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Ease of doing business

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Countries want foreign direct investment (FDI) because it creates jobs, boosts growth and transfers skills and technology. But, a sound investment climate is crucial for economic growth. Foreign investors are generally attracted to a country where they feel that its economy and government will allow them to be profitable with their investments.

According to an index prepared by the International Finance Corporation (IFC), Pakistan lost eight points and dropped from 75th position in 2010 to 83rd in the world ranking of the Ease of Doing Business 2011 (out of 183 economies). The overall index of ranking was based on a number of variables relevant to the business environment in a country.

 Starting Business in Pakistan had become more difficult during the year, with the sub-index dropping from 69 to 85, while Dealing with Construction Permits had become little but easier, with the sub-index improving from 102 in 2010 to 98 in 2011. The ranking in ease in Registering a Property and Getting Credit had worsened from 118 and 61 to 126 and 65, respectively, during 2011. The sub-index of Level of Protection to Investors and Trading Across Borders had gone down slightly from 27 and 78 to 28 and 81, respectively. Pakistan s ranking in ease of Closing a Business was also downgraded from 56 to 67 during the year.

It was also strange that despite tax reforms over a number of years, the country s ranking in Paying Taxes has fallen from 139 in 2010 to 145 in 2011. A slight improvement was reported in Enforcing Contracts where the country s ranking had gone up from 156 to 155. Notable was the fact, however, that despite a drop in Pakistan s ranking from 75th position to 83rd, the country was still ahead of some South Asian countries including India at 134, Bangladesh at 107, Bhutan at 142, Sri Lanka at 102, Maldives at 85, Nepal at 116 and Afghanistan at 167.

Also, it needs to be highlighted that the index of Ease of Doing Business was compiled after a lot of effort and investigation. For instance, while determining the position on Trading Across Borders , a detailed analysis on documents to export and import, time to export and import, and cost of import and export was undertaken to arrive at the relative position of a country. As expected, Singapore was the top ranked economy in the world in the Ease of Doing Business in 2011.

A substantial decline in the ranking in the Ease of Doing Business in the last one year reflects largely a deterioration in the overall business environment in the country, including the availability of the requisite infrastructure, particularly energy, and the ease of setting up of an enterprise and running it with the necessary freedom in an unconstrained manner. Needless to say that the higher ranking of the country because of greater facilities would be more attractive for domestic and foreign investors and vice versa. It is not surprising, therefore, that investors are deliberately trying to avoid Pakistan due to its low ranking, and finding other countries as relatively more favourable destinations of investment.

It is sad to note that both total investment and FDI have been declining continuously over the last few years in Pakistan and this adverse development has retarded the growth rate of the economy and increased unemployment in the country. Obviously, the continuation of such a trend could be very damaging for the prospects of economy and the welfare of the people and needs to be reversed as soon as possible to gain the confidence of investors and businessmen in order to avoid a hopeless situation in the future.

One fails to understand why our government has not been able even to redress some of the easily removable constraints with a view to improving the ranking in the ease of doing business in the country. For instance, while there could be genuine reasons for a low ranking in Getting Credit and Trading Across Borders , it is difficult to comprehend why Pakistan, out of 183 countries, should suffer the ignominy of being placed at 126 in Registering Property , 145 in Paying Taxes and 155 in Enforcing Contracts when impediments in the improvement of these sub-indices can easily be overcome. We would urge upon the government authorities to take a serious note of the situation and make a determined effort to facilitate and improve the business environment in the country, which would not only upgrade our ranking but also help our economy to stabilise and grow faster.

A question could, however, be justifiably asked about the reasons of comparatively lower level of investment in Pakistan when the country has been ranked higher than some of the other countries in the region. Explanation for such a phenomenon lies in the methodology of preparing the ranking by the IFC which has taken into account nine important stages of conducting business in a country, but excluded certain other areas that could also be crucial in certain cases.

For instance, the index does not cover the quality of infrastructure services (other than those related to trading across borders), the security of property from theft and looting, the transparency of government procurement, macroeconomic conditions or the underlying strength of the institutions. This could be due to the thinking in the IFC that such variables are either not very quantifiable or should be treated as normal in every country, although the fact of the matter is that these factors have become highly important in our context and worked adversely to drive down FDI from dollar 5. 41 billion in FY08 to a meagre level of dollar 1. 57 billion in FY11.

Even this level may be hard to maintain in FY12 due to severe energy shortage, deteriorating law and order situation, increasing militancy, instability in political situation and the suspension of SBA with the IMF - factors not included in the IFC ranking. It means that our position in Ease of Doing Business is actually much worse than suggested by the IFC ranking and the country has to redouble its efforts and strive much harder towards gaining the confidence of investors who may be somewhat influenced by such statistics but their practical decisions are based on a more thorough knowledge of the ground realities prevailing in various countries.

 

Courtesy: Business Recorder


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Forex Rates of Pakistan and charts are available from 1992 onwards