Pakistan: Poor investment climate impacting telecom industry

Despite ruling Pakistan Tehreek-e-Insaaf (PTI) government’s efforts to increase foreign investments, the incoming Foreign Direct Investment (FDI) has been decreasing.  According to a report by the State Bank of Pakistan (SBP), FDI inflow to Pakistan decreased by 30% to USD 1.39 billion during July-March (FY 2020-21) against USD 2.15 billion for the same period in the previous year. The drop is an indication of the country’s deteriorating business climate for investments including for telecommunication sector. However, the Pak government blamed the overall weak global trends for the tepid FDI inflows.

Depreciating Pakistan’s currency PKR (Pakistan Rupee) and continuing high inflation rate are viewed as the immediate factors affecting returns for foreign investors. The value of PKR has plummeted to around Rs. 177.49 against USD by December 2021 from Rs. 123 in August 2018, a depreciation of over 44% since the current PM took over administration. PKR is among the world’s worst-performing currencies in recent times and has depreciated with respect to all major currencies of the world. Inflation also rose from 5.65% in January-2021 to 12.3% in the month of December in 2021.

Pakistan’s inconsistent economic growth rate, rising debt payments, a balance of payment crisis, increasing country’s current account & fiscal deficits and poor security scenario have also impacted foreign investor’s confidence. The country’s terror financing and anti-money laundering laws are also still not compliant with international standards. Further, political instability and constant imbalance in civil-military relations too discourages foreign investment.

The US Department of State, in its 2021 Investment Climate Statement on Pakistan noted that Pakistan remains a challenging environment for investors with FDI declining by 29% in the first half of FY 2021 against the same time period in FY 2020, despite having a relatively open formal regime. Comparing with the regional competitors, it attributed the declining trend to unpredictable security situation; lengthy dispute resolution processes; poor intellectual property rights enforcement; inconsistent taxation policies; and lack of harmonization of rules across provinces.

Interestingly, Pakistan’s ‘all-weather/iron friend’ China is also wary of present business climate in the country. China has been the largest investor in Pakistan for several years. China’s share in Pakistan’s FDI increased significantly in 2013 after initiation of CPEC. However, Chinese FDI inflow during July-March (FY2020-21) had declined to USD 650.8 million compared to USD 859.3 million during the same period for the previous year. China’s reluctance for investing in the Phase-II of CPEC construction project can be seen in the backdrop of emerging differences between the two countries over the USD 6.8 billion worth railway project. It was also attributed to the increased debt burden of Pakistan, corruption in the CPEC authority & Chinese companies residing in Pakistan, as well attempts to expand military control over the CPEC projects.

The FATF’s (Financial Action Task Force) listing of Pakistan in gray list intermittently also resulted in a USD 38 billion economic loss coupled with stringent domestic tax and interest rate policies, contributing to deteriorating business interests for overseas investors. 

The adverse business climate also impacted Pakistan’s other indicators. The current government nearly doubled it’s foreign debt in just three years, adding USD 35.1 billion to bring the total to USD 85.6 billion as of June 30, 2021.

The declining FDI is also noticed in Pakistan’s telecommunications sector.  Telenor, the state controlled Norwegian telecom company has reportedly curtailed its future investment plans in Pakistan’s telecom sector.  Though the company is the 2nd largest cellular & digital market in Pakistan with market share of 26.71%, it did not participate (Sept 2021) in the new spectrum auction in Pakistan. Though Telenor successfully conducted 5G trials in March 2020 achieving speeds in excess of 1.5 Gbit/s, it has no future plans for investment in 5G. Since 2005, Telenor had invested more than USD 5 billion in Pakistan’s telecom sector.

The Pakistani government’s new spectrum auction for NGMS (New Generation Mobile Services) was a major setback to the government’s claims of raising USD 1 billion, with no new market entrants or major operators showing any interest to participate.  Further, historically Pakistan has had one of the highest taxation rates in the telecom services. Average revenue per user (ARPU) in Pakistan, a key performance benchmark for cellular companies, declined by 10% year-on-year during July-September 2021.

A recent World Bank report commissioned by Pakistan’s Ministry of Information Technology on 5G readiness plan, pointed that spectrum management policy is the main hurdle in investing in 4G deployment and competition in the country.  Furthermore, it stated that the spectrum has been priced in such a way that only the market leaders can afford to participate, hindering Pakistan’s 5G readiness. Even the full development of 4G is now delayed due to deteriorating business environment in Pakistan.

Data is said to be ‘the new oil’ and is precursor for ushering new rounds of development. Of the around 185 million cellular subscribers, only 46% have access to 3G/4G services in Pakistan. In a world where technology dictates all aspects of life, a digital divide indicates economic stagnation and Pakistan’s economic progress appears to be at stake.