2017 Investment Climate Statements: Pakistan

Policies Towards Foreign Direct Investment

The government welcomes foreign investment and offers incentives to attract new capital inflows. Incentives are largely industry-specific and include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services. In addition, Pakistan’s designated special economic zones (SEZs), none of which are currently fully operational but have attracted some investment, offer a separate basket of incentives to potential investors. In 2013, the PML-N government introduced an updated Investment Policy which further liberalized investment policies in most sectors.

Net inflows of FDI peaked at $5.4 billion in fiscal year (FY) 2008. In FY 2016, net FDI was $1.9 billion, roughly double that of the prior year. According to the State Bank of Pakistan (SBP), the largest share of FDI – $291 million – was in the thermal power sector, followed by $290 million in the coal-based power sector, and $290 million in the financial sector. Analysts identified the improved security environment, large energy projects included in the China-Pakistan Economic Corridor (CPEC), and improved macro-economic stability as the biggest drivers for the improvement of FDI in FY 2016. (The fiscal year in Pakistan runs from July 1 – June 30).

Pakistan as a market presents a mixed picture. Multinational companies in the consumer goods sector have witnessed steady profits, but other industries, including the pharmaceutical sector, have been stymied by onerous government regulation and lack of intellectual property (IP) protections, which has led several U.S. firms to leave Pakistan. Power generation companies have experienced an uptick in business activity, but mostly by conventional energy providers, as renewable energy providers have encountered obstacles. The ICT sector is growing steadily, especially companies outsourcing services and software development.

Pakistan has one of the lowest tax-to-gross domestic product (GDP) ratios in the world – approximately 11.0 percent in 2016 – and multinational corporations shoulder a significant portion of the tax burden. In addition, foreign investors in Pakistan report that both the federal and provincial tax regulations are difficult to navigate. The World Bank’s Doing Business 2017 report notes that companies must pay 47 different taxes, compared to an average 29.6 in other South Asian countries. On average, calculating these payments requires that business spend, on average, over 300 man hours per year. In addition, companies frequently lament the lack of transparency in the assessment of taxes. In some cases, the government has requested advance tax payments from companies, which can complicate these businesses’ operations. The government has long promised to introduce tax reforms, but these efforts have thus far failed to deliver meaningful results, with the notable exception of an increase in indirect (sales) taxes.

Limits on Foreign Control and Right to Private Ownership and Establishment

The 2013 Investment Policy eliminated the minimum initial capital investment requirements for all sectors. Currently, there is no minimum investment requirement or upper limit on the share of foreign equity allowed, with the exception of the airline, banking, agriculture, and media sectors. Foreign investors in the services sector may retain 100 percent equity for the life of the investment, as well as the ability to repatriate 100 percent of profits. In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agricultural sector, the threshold is 60 percent. There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a $100,000 limit on initial franchise investments and a cap on subsequent royalty payments of five percent of net sales for five years. Royalties and technical payments are subject to a 15 percent income tax. The tourism, housing, construction, and ICT sectors have been granted “industry status,” which makes them eligible for lower tax and utility rates compared with businesses categorized as “commercial sector” enterprises, including banks and insurance companies. Small-scale mining valued less than Rs. 300 million (roughly $3 million) is restricted to Pakistani investors.

Other Investment Policy Reviews

Pakistan has improved its financial services commitments after signing the World Trade Organization (WTO) Financial Services Agreement in December 1997. Foreign financial services companies can establish offices within Pakistan, and foreign banks are permitted to establish locally incorporated subsidiaries and branches, provided they have the minimum global tier-one capital of $5 billion or belong to one of the regional organizations or associations to which Pakistan is a member (e.g. Economic Cooperation Organization [ECO] or the South Asian Association for Regional Cooperation [SAARC]). Absent these requirements, foreign banks are limited to a maximum 49-percent equity stake in locally incorporated subsidiaries. Foreign and local banks must submit an annual branch expansion plan to the SBP for approval. The SBP approves branch openings depending on the bank’s net worth, adequacy of capital structure, future earnings prospects, credit discipline, and the need of the local population. All banks are required to open 20 percent of their new branches in small cities, towns, and villages.

