Investment environment

Sakib Sherani

THE demise of my newly acquired house plants produced an admonishment to my gardener that ended along the lines of “this would never have happened in Karachi.” Even though I moved to Islamabad 14 years ago there are some things, along with friends and family, that I still miss about Karachi — like its commercial ethos.

The reference to Karachi prompted my gardener to narrate his connection to the city. A bomb blast outside a well-known bakery in Gulshan-i-Iqbal several years ago killed two passers-by and completely destroyed Mumtaz’s nursery, which was located right opposite. He lost his entire life’s savings and moved to Punjab to start all over again.

Unfortunately, this story of loss and migration is not unique to one individual or even a handful of people. The deterioration of Pakistan’s internal security environment over many years, starting in the mid-1980s, has produced not only mass internal displacement of ordinary people, capital and entrepreneurs, but an emigration rate that is amongst the highest in the world.

While a partial attempt has been made to quantify Pakistan’s losses from the so-called ‘war on terror’, viewing the country’s investment woes from the prism of this misguided venture completely misses the point: Pakistan has been suffering from self-inflicted wounds on the internal security front for years preceding 9/11. The culmination of a disturbed security situation over many years, especially in the case of Karachi, is not just foregone investment but capital flight and, more worryingly, the flight of human capital, particularly of entrepreneurs.

In the early 1990s, I was involved in trying to raise foreign equity capital for an upcoming garment manufacturer based in Korangi. Set up by an enterprising and dynamic scion of a second-generation textile family, who also happened to be a childhood friend from school, this venture was run on extremely professional lines and was amongst the first in Pakistan to attract orders from Levi Strauss and Tommy Hilfiger. As we prepared to meet and pitch to potential investors, I was convinced this was going to be a success story. With the capital injection my friend had plans to expand production lines, adding to export revenues — and jobs.

A few years later, however, as Karachi’s troubles raged, this factory had been dismantled brick by brick and relocated north. It had proved too costly and the disruption to orders could not be managed. The factory had to be sold. To add to this business house’s troubles their remaining textile spinning units located in Kotri, Sindh, were burnt down during the riots following Benazir Bhutto’s assassination.

Today, rather than being an upcoming Birla or Godrej and employing thousands of fellow Pakistanis, my friend has left Pakistan and is working in the Gulf. Amongst my circle of friends he is the third to have sold a once-prospering business and move overseas. Last year, one of Pakistan’s leading exporters, and a close confidante of the government, confided to me that his son too had decided to move to either Bangladesh or the UAE and start all over again rather than take over the family business.

The story of ‘Max’, the Italian fashion designer exporting from a state-of-the-art facility in Korangi to fashion houses back in Italy, epitomises the havoc the internal law-and-order situation has played with investment. Against the advice of friends and family in Italy, and turning down an option to relocate to India, Max had a thriving export business and was a stellar ambassador for the country, promoting Pakistan as a ‘safe’ and profitable investment destination. That is, till December 2007, when his factory was burnt down in the riots. I don’t know if Max is still in Pakistan or not. Right after the riots he is reported to have expressed his determination to start all over again. But there are few who can, or will, brave such a loss.

As a result, with just a little help from the energy crisis, it is not surprising at all that private investment has collapsed to only 7.9 per cent of GDP in the fiscal year just ended — a multi-decade low. Or that foreign direct investment has shrunk to $800m from a peak of $7.3bn in 2007.

Karachi’s unchecked spasm of killings, extortion and kidnappings — and the government’s headless-chicken response — has only exacerbated a bad situation. Many entrenched businessmen have reportedly either given up completely on Karachi or have begun to diversify their business interests to other parts of the world.

Pakistan’s internal security troubles are not just affecting investors, foreign as well as local. Take the case of domestic tourism.

Thousands of small businesses, particularly in the country’s north, have been established to cater to tourists. In the best of times domestic tourism has flourished, generating local employment and income opportunities for a sizeable population.

However, today, at the height of the summer season, one’s options for travel within Pakistan are severely limited, impacting businesses and jobs.

I have been meaning to take the kids to Hunza but sporadic sectarian strife makes it dangerous. Swat has been out of bounds for the past few years, Chitral is dangerous because one has to pass through Dir. The people of Parachinar have, till recently, travelled to Pakistan via Afghanistan. Travelling to 44 per cent of Pakistan’s land mass (Balochistan) is out of the question for almost 90 per cent of the population and has been so since 2006.

And, finally, Karachi. Sending the kids to Karachi gave me exaggerated visions of packing them off to Beirut at the height of the civil war. While friends assure me it is not as bad as the media hype portrays, the negative perception Karachi’s unending cycle of violence creates — and the palpable losses businesses suffer — are enough to deter any new investment.

Without an appreciation of how this blowback has cost Pakistan and measures to contain the spillover rather than make it worse, as in the case of Karachi or Balochistan, neither investment conditions nor the economy can recover sustainably. The loss of entrepreneurial capital cannot be made up by fiscal incentives or lowering interest rates. It is permanent.


The writer is a former economic adviser to government and currently heads a macroeconomic consultancy based in Islamabad.