During the pandemic, the current account of the balance of payments ended in surplus for the first time in five years, largely attributed to record inflows of workers’ remittances from abroad (expected to reach $26 billion in 2021) and a sharp decline in services imports. Even with the increase in the number of infected people, the government is trying to restrict economic activities as little as possible.
However, the risks would be reduced demand for Pakistani goods if the pandemic situation worsens in major export destinations. 2021 should be a year of economic growth for Pakistan thanks to the fastest recovery from the covid-19 pandemic in the Indian subcontinent.
The Pakistani government decided on a package of rescue measures worth 8 billion USD (about 2.8% of GDP). The IMF provided immediate assistance of US$billion in April 2020 and another US$0.5 billion under a previously agreed reform program in March 2021. Another US$ billion was received by Pakistan from the World Bank and the Asian Development Bank. By the end of 2020, over 60,000 households have received financial and material aid, and up to 30 million households are to receive food subsidies from June this year.
Although agriculture suffered significant losses in the pandemic year, the construction and finance sectors managed to end 2020 on a positive note thanks to government incentives. The State Bank of Pakistan has gradually reduced the benchmark interest rate from 13.25% to the current 7% (March 2021). Potential sectors that can attract FDI include energy, telecommunications (potential 5G license auction in Pakistan), oil and gas exploration, and automotive.
Post-COVID-19 opportunities for foreign exporters
Despite the noticeable improvement in electricity supply in recent years, the expansion of its production remains one of the priorities of economic policy; the goal is to meet growing demand and eliminate chronic outages.
According to allcountrylist, over 60% of Pakistan’s energy needs are covered by oil and gas, of which only 18% comes from domestic sources, and the cost of importing energy raw materials is increasingly burdening the state budget. Oil imports over the past year represent about a fifth of the value of total imports. The installed capacity of power plants has increased significantly, from about 23 GW in 2014 to almost 40 GW in 2020. However, Pakistan still lacks several GW of capacity, especially outside the summer period, when hydroelectric generation is lower and consumption is high. The Department of Energy advises that if the country grows by 5.5% of GDP per year, 70.9 GW of generated capacity will be needed in 2029 to meet peak demand. However, energy consumption is expected to grow by an average of 2.2% annually until 2029.
In addition to thermal power plants, Pakistan has significant hydropower (potential up to 40 GW according to estimates), a certain share of nuclear generation and growing generation from renewable sources. The government has announced ambitious plans to increase the share of electricity from renewable sources: in 2030, 30% of electricity is to come from wind, solar, small hydro and biomass. Capacity for solar and wind power will increase substantially and is expected to reach nearly 10 GW by 2029. The aim is also to increase the share of large hydropower plants (above 50 MW) to 30%.
Several hydropower projects with a total capacity of around 13 GW are being installed under the China-Pakistan Economic Corridor (CPEC) project; it is to increase to 17 GW by the end of 2029. The government aims to achieve 45 GW to ensure uninterrupted supply at an affordable cost and ensure access to electricity for 90% of the population, up from the current 67%. Demand will be driven mainly by the electrification of areas that are not currently covered by the electricity grid.
Pakistan’s energy sector is dealing with the problem of “circular debt”: distributors are unable to collect fees and limit losses in the distribution of electricity to the required level, and therefore do not pay electricity producers, and when losses reach an unbearable level, the state budget pays them. This dynamic does not motivate distributors to improve performance and discourages electricity producers from investing in new capacities. The IMF and the Asian Development Bank have financial help to solve this problem.
For Czech manufacturers, there is an opportunity to work in the design and supply of small hydroelectric power plants, power plants using biomass, or to participate in projects of alternative and renewable sources. Supply of biomass boilers or power and distribution transformers can be counted on. In addition to these smaller, but widely replicable supplies, supplies for planned or under construction large hydropower plants (Diamer Bhasha, Dasu) and, finally, thermal plants that count on the use of domestic coal resources are also considered. The reform of the energy sector, which should result in better collection of fees, will require the installation and maintenance of a large number of metering devices.