The government provides the same treatment and legal protection to foreign and domestic investments in all sectors, except for defense and broadcasting. The 1976 Foreign Private Investment Promotion and Protection Act, Economic Reforms Act, and Investment Plan address foreign investors’ rights. The Foreign Private Investment Promotion and Protection Act stipulates that foreign investments will not be subject to higher income taxes than similar investments made by Pakistani citizens. While Pakistan’s legal code and economic policy does not discriminate against foreign investments, enforcement of contracts remains problematic due to a weak and inefficient judiciary.

Business Facilitation

The Companies Ordinance of 1984 stipulates that the Securities and Exchange Commission of Pakistan (SECP) manages the registration of companies. Both foreign and domestic companies begin the registration process by registering a unique name and paying the requisite registration fees to the SECP. Companies then supply documentation regarding the proposed business, including lists of corporate offices, location of company headquarters, and a copy of the company charter. In addition, companies must apply for national tax numbers with the Federal Board of Revenue (FBR) to facilitate payment of income and sales taxes. Industrial or commercial establishments with five or more employees must also register with Pakistan’s Federal Employees Old Age Benefits Institution (EOBI) for social security purposes. Depending on the location, companies may also need to register with a variety of provincial-level government organizations.

Pakistan’s federal and provincial Boards of Investment exist to provide potential investors with guidance and assistance in establishing and registering a company in Pakistan. Despite these entities’ services, the business registration process can be challenging and cumbersome. In fact, Pakistan ranked 141 out of 190 countries in the 2017 World Bank Doing Business report’s “Starting a Business” category.

The government’s investment policy provides both domestic and foreign investors with the same incentives, concessions, and facilities for industrial development. Though some incentives are included in the federal budget, most incentives are issued through a Statutory Regulatory Order (SRO) – a bureaucratic mechanism for issuing special or narrowly-tailored taxes or incentives. For example, an SRO issued in 2016 abolished sales tax on industrial machinery and customs duties on imported agricultural machinery.

Outward Investment

Pakistan does not promote or incentivize outward investment. Although the government does not prohibit Pakistanis from investing abroad, the process for obtaining approvals from the required government agencies is cumbersome and, in some cases, can last years.

Pakistan and the United States began negotiating a Bilateral Investment Treaty (BIT) in 2004, and closed and initialed the text in 2012, but never signed the agreement due to reservations from some Pakistani government stakeholders. Pakistan has signed BITs with 50 countries but only 27 of those agreements have entered into force, according to the BOI.

The United States and Pakistan signed a bilateral tax treaty in 1959. Pakistan also has double taxation agreements with 63 other countries. A multilateral tax treaty between the SAARC countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) came into force in 2011. The treaty provides additional provisions for cooperation among the countries in the administration of taxes.

In 2016, Pakistan signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The Convention is expected to help Pakistan exchange banking details with the other 80 signatory countries to locate untaxed money in foreign banks. The OECD’s invitation to Pakistan to sign the Convention followed two years of peer reviews and amendments to Pakistan’s tax laws to meet OECD standards. Pakistan is a member of the Base Erosion and Profit Shifting (BEPS) framework and will automatically exchange country-by-country reporting as required by the BEPS package.

International Regulatory Considerations

Pakistan has bilateral trade agreements with China, Indonesia, Iran, Malaysia, Mauritius and Sri Lanka, although most of these agreements are limited to a few hundred tariff lines and do not cover all trade. Pakistan is currently negotiating additional trade agreements with Turkey, Thailand, and South Korea. It is a member of the South Asia Free Trade Area. In addition, Pakistani is a member of SAARC, the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO).

Pakistan has been a World Trade Organization (WTO) member since January 1, 1995 and provides most favored nation (MFN) treatment to all member states, except India and Israel. Since 2012, the government has maintained a “negative list,” which specifies a list of products that cannot be imported from India. This list currently contains approximately 1,200 products. Pakistan does not recognize the State of Israel and thus does not trade with Israel.

In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA). Pakistan is also one of 23 WTO countries negotiating the Trade in Services Agreement.

