Survey on Strengthening Bilateral Economic Relationship between Pakistan and Japan FINAL REPORT February 2019 Ministry of Economy, Trade and Industry International Development Center of Japan Inc. (IDCJ) CONTENTS Chapter 1 Overview of Pakistan’s Economy .................................................................. 1 1-1 Macro Economy ....................................................................................................... 1 1-2 Industry................................................................................................................... 2 1-3 Trade ....................................................................................................................... 4 1-4 Inward Foreign Direct Investment ......................................................................... 6 Chapter 2 Pakistan’s Business Environment ................................................................ 8 2-1 Government Organization ...................................................................................... 8 2-2 Business-related Acts .............................................................................................. 9 2-3 Approval and Authorization for Foreign Direct Investment .................................10 2-4 Investment Policy .................................................................................................. 11 2-5 Infrastructure ........................................................................................................14 2-5-1 Electric Power .....................................................................................................14 2-5-2 Railways ..............................................................................................................15 2-5-3 Road ....................................................................................................................16 2-6 IT Industry in Pakistan .........................................................................................18 Chapter3 Requests and Proposals from Pakistan for Strengthening Economic Relationship .....................................................................................................................21 3-1 Trade ......................................................................................................................21 3-2 Investment Promotion .........................................................................................22 Chapter4 Business Environment in Pakistan from the Viewpoint of Japanese Companies .........................................................................................................................................25 4-1 Survey Method...........................................................................................................25 4-2 Survey Analysis......................................................................................................26 4-2-1 Analysis of Attractiveness and Competitive Advantage .................................26 4-2-2 Analysis of Promising Industries, Investment Decisive Factors, and impediment Factors ..................................................................................................28 4-2-3 Analysis of Trade Opportunities......................................................................32 4-2-4 Identification of Recognition Gap on Business Environment and Factor Analysis ....................................................................................................................36 4-3 Comparative Examples on Business Environment in Pakistan .........................38 4-3-1 Ranking in “Ease of Doing Business 2019” by the World Bank ...................38 4-3-2 Ranking in Global Competitive Index 2018 by World Economic Forum......40 Chapter 5 Measures for Strengthening Bilateral Economic Relationship .....................42 5-1 Improvement of Investment Environment ............................................................42 5-1-1 Overview of Investment Environment ............................................................42 5-1-2 Extraction of Issues .........................................................................................43 5-1-3 Identification of Items to be Improved and Suggestions for Improvement ....45 5-2 Improvement on Strengthening Bilateral Trade Relationship .............................50 5-2-1 Overview of Bilateral Trade ............................................................................50 5-2-2 Extraction of Issues .........................................................................................51 5-2-3 Identification of Items to be Improved and Suggestions for Improvement ....53 5-3 Possibilities of FTA ................................................................................................59 5-3-1 Japan’s FTAs ...................................................................................................59 5-3-2 Pakistan’s FTAs ...............................................................................................61 5-3-3 Possible Impact of FTA on Japanese and Pakistani Economies .....................71 Chapter 1 Overview of Pakistan’s Economy 1-1 Macro Economy Pakistan launched "Vision 2025" in May 2014, a mid- to long-term growth strategy consisting of three stages: Pakistan aims at becoming among world's top 25 countries in terms of the economic scale by 2025, becoming one of the global leaders in important sectors by 2035, and becoming among the world's top 10 countries being a member of developed country in 2047. Even though there was a change of government, new policy has not been launched. Pakistan’s population is exceeding 200 million people, of which the population under the age of 30 accounts for 60% of the overall population; in other words, Pakistan has a high economic potential. In 2017, Pakistan’s GDP is US $ 304.95 billion and per capita GDP is US $ 1,541.1. Table 1-1 Pillars of Pakistan Vision 2025 １．Developing human capital and social development ４．Energy, Water & Food Security ・Realize 100% enrollment rate of primary education. ・Double the total domestic power generation capacity to ・Expand enrollment rate of higher education from 7% to 12%. 45,000 MW. ・Expand the proportion of public health eligible population ・Improve electrification rate from 67% to 100%. from 48% to 90%. ・Reduce the population facing food insecurity from 60% to 30%. ２．Achieving sustained, indegenous and inclusive growth ５．Private Sector & Entrepreneurship Led Growth ・Modernize the public sector for the provision of efficient and ・Rank in the top 50 countries on the World Bank's Ease of Doing effective civil services Business rankings. ・Become one of the largest 25 economies in the World. ・Expand private investment from overseas to over $ 40 billion. ・Increase export value from $ 25 billion to $ 150 billion. ６．Developing Competitve Knowledge Economy through ３．Democratic Governance, Institutioal Reform & Value Addition Modernization of Public Sector ・Improve Productivity ・In the governance index of the World Bank, each item such as ・Improve Pakistan’s score on the World Bank Institute’s political stability, nonviolence / terrorism, and corruption is Knowledge Economy Index from 2.2 to 4.0. improved to the top 50% in the world. ７．Modernizaing Transportation Infrastructure & Greater Regional Connectivity ・Positioned as a regional trade and commercial hub. ・Expand the road from 32 km to 64 km per 100 km2, and expand the proportion of mode of railways in logistics from 4% to 20%. Pakistan achieved GDP growth rate of 5.8% in 2018 (July 2017/ June 2018), which is the highest in the past 13 years. Pakistan maintained a low level of inflation of 3.9% and achieved inflation targets for four consecutive year. This in turn led to the credit expansion in private sector. High economic growth rates are mainly due to domestic consumption and low interest rates, additional fiscal expenditure, and the improvement of real income also supported high economic growth. On the other hand, trade deficits tend to expand due to the rapid increase in imports caused by high domestic demand, causing a decrease in foreign reserves almost by half from US$ 14.1 billion at the end of 2017 to US$ 7.3 billion at the end of 2018. Normally, foreign exchange reserves are required for three months of monthly imports, but the level remained below two months of monthly imports. In order to curve the increase in imports, Pakistani government imposed Regulatory Duties (RD) on 1 luxury items in October 2017. Thereafter, State Bank of Pakistan issued Foreign Exchange Circular No.06 of 2018, stating that advance payment for imports is basically not allowed.1。 The budget deficits in 2018 reached the all-time high in the past five years, and the public debt has been increasing significantly. According to the IMF, public debt of emerging countries is considered to reach a dangerous level when the rate of public debt exceeds 70% of GDP. However, the rate of Pakistan exceeded 72.5% of GDP in 20182. In 2018, Pakistan requested financial assistance to the IMF, Saudi Arabia, and China. Saudi Arabia agreed in October 2018 to provide Pakistan with a package equivalent to US $ 6 billion. Pakistan has received financial assistance from IMF 13 times in the past. Most recently, in September 2013, Pakistan received from the IMF Extended Credit Facility (EFF) of 6.6 billion dollars for three years. Table1-2 Macro Indicators FY15 FY16 FY17 FY18 Target Result Growth Rate（％） Real GDP Growth Rate 4.1 4.6 5.4 6.0 5.8 Agriculture