The Information Technology sector has been identified by the Government of Pakistan as one of the priority sectors for the coming period. ICT contributes around 1% of Pakistan’s GDP and is valued at USD billion. Over the past three years, computer software exports have increased by 70%, and the government expects to increase exports in the ICT sector from around $1 billion at present to $10 billion by 2023. In July-December 2020-2021, exports increased by 40 % compared to the previous comparable period 2019-2020. In line with the country’s digital vision, the ICT sector is expected to reach USD 20 billion in 2025.
Local app developers and IT companies are the main reason behind the success of this sector in Pakistan which employs over 300 thousand professionals in various industries. Interest in entering the online space is growing in Pakistan, especially after the introduction of 4G and 5G technologies. Most development activities include consumer applications based on Android or Apple platforms, website development, e-wallets/payments, e-commerce and online games. Most foreign companies operate either through their local distributor or through their own office with fully equipped technical and support teams.
In developed countries, governments play a key role in ICT development. The Government of Pakistan has introduced several incentives to attract foreign investors. These include: 100% equity ownership; 100% repatriation of profits; tax credits for venture capital funds until June 2024; accelerated depreciation (30%) on computer equipment and the availability of a reliable and high-speed Internet connection. The State Bank of Pakistan (SBP) has permitted local banks to open online merchant accounts.
According to official statistics, approximately 85% of the local telecommunications infrastructure is carried over optical fiber, which provides Internet access to more than 2,000 cities. In addition, the government and the private sector have launched a strategy regarding the development of new educational institutions in the field of IT and the introduction of new short training programs. According to the Ministry of IT and Telecommunications, special technological zones are to be built in the country to support the growth of ICT.
Among the most promising fields in ICT for Czech companies can be included: e-commerce, IT parks, incubators, software and video game development, data, training and consulting centers or development cooperation in specialized university fields and in other sectors, e.g. in engineering, mining, agriculture, artificial intelligence and nanotechnology.
The construction industry contributes 2.5% to GDP creation and employs 8% of the workforce. Construction activity grew by 8.1% during the 2019–2020 financial year. Fitch Solutions predicts that by 2028, the construction industry in Pakistan will climb to a value of around USD 17 billion. Currently, the value is around one third.
In April 2020, the government announced a package of measures to revive the construction industry, which loosens regulations, in addition to providing tax and other benefits. By supporting the construction industry, the state promises to mitigate the effects of the coronavirus crisis on employment, as workers of various qualifications, including unskilled workers without formal employment, will return to work more quickly, but also to shake up the previous economic stagnation by encouraging domestic and foreign investments.
In late 2020, the government announced additional incentives for the construction sector, which lower loan interest rates (end of March 2021: interest rate would be reduced from 5% to 3% and loan limit increased by 100% to PKR 10 million), release for investors regarding the source of income and simplification of administration and approval of projects. Projects worth billions of PKR have already been launched to create up to 250,000 new job opportunities.
There is a shortage of 11-12 million housing units in the country, about a third of which are in cities. Housing construction is one of the key points of the current government’s agenda: it criticizes its predecessors for neglecting the housing sector and considers it necessary to add at least one million new apartments every year to cover current demand and at least partly the 2.1% annual population increase. The construction support package includes special concessions and subsidies for the social housing project that the government announced shortly after taking office in 2018.
It is mainly intended for people with low and lower middle incomes and residents of illegal spaces, squats and slums, which is roughly a fifth of the city’s population. In addition to the massive construction of cheap apartments in cities and in the countryside, support for the construction industry should also help revive the construction of shopping centers and office buildings. In cheap housing projects, especially in the countryside, simple typified houses are used. Energy-saving solutions using solar energy are needed for all construction.
The revival of construction activities will bring demand for building materials of all kinds (cement, steel rods and sheets, rods, bricks, blocks, tiles, glass sheets, pipe fittings, paints and varnishes, etc.), of which only a part and the basic assortment is covered by domestic production. The demand for wood and cement is permanent. Cement posted a record 44.4% year-on-year growth of 44.4% to 5,773 million tonnes in March due to a massive increase in domestic consumption and exports. Cement plants in the north sold 3,809 million tons to the local market, compared to 2,749 million tons in March 2020, an increase of 38.5%. In the south of the country, sales increased by 62%.