipline,
an IMF programme, bond sales and domestic borrowing have enabled the government to
balance the external account and limit the budget deficit and inflation. The IMF has certified
Pakistans economic health and rating agencies have upgraded it to investment grade.

Fourth, manageable private debt. When they were the flavour of the month, emerging
market companies received generous and almost indiscriminate credit. Now, much of this
debt is toxic. Pakistani companies do not carry this baggage because they have not had
easy access to international or domestic credit. Although the KSE fell in recent weeks along
with other bourses, this was due to global market sentiment, rather than problems with
the fundamentals of Pakistans economy or the traded companies, most of which are credit-
worthy.

Fifth, the China-Pakistan Economic Corridor. If the projects envisaged under the $46
billion Chinese commitment are implemented, it will provide a solid foundation of
infrastructure and economic activity to jumpstart growth in several segments of Pakistans
economy, and add up 2pc to annual GDP growth. Under the CPEC umbrella, Chinese
companies are actively looking for investment opportunities in addition to already identified
projects. Also, Chinas commitment has had a positive impact on investor sentiment in the
Gulf, Europe and America.

Sixth, Pakistans demography. With almost 200 million people, Pakistan has the fifth
largest population in the world. The median age of 22 implies a vast source of both workers
and demand. Pakistans level of urbanisation (36pc) is among the lowest in the world but
rising rapidly. This will propel high consumption led growth. So too will Pakistans middle
class, which constitutes 40pc of the population, a higher proportion than in India or
Bangladesh.

Seventh, ability to grow autonomously. Eighty-four per cent of Pakistans GDP is

created by domestic demand, a larger share than any other Asian economy, including China
(34pc), Indonesia (57pc) and India (59pc). Thus, unlike most older emerging markets,
Pakistans growth is not dependent on finding export markets; it can be generated largely
within Pakistan itself.

Eighth, vast investment opportunities. Due to the paucity of past investment, there is a
huge pent-up demand for goods and services in almost every sector: energy, transport,
agriculture, housing, health, education, IT, consumer and durable goods. The negligible
ratio of private equity penetration in Pakistan with a private equity investment to GDP
ratio of less than 0.01pc is indicative of the sizable investment opportunities in Pakistan.

Pakistan must avail of the window of opportunity created by the confluence of the listed
circumstances to accelerate growth and development. The government, in partnership with
the private sector, should launch a campaign to project the attractions of Pakistan as an
investment and business destination. It can also take some steps to reassure potential
investors, such as on the creation of an investment insurance facility.

To successfully make Pakistan a prime investment destination, the government needs to

urgently address two critical problem areas. One, revenue generation. National
savings should be available for development and growth-oriented investment, not for
current consumption by governments. The government should refrain from borrowing from
the national savings by generating sufficient revenues. To this end, it is essential to: expand
significantly the countrys very narrow tax base; ensure the full collection of taxes (by using
new technologies and appropriate penalties for evasion); accelerate the privatisation or
turnaround of the score of loss-making government corporations and end wasteful
subsidies. Such revenue rationalisation would also inter alia solve the circular debt
problem in the energy sector, a major impediment to investment and growth in the entire
economy.

Two, economic and investment oversight. Like many other countries, especially
developing countries, Pakistan is plagued by the phenomena of crony capitalism and
accompanying corruption, inefficiencies and inequalities leading eventually to social and
political challenges. To put an end to this, and create a level playing field, it would be wise
to create a high-level and independent economic and investment commission, composed of
qualified, reputable and experienced Pakistanis from private and public life. The Commission
could be responsible for: introducing clarity in economic regulations and jurisdictional
responsibilities in each sector of the economy; ensuring the functional competence of
persons leading major economic- and investment-related institutions; ensuring
transparency in every major investment or economic transaction; providing speedy
resolution of disputes or complaints relating to major economic or investment issues.

All Pakistans national goals rest on the realisation of rapid economic and social
development. Pakistan has a unique opportunity today to emerge as one of the worlds
dynamic growth stories. It cannot afford to lose this opportunity (again).