Legal System and Judicial Independence

Pakistan’s legal system is based on British common law. Laws governing domestic or personal matters are also strongly influenced by Islamic Sharia Law. There are two classes of courts: the superior (high) courts and the subordinate (lower) courts. The superior judiciary is composed of the Supreme Court, the Federal Sharia Court, and five High Courts, Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court, whose decisions have national standing. The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government. Neither the Supreme Court nor a High Court has jurisdiction in matters relating to Pakistan’s Tribal Areas, except in limited circumstances. The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, smuggling, drug trafficking, terrorism, tax law, environmental law, consumer protection, insurance, and cases of corruption.

Laws and Regulations on Foreign Direct Investment

Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in all sectors of the economy, including manufacturing, trading, and service sectors, with full repatriation rights for capital and dividends remittable through a commercial bank.

Most of the foreign companies operating in Pakistan are “private limited companies,” which can be incorporated by a minimum of two shareholders and two directors by registering with the SECP. In order to attract additional FDI, the government eliminated in 2013 a previous requirement that foreign companies invest a minimum of $150,000.

While a company director does not need to be a resident in Pakistan, the chief executive is expected to reside in Pakistan to conduct the company’s routine affairs. If the chief executive is a foreign national, he/she is required to obtain a “multiple work visa,” which is a combination of “work permit” and “multiple-entry visa.” Companies are statutorily required to retain full-time audit services and legal representation. Changes to the name, registered address, directors, shareholders, CEO, auditors/lawyers, etc. must be registered with the SECP within 15 days of the change.

To address investors’ concerns about visa delay and uncertainty, SECP Instruction No. 4 of 2011 was amended in 2013 to permit the issuance of a provisional ”Certificate of Incorporation” prior to the final issuance of the NOC as part of the incorporation process. The Certificate has the provision that company shares would be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fail to obtain a NOC. SECP Instruction No.4 of 2011 had previously required companies with foreign shareholders and directors to obtain a “No Objection Certificate” (NOC) from the Ministry of Interior as a part of the company incorporation process. The process, which included a review by multiple Pakistani government agencies, took between 3-4 months to complete and negatively affected foreign investors’ perceptions of Pakistan’s business climate.

A variety of special courts and tribunals handle the issues of taxation, banking, labor, and IPR enforcement. Nonetheless, due to the weak and inefficient judiciary, many foreign investors include contract provisions that provide for international arbitration in order to avoid protracted disputes.

Pakistan’s Board of Investment (BOI) is the primary government entity that assists foreign investors in understanding applicable laws, procedures, and reporting requirements. The Board of Investment Ordinance 2001 establishes the BOI to promote, encourage and facilitate local and foreign investment inflow in Pakistan. In October 2009, BOI was placed under the administrative control of the Prime Minister’s Secretariat.

Competition and Anti-Trust Laws

The Competition Commission of Pakistan (CCP), established in 2007, is responsible for regulating the anti-competitive and monopolistic practices of both private and public sector organizations. The CCP was established on October 2, 2007, through the Competition Ordinance, which replaced 1970s-era anti-trust legislation. Complaints regarding anti-competition practices can be lodged with CCP, which is responsible for conducting the investigation and is legally empowered to award penalties, which are reviewable by the CCP’s appellate tribunal in Islamabad. The tribunal is bound to issue decisions on any anti-competition practice within six months from the date in which they become aware of the practice.

Expropriation and Compensation

The Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976 protect foreign investment in Pakistan from expropriation. In addition, the Investment Policy of 2013 reinforced the government’s commitment to protecting the interests of foreign investors.

Dispute Settlement

Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID). In 2005, Pakistan ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Foreign investors have noted, however, that the lack of clear, transparent, and timely investment dispute mechanisms directly impacts their investment calculations. Investors have also expressed concerns over the consistency, impartiality, and protracted duration of arbitration cases. Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but court cases typically take years to resolve. To mitigate these risks, most foreign investors include contract provisions that provide for international arbitration.

Bankruptcy Regulations

Pakistan does not have a single, comprehensive bankruptcy law. Currently, foreclosures are governed under the Companies Ordinance of 1984 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions. Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.

