India

Executive Summary

India’s GDP growth in 2019 declined to the slowest rate in over six years. Prior to the onset of the COVID-19 pandemic, the International Monetary Fund had reduced its growth prediction for FY 2020 to 4.8 percent from a previous estimate of 6.1 percent. The slowing growth reflected a sharp decline in private sector consumption and reduced activity in manufacturing, agriculture, and construction. The stock of foreign direct investment (FDI) in India has declined a full percentage point over the last six years according to data from the Department for Promotion of Industry and Internal Trade (DPIIT). This mirrors a similar drop in Indian private investment during the same period.

Non-performing assets continue to hold back banks’ profits and restrict their lending, particularly in the state banking sector. The collapse of the non-bank financial company Infrastructure Leasing & Financial Services (IL&FS) in 2018 led to a credit crunch that largely continued throughout 2019 and hampered consumer lending.

Demographic increases mean India must generate over ten million new jobs every year – a challenge for the economy and policy makers. While difficult to measure, given the large size of the informal economy, several recent studies, in 2017-18 suggest India’s unemployment rate has risen significantly, perhaps event to a 40-year high.

The Government of India has announced several measures to stimulate growth, including lowering the corporate tax rate, creating lower personal income tax brackets, implementing tax exemptions for startups, establishing ambitious targets for divestment of state-owned enterprises, withdrawing a surcharge imposed on foreign portfolio investors, and providing cash infusions into public sector banks. India’s central bank, the Reserve Bank of India (RBI), also adopted a monetary policy that was accommodative of growth, reducing interest rates by a cumulative 135 basis points throughout 2019 to 5.15 percent. However, transmission remained a problem as banks, already struggling with large volumes of non-performing assets pressuring their balance sheets, were hesitant to lend or pass on the RBI’s rate cuts to consumers.

The government actively courts foreign investment. In 2017, the government implemented moderate reforms aimed at easing investments in sectors such as single brand retail, pharmaceuticals, and private security. It also relaxed onerous rules for foreign investment in the construction sector. In August 2019, the government announced a new package of liberalization measures removing restrictions on FDI in multiple sectors to help spur the slowing economy. The new measures included permitting investments in coal mining and contract manufacturing through the so-called Automatic Route. India has continued to make major gains in the World Bank’s Ease of Doing Business rankings in 2019, moving up 14 places to number 63 out of 190 economies evaluated. This jump follows India’s gain of 23 places in 2018 and 30 places in 2017.

Nonetheless, India remains a difficult place to do business and additional economic reforms are necessary to ensure sustainable and inclusive growth. In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate to store all “data related to payments systems” only in India went into effect on October 15, 2018, despite repeated requests by industry and the U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. The RBI policy overwhelmingly and disproportionately affects U.S. banks and investors, who depend on the free flow of data both to achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and AML/CFT protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.

In addition to the RBI data localization directive for payments companies, the government formally introduced its draft Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India. The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that are considered “critical” can only be stored in India. The Bill is based on the conclusions of a ten-person Committee of Experts, established by the Ministry of Information Technology (MeitY) in July 2017.

On December 26, 2018, India unveiled new restrictions on foreign-owned e-commerce operations without any prior notification or opportunity to submit public comments. While Indian officials argue that these restrictions were mere “clarifications” of existing policy, the new guidelines constituted a major regulatory change that created several extensive new regulatory requirements and onerous compliance procedures. The disruption to foreign investors’ businesses was exacerbated by the refusal to extend the February 1, 2019 deadline for implementation.

9. Corruption

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Kyrgyz Republic

Executive Summary

The Kyrgyz Republic has undergone waves of political upheaval and severe economic downturns since its independence in 1991, resulting in an unfavorable investment climate for investors with low tolerance for risk of political instability. The violent arrest and detention of former President Atambaev by state security forces in August 2019 alarmed potential investors anticipating continued stability and positive investment prospects. Corruption continues to be a major constraint to business development, particularly in the state customs and border agencies, despite President Sooronbai Jeenbekov’s campaign to stamp out corruption in business regulation and to increase transparency in the public procurement process. The country’s judicial system is not fully independent and susceptible to external political influence. While the legal and regulatory framework is set up to be in accordance with international norms, poor implementation and weak enforcement, particularly with respect to intellectual property rights protection, is an endemic problem.

