The SBP in its recently released annual report has incorporated a chapter on factors constraining investment in Pakistan: beyond macroeconomics. It is an interesting and much needed literature added in the report. The prime reason for frequent boom bust cycle in Pakistan is nothing but persistent low investment in Pakistan and every boom cycle coincides with rise and fall of foreign savings.

The chapter highlighted the issues beyond the macro factors such as low savings, shallow financial market and presence of large informal economy. The legal and operational challenges faced by both local and foreign investors in terms of dispute settlement, policy advocacy and investor retention are highlighted. This is followed by the problems in tax collection – lack of administrative ease and cumbersome documentation., which have made the regulatory environment unfavorable for businesses.

The problem of falling investment in Pakistan is not a recent issue – investment to GDP peaked in 80s at 18.7 percent of GDP and has been on downhill since, to stand at 15.3 percent of GDP in 2010s. The investment was never too high in Pakistan as compared to other emerging economies with China over 45 percent and India over 30 percent. The gap is huge, and persistent structural reforms, improvement in skillset, education and health, and many other factors are required.

The problem is not just of low investment, but also the quality of the investment. In Pakistan, majority of investment came in market seeking (94%) while efficiency seeking investment is lowest amongst peers – not only 1 percent. That sums up the market dynamics where the focus is on catering domestic demand. All the FDI mainly comes to cater domestic demand – be it in telco, FMGC or any other sector. It is hardly to find an example of FDI in textile or other sectors for exporting purposes.

Even today, there are a few deals in the making where local brands in consumer segments are eyed by multinationals – one such rumor is of Unilever buying local business of Shan Foods. There is a buzz of another deal where a newly emerged local brand in packaged food may be acquired by an MNC.

Absence of efficiency seeking investment eludes firms in Pakistan to obtain comparable level of innovation, product diversification and economies of scale to peer countries. That partially explains Pakistan's export standings. There is a case of protection of domestic industries to imports – the idea starts with removing protection once the industry is globally or regionally competitive, but that seldom happens as lobbying by market seekers is too strong.

The other issue is of love of large firms to cash (issuing dividend) over investing surplus in capex – that limits the ability of attaining the economies of scale and in turn adversely affect the small firms' capability to grow. The surplus is being invested in low productive sectors such as real estate, and that fuels the consumption based economy to grow further.

The legal issues are due to discrepancies between country's investment policy and investment laws. That is why, despite having liberal and fairly open investment policies – such as 100 percent ownership, currency convertibility and no or low restriction on repatriation of profits, FDI is hard to come by.  One main issue is poor dispute resolution mechanism in terms of contract enforcement and expropriation. There are number of high-profile disputes lingering involving Pakistan government and established foreign investors – Reko Diq with Australian mining firm and rental power issue with a Turkish company, to name a few.

In the recent improvement in ease of doing business, there is no change in contract enforcement and credit availability scores. And without these two, no significant jump in either foreign or domestic investment could be expected.

Another key operational impediment is difference between de jure and de facto policy.  On paper, Pakistan has the most liberal regime, but on ground unnecessary security and other clearances are required. Apart from that, incidence of corruption and bribery is on the higher side. The other problem is of inconsistency in policies as that coupled with low aftercare makes investment retention difficult. Then there is the unfavorable tax environment.

Above mentioned issues are more related to big firms, the problems of small firms are no different. The SBP report rightly points that small firms find it hard to scale up. Issues like contract enforcement and poor copyright laws elude the succession planning as owners keep the plans very close to their hearts. The absence of skill labour creates problem for progressive entrepreneurs. The absence of formal credit not only limits expansion, but also creates hurdle in spending for R&D. And the list goes on.

The good thing is that SBP has given special attention to the problem and has welcomed recent improvements. There is a long way to go and concentrated persistent efforts are required to improve the overall investment culture.