The Companies Ordinance of 1984 regulates mergers and acquisitions. Mergers are allowed between international companies, as well as between international and local companies. In 2012, the government enacted legislation providing a legal framework for friendly and hostile takeovers. The law requires companies to disclose any concentration of share ownership over 25 percent. There are no laws or regulations to authorize private firms to adopt articles of incorporation that discriminate against foreign investment.

There is no minimum equity investment or national ownership requirement for investments in the manufacturing sector and the government allows 25 percent first-year depreciation for all fixed assets in this sector. The government also allows 25 percent of the cost of a plant and machinery to be counted as the first-year depreciation in infrastructure and social sectors.

The government does not offer any incentives to encourage research and development. However, certain technology-focused industries, including information technology and solar energy, benefit from a wide range of fiscal incentives.

Investment Incentives

In 2016, Pakistan introduced temporary tariff concessions for certain manufacturing sub-sectors. These incentives, in part, reduce or eliminate custom duties on the importation of equipment and machinery and duty-free importation of certain raw materials.

Foreign Trade Zones/Free Ports/Trade Facilitation

The government established the first Export Processing Zone (EPZ) in Karachi in 1989, providing special fiscal and institutional incentives exclusively for export-oriented industries. Subsequent EPZs were established in seven other locations: Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, RekoDek, and Duddar; only the zones in Karachi, Risalpur, Sialkot, and Saindak remain operational. EPZs offer investors tax and duty exemptions on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to the EPZ Authority (EPZA) “Single Window” that facilitates the issuance of import and export authorizations. In 2012, Pakistan implemented the Special Economic Zones (SEZ) Act, which established the regulatory framework under which SEZs operate within Pakistan today. The SEZ act allows both domestically-focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs. Despite offering substantial financial, investor service, and infrastructure incentives to reduce the cost of doing business, Pakistan’s SEZs have struggled to attract investment due lack of basic infrastructure.

Apart from SEZ-related incentives, the government offers special incentives for Export-Oriented Units (EOU) – a stand-alone industrial entity that exports 100 percent of its production. EOU incentives include duty and tax exemptions for imported machinery and raw materials, as well as the duty-free import of vehicles. EOUs are allowed to operate anywhere in the country. Pakistan provides the same investment opportunities to foreign investors and local investors.

Performance and Data Localization Requirements

Foreign investors are not required to use domestic content in goods or technology or hire Pakistani nationals, either as laborers or as representatives on the company’s board of directors. Likewise, there are no specific performance requirements for foreign entities operating in the country, and the same investment incentives are available to both local and foreign investors. Similarly, there are no special performance requirements on the bases of origin of the investment.

Representatives of U.S. businesses often have difficulty securing visas to visit Pakistan, and if the visas are granted in a timely manner, they are typically single-entry with short duration validity. Additionally, the Pakistani government requires a NOC for Americans wanting to visit locations outside of Islamabad, Karachi, or Lahore, making it difficult to inspect factories, supply chains, or goods outside of these three cities. Technical and managerial personnel working in sectors that are open to foreign investments are typically not required to obtain special work permits. For their part, Pakistani officials often complain that the U.S. travel warning for Pakistan discourages U.S. business people traveling to Pakistan, thereby hurting Pakistani exports.

Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information. According to the country’s 2013 Investment Policy, manufacturers that introduce new technologies (which are currently unavailable in Pakistan) receive the same incentives available to companies operating in Pakistan’s Special Economic Zones (SEZs).

Post has not received complaints about encryption issues from IT companies operating in Pakistan. Officially, Pakistan requires entities using encryption and cryptography services to obtain accreditation from the Electronic Certification Accreditation Council, which falls under the Ministry of Information Technology. In practice, this requirement is not consistently enforced. For example, WhatsApp is widely used in Pakistan, despite the company’s April 2016 announcement that it would employ end-to-end encryption. However, Research in Motion (RIM), the makers of BlackBerry mobile devices, faced scrutiny from the government regarding its use of encryption. In July 2015, Pakistan Telecommunication Authority (PTA) demanded RIM provide access to its BlackBerry Enterprise Services, which encrypts data transmissions on these devices. PTA initially demanded unfettered access to BlackBerry customer information, and the issue was resolved when RIM agreed to assist law enforcement agencies in the investigation of criminal activities.