Kyrgyz government officials speak optimistically of factors they say indicate an improving investment climate. The government has identified FDI as a key component to growing the economy in the coming years and has created a strategic roadmap for economic development designed to facilitate this growth. The government is taking steps to streamline the process of starting a business, as well as its tax regime. The newly established Institute of the Business Ombudsman, intended to instill greater confidence in the business community, is charged with advocating for the protection of rights and freedoms of foreign and domestic business entities. Under the “Digitalization Kyrgyzstan” initiative for 2019-2023, the development of information and communication technology infrastructure is aimed at improving the regulatory framework for incentivizing innovation and protecting intellectual property.

Stifled progress in improvements to the business legal and regulatory framework deters foreign investors from entering the Kyrgyz market. The Kyrgyz economy continues to rely heavily on the mining and agricultural sectors. Kumtor Gold Company and the parent company Centerra Gold Inc. completed a new strategic agreement with the government in August 2019 after nearly two years of contentious disputes, further dampening the country’s investment image. The government retains a poor track record in international arbitration cases, and in the last five years, foreign investors have filed twenty different lawsuits against the Kyrgyz government.

The Kyrgyz Republic struggles to meet basic infrastructure needs. Disruptions in the supply of electricity remain a problem, especially outside the capital, Bishkek. Power plants, roads, and canals are dilapidated and in need of major capital investment. Chinese infrastructure projects, primarily implemented with non-market loans from the Export-Import Bank of China, tend to improve market access predominantly for Chinese companies.

The Kyrgyz Republic has yet to reap the economic benefits of membership within the Eurasian Economic Union (EAEU), following the country’s August 2015 accession into the customs union whose current members also include Russia, Kazakhstan, Armenia, and Belarus. Harmonized tariff schedules have left Kyrgyz producers and suppliers struggling to compete with cheaper import goods produced by other EAEU member states, in addition to non-member states that have signed Free Trade Agreements with the EAEU. An increase in non-tariff measures, to which the Kyrgyz government and businesses alike have struggled to adapt, create further barriers for Kyrgyz producers. The slow development of technical infrastructure to ensure compliance with EAEU sanitary and phytosanitary standards and quality control have precluded Kyrgyz goods from target markets within the customs union. Persistent reliance on Russia as a source of remittances, imports, and financial support subjects the economy to Russian influence and makes it vulnerable to external shocks to the Russian economy.

The Kyrgyz government remains very open to foreign direct investment, particularly from U.S. and European countries. Kyrgyz entrepreneurs increasingly are purchasing franchise licenses of major U.S.-based companies, particularly in the food service and retail sectors. The Kyrgyz Republic has also experienced a modest uptick in interest from U.S. corporations seeking to bid on infrastructure development projects funded by international financial institutions.

The COVID-19 pandemic significantly disrupted any positive momentum in the Kyrgyz Republic’s economy over the last year. Assuming that the economic downturn will last for at least the first half of 2020, the IMF assessed that real GDP growth will drop to 0.4 percent in 2020. Nearly all sectors face acute setbacks for recovery with the prolongation of emergency quarantine restrictions for an indefinite period. The closure of regional borders, particularly with China and Kazakhstan, caused mass supply chain disruptions, particularly for intermediary materials and equipment, necessary for agricultural, mining, and construction activities. The collapse of global oil prices coupled with high rates of unemployment among migrant workers, in addition to depreciation of the Kyrgyz som exchange rate against the U.S. dollar, have depressed remittance earnings. Local businesses are struggling to adapt to current conditions, but the domestic information technology sector may experience a boom as more local enterprises aim to transition to e-commerce and online platforms. Despite having accepted close to USD 500 million in concessional loans and grants from international donor organizations in response to COVID-19, the Kyrgyz Republic’s public debt in the long-term is expected to remain at 60 percent of GDP and the risk of debt distress will remain moderate.

9. Corruption

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Pakistan

Executive Summary

Pakistan’s government increased its positive rhetoric regarding foreign investment since it assumed power in August 2018, pledging to improve Pakistan’s economy, restructure tax collection, enhance trade and investment, and eliminate corruption.  However, the government inherited a balance of payments crisis, forcing it to focus on immediate needs to acquire external financing rather than medium to long-term structural reforms.  The government sought and received an IMF Extended Fund Facility in July 2019 and promised to carry out several structural reforms under the IMF program.