PTA and State Bank of Pakistan (SBP) prohibit telecom and financial companies from transferring customer data overseas. Other data, including emails, can be legally transmitted and stored outside the country.

Real Property

Pakistan’s legal system largely supports enforcement of property rights and interests for both local and foreign owners. However, the legal system offers incomplete protection for the acquisition and disposition of property rights. There are no specific regulations regarding land lease or acquisition by foreign or non-resident investors, with the exception of the agricultural sector, in which foreign ownership is limited to 60 percent. Corporate farming by foreign-controlled companies is permitted, though these companies must have subsidiaries incorporated in Pakistan. There are no limits on the size of corporate farmland holdings, and foreign companies can lease farmland for up to 50 years, with renewal options. The 1979 Industrial Property Order safeguards industrial property in Pakistan against government use of eminent domain without sufficient compensation for both foreign and domestic investors. The 1976 Foreign Private Investment Promotion and Protection Act guarantees the remittance of profits earned through the sale or appreciation in value of property.

Pakistan’s legal system provides protection for legal purchasers of land, even if the purchased land remains unoccupied, but clarity of land titles is a significant challenge in Pakistan. The provincial governments of Punjab, Sindh, and Khyber Pakhtunkhwa have recently devoted significant resources to digitize land records, which has led to an overall improvement in land titling issues.

Intellectual Property Rights

The government has identified intellectual property protection as a key area for its “second generation” economic reforms. In 2005, Pakistan created the Intellectual Property Organization (IPO) to consolidate the government control over trademarks, patents, and copyrights – areas that were previously handled by offices in three separate ministries. IPO’s mission also includes monitoring the enforcement and protection of intellectual property rights through law enforcement agencies. Although the establishment of IPO represents an important step in the government’s recognition of IPR, the organization has not yet delivered meaningful results in the enforcement of the widespread violations throughout Pakistan.

In 2015, the government established IP tribunals in Lahore, which covers the Punjab region; in Karachi, which covers Sindh and Balochistan; and in Islamabad, which covers Islamabad and Khyber Pakhtunkhwa. While the Lahore and Islamabad IP tribunals are considered fully operational, it is too early to assess their overall impact on the IP environment in Pakistan. The Karachi IP Tribunal, however, is not yet functioning due to a variety of administrative delays. In addition, Pakistan has amended five major laws relating to patents, copyrights, trademarks, and industrial designs, but weak enforcement has limited these laws’ impact on the IPR environment. IPO, in collaboration with the U.S. Commercial Law Development Program, is comprehensively reviewing and updating Pakistan’s intellectual property legislation to better align the country’s laws with international standards.

In 2016, the government enacted the Plant Breeders’ Rights Act, a law which if implemented, will provide a framework for patent protection to the breeders of a new variety of plant. The Act has been the most forward looking in establishing potential IPR protection by enabling firms to register their plant varieties.

IPO is also charged with increasing awareness about IP, in part, through collaboration with the private sector. A cross section of contacts, including academics and private attorneys, have noted that, in contrast with previous years, IPO’s public awareness efforts have started to yield tangible results. While difficult to quantify, they point to broader awareness of IPR, specifically increased local demand for IPR protections from small businesses and startups.

Pakistan is a party to the Berne Convention for the Protection of Literary and Artistic Works, and is a member of the World Intellectual Property Organization (WIPO). In July 2004, Pakistan acceded to the Paris Convention for the Protection of Industrial Property. Pakistan has not yet ratified the WIPO Copyright Treaty or the WIPO Performance and Phonograms Treaty.

In 2016, Pakistan was upgraded from Priority Watch List to Watch List with an Out-of-Cycle Review on the U.S. Trade Representative’s Special 301 Report. The report acknowledged certain achievements by the government but highlighted the lack of enforcement of violations, particularly with respect to copyrights, pharmaceutical data, and media piracy.

Pakistan does not track and report on seizure of counterfeit goods.

Capital Markets and Portfolio Investment

Pakistan’s financial sector policies support the free flow of financial resources for domestic and foreign investors. The SBP and SECP continue to expand their regulatory oversight of financial and capital markets. Interest rates depend, in large part, on the reverse repo rate (also called the policy rate). The SBP steadily lowered the policy rate from a high of 10 percent at the fourth quarter 2014 to 5.75 percent in February 2017. The five largest banks, one of which is state owned, control 52.6 percent of all banking sector assets. In FY 2016, total assets of the banking industry were $15.4 billion. As of December 2016, net non-performing bank loans totaled approximately $604 million, roughly 1.5 percent of net total loans.

Banks are required to ensure that total debt exposure to any domestic or foreign entity does not exceed 25 percent of the bank’s equity. The private sector predominantly accesses credit from commercial banks, but credit can be difficult to secure for all but the most credit-worthy companies. Commercial banks lend a large portion of their deposits to the government rather than the private sector, and although this proportion has begun decreasing recently, much of the new lending is to large-scale government-directed energy and infrastructure projects. Pakistan’s domestic corporate bonds, commercial papers, and derivative markets remain in the early stages of development. According to the 2013 Investment Policy, foreign investors in all sectors are allowed domestic credit lines subject to prevailing the rules and regulations of the SECP and SBP, and observance of the required debt-to-equity ratio. The policy also extends the use of loans, previously limited to import of industrial plant machinery, to any business purpose.

In 2016, Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSE). The PSE is a member of the Federation of Euro-Asian Stock Exchanges (FEAS) and the South Asian Federation of Exchanges (SAFE). The PSE is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions. In 2016, the PSE was Asia’s best performing stock market.

In 2010, the government implemented a capital gains tax of 10 percent on stocks held for less than six months and eight percent on stocks held for more than six months but less than a year. Capital gains tax does not apply to holdings that exceed 12 months. The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax.

Per the Foreign Exchange Regulations, any foreign investor can invest in shares and securities listed on the PSE and can repatriate profits, dividends, or disinvestment proceeds. The investor must open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.

Recent capital market reforms include the introduction of minimum capital requirements for brokers, linking of exposure limits to net capital, strengthening of brokers’ margin requirements, the introduction of system audit regulations (mandating audit of 60 percent of brokers), the introduction of over the-counter (OTC) markets to facilitate registration of new companies with less paid-up capital, and the establishment of a National Clearing and Settlement system. In 2015, the SECP implemented a number of other regulations, including on clearing houses, margin trading, proprietary trading, and abolition of the group account facility. Capital market legal, regulatory, and accounting systems are consistent with international norms.

Pakistan has adopted and adheres to international accounting and reporting standards, with comprehensive disclosure requirements for companies and financial sector entities.

Money and Banking System

The SBP requires that foreign banks have at least $300 million in capital reserves at their flagship location in Pakistan and a minimum of eight percent capital adequacy ratio. In addition, foreign banks are required to maintain the following minimum capital requirements, which vary based on the number of branches they are operating:

• 1 to 5 branches: $28 million in assigned capital;
• 6 to 50 branches: $56 million in assigned capital;
• Over 50 branches: $94 million in assigned capital.

Foreign Exchange and Remittances

Foreign Exchange

The SBP maintains strict controls over the exchange rate and monitors foreign exchange transactions in the open market. Banks are required to report and justify outflows of foreign currency. Travelers leaving or entering Pakistan are allowed to physically carry a maximum of $10,000 in cash.

In 2002, the SBP began allowing cross-border payments of interests, profits, dividends, and royalties, without submitting prior notification. Banks are still required to report loan information, which allows the SBP to verify remittances against repayment schedules.

Exchange companies are permitted to buy and sell foreign currencies for individuals, banks, and other exchange companies, and can also sell foreign currencies to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees. Exchange companies play an increasingly important role in facilitating remittances from Pakistanis working overseas.

Remittance Policies

The government allows the remittance of full capital, profits, and dividends over $5 million. Dividends are tax-exempt. There are no limits on dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law. However, large transactions – those which could impact Pakistan’s foreign exchange reserves – require approval from the government’s Economic Coordination Committee. Banks are required to report and justify outflows of foreign currency and investor remittances can only be made against a valid contract or agreement registered with the SBP within 30 days of execution.

The SBP, Ministry of Overseas Pakistanis, and Ministry of Finance created the Pakistan Remittance Initiative in 2009 to facilitate faster, cheaper, and more efficient flow of remittances and in recent years, and remittances from overseas workers through the formal financial sector have increased. Likewise, the 2001 Income Tax Ordinance of Pakistan exempts taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels.

The 1976 Foreign Private Investment Promotion and Protection Act guarantees the outward remittance of profits earned through the sale and appreciation in value of property.

Sovereign Wealth Funds

Pakistan does not have its own sovereign wealth fund (SWF) and no specific exemptions for foreign SWFs exist in Pakistan’s tax law. Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.

Large and inefficient state-owned enterprises (SOE) exist in several key sectors, and the government regularly subsidizes the SOEs’ losses. Three of the country’s largest SOEs include Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM). When the PML-N assumed office in June 2013, SOE privatization figured prominently in the party’s economic reform agenda and the country’s IMF EFF program, and PM Sharif identified 31 state-owned companies for privatization. These efforts, however, have largely failed to deliver the promised results, in part due to stiff resistance from labor unions and opposition political parties.

PR is the only provider of rail services in Pakistan and the largest public sector employer with approximately 90,000 employees. PR’s freight traffic has declined by over 75 percent since 1970 and, of PR’s 458 locomotives, only about 250 are serviceable. PR has recently attempted to recapture the market share previously ceded to the trucking industry, and in 2016, it purchased 55 new locomotives from GE for its freight operations. PR relies on monthly government subsidies of approximately $2.8 million to cover its obligations. In the FY 2016 budget, government payments to PR totaled approximately $410 million. Pakistan no longer intends to privatize PR, and the Privatization Commission has removed it from the list of SOEs slated for privatization.

Although the government maintains that its efforts to sell a 26 percent stake in PIA will resume in the near future, the process has been stalled since early 2016 when three labor union members were killed during a protest that turned violent. The protest was in response to the GOP’s decision to issue an ordinance (rather than a bill subject to Parliamentary approval) to convert PIA into a limited company, thus allowing shares to be transferred to a non-government entity and paving the way for privatization. The ordinance was ultimately repealed and a bill put forward and passed by the legislature, which became law. However, in the course of negotiations, the government agreed not to include management control with any stake offered for sale, which made the potential sale much less appealing to potential buyers. PIA owns diverse non-core assets, including two luxury hotels in New York and Paris.

PSM was established by the GOP in order to avoid importing foreign steel, but PSM deteriorated into a money-losing enterprise. In the first quarter of FY 2014, the government granted PSM a government-backed financial restructuring package worth $185 million, but these efforts were not sufficient to sustain PSM’s operations, which ceased in June 2015. PSM has accumulated losses of approximately $1.56 billion and other outstanding debts. The company loses $5 million a week, and has not produced steel since June 2015, when the national gas company cut power supplies due to over $340 million in outstanding bills. Like PIA, the government attempted to privatize PSM under the IMF EFF program but was stymied by domestic and political opposition. With decades of under-investment, PSM would require significant capital investments to be competitive with foreign steel makers. Facing this reality, the government is reportedly considering the lease of PSM, coupled with a basket of incentives that would provide for a 10-year tax holiday and duty-free import of any machinery and equipment upgrades to potential lessees.

Privatization Program

Pakistan allows foreign and local investors to purchase public shares of SOEs and financial institutions on equal terms. From 2002-2007, Pakistan attracted significant foreign investment through the privatization of SOEs in the financial services and telecommunications sectors, though privatization stalled from 2008-2013. Under the most recent IMF EFF program, the government identified 31 SOEs for either partial or total privatization. In 2015, the government successfully offloaded its stakes in several banks and publicly-traded firms and the following year, also sold its 40 percent stakes in the Pakistan Stock Exchange. However, due to significant political resistance, the government has postponed plans to privatize its largest and most inefficient SOEs, namely PIA, PSM, and several power generation and distribution companies.

There are no unified set of standards defining responsible business conduct in Pakistan.

In 2016, Pakistan ranked 116 out of 175 countries on Transparency International’s Corruption Perceptions Index. Although the PML-N has made progress in its anti-corruption agenda, including introducing new anti-corruption policies and prosecuting officials accused of illegal activity, corruption remains a widespread and pervasive problem in Pakistan. Moreover, anecdotal evidence suggests that corruption has increased at the provincial level following the 2010 constitutional amendment that devolved certain authorities from the federal to the provincial governments. According to Transparency International, major causes of corruption are the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotion, and relatively low salaries.

Offering and accepting bribes are criminal acts punishable by law. Nonetheless, corruption within the lower levels of the government bureaucracy is common, and even considered normal by most Pakistanis. Lower courts are often considered corrupt, inefficient, and subject to pressure from prominent wealthy, religious, and political figures. Political involvement in judicial appointments increases the government’s influence over the court system.

Established under the 1999 National Accountability Ordinance, the National Accountability Bureau (NAB) is the country’s premier anti-corruption organization, with a mandate to expose and prevent corrupt activities and to enforce anti-corruption laws, but the organization suffers from insufficient funding and staffing. In addition to NAB, the CCP’s mandate also includes anti-corruption authorities, but like NAB, CCP’s effectiveness is hindered by resource constraints.

The 2007 National Reconciliation Ordinance (NRO) provided for amnesty to certain public officials accused of corruption, embezzlement, money laundering, murder, and terrorism between January 1, 1986, and October 12, 1999. In December 2009, the Supreme Court invalidated the NRO and reopened all 8,000 cases against those who had received amnesty, including President Musharraf. The implementation of Supreme Court’s decisions about the NRO beneficiaries is still pending.

UN Anticorruption Convention, OECD Convention on Combating Bribery

Pakistan is not a signatory to the OECD Convention on Combating Bribery, but is a signatory to the Asian Development Bank/OECD Anti-Corruption Initiative. Pakistan has also ratified the UN Convention against Corruption.

Resources to Report Corruption

Major Qamar Zaman Chaudhary
Chairman
National Accountability Bureau
Ataturk Avenue, G-5/2, Islamabad
+92-51-111-622-622
chairman@nab.gov.pk

Sohail Muzaffar
Chairman
Transparency International
5-C, 2nd Floor,Khayaban-e-Ittehad, Phase VII, D.H.A., Karachi
0092-21-35390408-9
ti.pakistan@gmail.com

The presence of foreign and domestic terrorist groups within Pakistan poses a significant danger to U.S. interests and citizens. Terrorist attacks have targeted civilians, government and military officials, and foreign personnel and organizations. The Embassies of many countries, including the United States, United Kingdom, Canada, Australia, and New Zealand, have issued travel advisories against non-essential travel to Pakistan, and many multinational companies operating in Pakistan often employ private security and risk management firms to mitigate the significant threats to their business operations.

The BOI, in collaboration with Provincial Investment Promotion Agencies, has, in the past, coordinated airport-to-airport security and secure lodging for foreign investors. To inquire about this service, investors can contact the BOI for additional information.

Pakistan’s civilian workforce consists of approximately 63 million workers, not including child laborers or the sizable informal sector. The majority of the labor force works in the agricultural sector (42 percent), followed by the services (35 percent), and manufacturing (23 percent) sectors. Pakistan is also an extensive exporter of labor, particularly to the Middle East. Officially, the unemployment rate hovers at around 6.5 percent, but the actual figure is likely significantly higher. Additionally, underemployment is a significant problem.

The 18th Amendment to the Constitution, passed in 2010, devolves jurisdiction over labor matters to the provinces. In Punjab, Sindh, Baluchistan, and Islamabad, the minimum wage is PKR 14,000 per month ($140). In Khyber Pakhtunkhwa, it is PKR 12,000 per month ($120). Legal protections for laborers are weak, both at the federal and provincial levels. Required labor inspections are infrequent, and labor courts are generally considered corrupt and strongly biased in favor of employers.

The Overseas Private Investment Corporation (OPIC) maintains an active portfolio of projects worth $900 million in Pakistan, including new investments in renewable energy and electricity distribution efficiency.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Trade and Investment Officer
U.S. Embassy, Islamabad
(+92) 051-201-4000