Pakistan has made significant progress over the last year in transitioning to a market-determined exchange rate and reversing its large current account deficit, while inflation has decreased each month of 2020.  However, progress has been slow in areas such as broadening the tax base, reforming the taxation system, and privatizing state owned enterprises.  Pakistan ranked 108 out of 190 countries in the World Bank’s Doing Business 2020 rankings, a positive move upwards of 28 places from 2019.  Yet, the ranking demonstrates much room for improvement remains in Pakistan’s efforts to improve its business climate.  The COVID-19 pandemic has had a significant impact on Pakistan’s economy.  While the IMF had predicted Pakistan’s GDP growth to be 2.4 percent in FY2020, Pakistan’s economy is now expected to contract by 1.5 percent this fiscal year, which ends June 30.

Despite a relatively open foreign investment regime, Pakistan remains a challenging environment for foreign investors.  An improving but unpredictable security situation, difficult business climate, lengthy dispute resolution processes, poor intellectual property rights (IPR) enforcement, inconsistent taxation policies, and lack of harmonization of rules across Pakistan’s provinces have contributed to lower Foreign Direct Investment (FDI) as compared to regional competitors.  The government is working on a multi-year foreign direct investment (FDI) strategy which aims to gradually increase FDI to USD 7.4 billion by Fiscal Year (FY) 2022-23 from USD 2.8 billion in FY2019-20.

Over the last two decades, the United States has consistently been one of the top five sources of FDI in Pakistan.  In 2019 China was Pakistan’s number one source for FDI, largely due to projects related to the China-Pakistan Economic Corridor.  Over the past year and a half, U.S. corporations pledged more than USD 1.5 billion in direct investment in Pakistan.  American companies have profitable investments across a range of sectors, notably, but not limited to, fast-moving consumer goods and financial services.  Other sectors attracting U.S. interest include franchising, information and communications technology (ICT), thermal and renewable energy, and healthcare services.  The Karachi-based American Business Council, an affiliate of the U.S. Chamber of Commerce, has 68 U.S. member companies, most of which are Fortune 500 companies operating in Pakistan across a range of industries.  The Lahore-based American Business Forum – which has 25 founding members and 18 associate members – also assists U.S. investors.  The U.S.-Pakistan Business Council, within the U.S. Chamber of Commerce, supports members in the United States.  In 2003, the United States and Pakistan signed a Trade and Investment Framework Agreement (TIFA) to serve as a key forum for bilateral trade and investment discussions.  The TIFA seeks to address impediments to greater bilateral trade and investment flows and increase economic linkages between our respective business interests.

9. Corruption

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Tajikistan

Executive Summary

Tajikistan is a challenging place to do business but could present high-risk, high-reward opportunities for foreign investors who have experience in the region, a long-term investment horizon, and the patience and resources to conduct significant research and due diligence.  At the most senior levels, the Tajik government consistently expresses interest in attracting more U.S. investment, but the poorest of the Central Asian countries harbors few U.S. investors and remains a largely uncompetitive investment destination.

Tajik President Rahmon publicly emphasizes the need to foster private-sector-led growth, and attracting investment is prioritized in the government’s 2016-2030 National Development Strategy and in-progress 2021-2024 Economic Development Strategy. Strategy documents notwithstanding, bureaucratic and financial hurdles, widespread corruption, a largely dysfunctional banking sector, non-transparent tax system, and countless business inspections greatly hinder investors. The absence of private investment, along with the government’s commitment to dedicate significant financial resources to the construction of the Roghun Dam hydropower plant, creates pressure on the Tax Committee to enforce or reinterpret tax regulations arbitrarily in order to meet ever-increasing revenue targets.

Tajikistan is saturated in opaque loans connected to China’s Belt and Road Initiative, and Chinese investments account for more than three-quarters of the country’s total Foreign Direct Investment. Tajikistan is also reportedly considering joining the Russian-led Eurasian Economic Union.  Should it apply for and receive membership, U.S. firms could experience higher trade tariffs. Finally, despite Tajikistan’s 2013 accession to the World Trade Organization, the Tajik government has imposed both blanket and targeted trade policies to protect private interests without notifying its partners, as occurred with bans on imported chicken meat in 2017 and exports of mining concentrate in 2019.

The Tajik economy faces endemic challenges. Consumption has been a major driver of Tajikistan’s economic growth, but it is reliant on migrant remittance flows from Russia, where about one million labor migrants reside. The novel coronavirus pandemic is projected to severely reduce remittances this year and precipitate a two percent GDP contraction in Tajikistan. Falling remittances also lead to shortages of foreign exchange and put downward pressure on the country’s reserves as it defends the national currency. Tajikistan’s banking sector is plagued by politically-directed, non-performing loans, high interest rates, and the absence of correspondent banking accounts in the West.

Despite these challenges and risks to potential investors, Tajikistan is pursuing greater trade links with its neighbors and has made modest progress to improve its investment climate over the past year. The World Bank cited Tajikistan as a top reformer on its Doing Business 2020 report and is also providing technical assistance towards tax reform. Authorities made steps towards greater compliance on intellectual property rights protections this year, and Tajikistan was recognized for significant progress towards transparency in the extractives sector. Should the government continue an economic reform path, opportunities in energy, agribusiness, food processing, tourism, textiles, and mining could prove promising.

9. Corruption

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Turkmenistan

Executive Summary

Turkmenistan is slightly larger than the state of California but is sparsely inhabited, with abundant hydrocarbon resources, particularly natural gas.  Turkmenistan’s economy depends heavily on the production and export of natural gas, oil, petrochemicals and, to a lesser degree, cotton, wheat, and textiles.  The economy is still recovering from a deep recession that followed the late 2014 collapse in global energy prices.  The current investment climate is considered high risk for U.S. foreign direct investment.

Official figures from the government of Turkmenistan show that the country’s GDP at the official exchange rate was USD 40.76 billion in 2018 and USD 38 billion in 2017.  The black-market exchange rate for dollars, on average 4 times the official rate in 2017-2018, suggests the true GDP numbers are much lower.  An official number for 2019 GDP was not yet available, though the government reported an implausibly high GDP growth of 6.2 percent in 2019.  GDP growth in 2018 was reported as 6.5 percent.  Most economic indicators released by the government are widely seen as unreliable.

Many businesses assert the government has not taken serious measures to incentivize foreign direct investment outside the petroleum industry and there is no significant U.S. FDI in Turkmenistan.  Most U.S. commercial activity in Turkmenistan is related to exports. Some companies, such as General Electric and John Deere, have established themselves as key suppliers of industrial equipment in certain sectors, but their business operations are largely limited to sales to the Turkmen government.  Delays in payment to foreign companies are common and some firms require upfront payment prior to delivery of goods.

A lack of established rule of law, an opaque regulatory framework, and rampant corruption remain serious problems in Turkmenistan.  Contracts are often awarded to companies with close ties to the President’s family.  The government strictly controls foreign exchange flows and limits on currency conversion make it difficult to repatriate profits or make payments to foreign suppliers.  In 2019 the black market rate was relatively steady, hovering around 18 manat/dollar, while the official exchange rate was pegged at 3.5 manat (TMT)/dollar.  The COVID-19 pandemic put additional pressure on Turkmenistan’s hard currency reserves and caused the black-market rate to spike to 21 manat/dollar in the first part of 2020.

Although Turkmenistan regularly amends its laws to meet international standards, many businesses have complained that the country often fails to implement or consistently enforce investment-related legislation.  There are no meaningful legal protections against government expropriation of assets and there is no independent judiciary.  In December 2016, the government expropriated the largest (and only foreign-owned) grocery store in Ashgabat, as well as the shopping center where it was located and a business center, without compensation or other legal remedy.  There have also been consistent reports in recent years of officials associated with the family of President Gurbanguly Berdimuhamedov seizing local companies.  In some cases, local business owners have reportedly been jailed using security-related laws as a pretext to reopen the business under new ownership.

Political stability is the most positive aspect of doing business in Turkmenistan.  Where opportunities exist, U.S. companies may be able to secure contracts with the Turkmen government for export of goods or services, in particular for construction materials, agricultural equipment, oil and gas extraction parts, medical devices, and food processing equipment.  Many foreign firms working with the Turkmen government are able to provide some form of financing, often through export credit agencies and development banks.  The Turkmen government has expressed interest in attracting more U.S. companies to compete for tenders and take part in infrastructure projects and bringing more western technology to the Turkmen market.

Key issues to watch:  developments in the financial sector, including the TMT/USD black market exchange rate and the severity of restrictions on currency conversion, will determine to some extent the health of the investment climate.  The COVID-19 pandemic is expected to have lasting economic consequences for Central Asia in particular, although the extent of the crisis remains to be seen.  Downward pressure on global energy prices and fundamental shifts in natural gas markets are also expected to have an outsized impact on Turkmenistan’s government revenue.

9. Corruption

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics