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.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Pakistan seeks greater foreign direct investment in order to boost its economic growth, particularly in the energy, agriculture, information and communications technology, and industrial sectors. Since 1997, Pakistan has established and maintained a largely open investment regime. Pakistan introduced an Investment Policy in 2013 that further liberalized investment policies in most sectors to attract foreign investment, and signed an economic co-operation agreement with China, the China Pakistan Economic Corridor (CPEC), in April 2015. CPEC Phase I, which concluded in late 2019, focused primarily on infrastructure and energy production. Foreign investors continue to advocate for Pakistan to improve legal protections for foreign investments, protect intellectual property rights, and establish clear and consistent policies for upholding contractual obligations and settlement of tax disputes.
Incentives introduced through the 2015-18 Strategic Trade Policy Framework (STPF) and Export Enhancement Packages (EEP) remain in place. These incentives are largely industry-specific and include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services. A new STPF policy has been approved by the Prime Minister but must be submitted to the Economic Coordination Committee and then the cabinet for final approval. The new STPF reportedly envisages incentivizing 26 non-traditional sectors to boost exports and plans to improve the tax refund process.
The Foreign Private Investment Promotion and Protection Act, 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection for foreign investors and investment in Pakistan. 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. All sectors and activities are open for foreign investment unless specifically prohibited or restricted for reasons of national security and public safety. Specified restricted industries include arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol. There are no restrictions or mechanisms that specifically exclude U.S. investors.
The specialized investment promotion agency of Pakistan is the Board of Investment (BOI). BOI is responsible for the promotion of investment, facilitating local and foreign investor implementation of projects, and enhancing Pakistan’s international competitiveness. BOI assists companies and investors who intend to invest in Pakistan and facilitates the implementation and operation of their projects. BOI is not a one-stop shop for investors, however.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreigners, except Indian and Israeli citizens/businesses, can establish and own, operate, and dispose of interests in most types of businesses in Pakistan, except those involved in arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol. There are no restrictions or mechanisms that specifically exclude U.S. investors. There are no laws or regulations authorizing private firms to adopt articles of incorporation discriminating against foreign investment. The 2013 Investment Policy eliminated minimum initial capital investment requirements across sectors so that no minimum investment requirement or upper limit on the share of foreign equity is allowed, with the exception of investments in the airline, banking, agriculture, and media sectors. Foreign investors in the services sector may retain 100 percent equity, subject to obtaining permission, a no objection certificate, or license from the concerned agency, as well as fulfilling the requirements of the respective sectoral policy. In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed. Small-scale mining valued at less than PKR 300 million (roughly USD 2.6 million) is restricted to Pakistani investors.
Foreign banks can establish locally incorporated subsidiaries and branches, provided they have USD 5 billion in paid-up capital 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 49-percent maximum equity stake in locally incorporated subsidiaries.
There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a USD 100,000 limit on initial franchise investments and a cap on subsequent royalty payments of 5 percent of net sales for five years. Royalties and technical payments are subject to remittance restrictions listed in Chapter 14, section 12 of the SBP Foreign Exchange Manual (http://www.sbp.org.pk/fe_manual/index.htm).
Pakistan maintains investment screening mechanisms for inbound foreign investment. The BOI is the lead organization for such screening. Pakistan blocks foreign investments if the screening process determines the investment could negatively affect Pakistan’s national security.
Other Investment Policy Reviews
Pakistan has not undergone any third-party investment policy reviews over the last three years.
The government works with the World Bank to improve Pakistan’s business climate. The government has simplified pre-registration and registration facilities and automated land records to simplify property registration, eased requirements for obtaining construction permits and utilities, introduced online/electronic tax payments, and facilitated cross-border trade by improving electronic submissions and processing of trade documents. Starting a business in Pakistan normally involves 5 procedures and takes at least 16.5 days. Pakistan ranked 108 out of 190 countries in the World Bank Doing Business 2020 report’s “Starting a Business” category. Pakistan ranked 28 out of 190 for protecting minority investors.
The Securities and Exchange Commission of Pakistan (SECP) manages company registration, which is available to both foreign and domestic companies. Companies first provide a company name and pay the requisite registration fee to the SECP. They then supply documentation on the proposed business, including information on corporate offices, location of company headquarters, and a copy of the company charter. Both foreign and domestic 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 register with Pakistan’s Federal Employees Old-Age Benefits Institution (EOBI) for social security purposes. Depending on the location, registration with provincial governments may be required. The SECP website (www.secp.gov.pk) offers a Virtual One Stop Shop (OSS) where companies can register with the SECP, FBR, and EOBI simultaneously. The OSS is also available for foreign investors.
Pakistan does not promote or incentivize outward investment. Although the cumbersome government approval process can discourage potential investors, larger Pakistani corporations have made major investments in the United States in recent years.
2. Bilateral Investment Agreements and Taxation Treaties
Pakistan has signed Bilateral Investment Treaties (BITs) with 49 countries, with only 27 entered into force. U.S.-Pakistan Bilateral Investment Treaty (BIT) negotiations began in 2004 and the text closed in 2012; however, the agreement has not been signed. Pakistan has a Trade and Investment Framework Agreement (TIFA) in place with the United States. Pakistan has free or preferential trade agreements with China, Malaysia, Sri Lanka, Iran, Mauritius, and Indonesia. It is also a signatory of the South Asian Free Trade Agreement (SAFTA) and the Afghanistan Pakistan Transit Trade Agreement (APTTA). Pakistan is negotiating free trade agreements with Turkey and Thailand.
A U.S.-Pakistan bilateral tax treaty was signed in 1959. Pakistan 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 and provides additional provisions for the administration of taxes. In 2018, Pakistan updated its tax treaty with Switzerland. Pakistan relies heavily on multinational corporations for a significant portion of its tax collections. Foreign investors in Pakistan regularly report that both federal and provincial tax regulations are difficult to navigate and tax assessments are non-transparent. Since 2013, the government has requested advance tax payments from companies, complicating businesses’ operations as the government intentionally delays tax refunds. The World Bank’s Doing Business 2020 report notes that companies pay 34 different taxes, compared to an average of 26.8 in other South Asian countries. On average, calculating these payments requires that businesses spend over 283 hours per year.
In 2016, Pakistan signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The Convention will help Pakistan exchange banking details with the other 80 signatory countries to locate untaxed money in foreign banks. 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
3. Legal Regime
Transparency of the Regulatory System
Most draft legislation is made available for public comment but there is no centralized body to collect public responses. The relevant authority gathers public comments, if deemed necessary; otherwise legislation is directly submitted to the legislative branch. For business and investment laws and regulations, the Ministry of Commerce relies on stakeholder feedback from local chambers and associations – such as the American Business Council and Overseas Investors Chamber of Commerce and Industry (OICCI) – rather than publishing regulations online for public review.
Prior to implementation, non-government actors and private sector associations can provide feedback to the government on different laws and policies, but authorities are not bound to collect nor implement their suggestions. Respective regulatory authorities conduct in-house post-implementation reviews for regulations in consultation with relevant stakeholders. However, these assessments are not made publicly available. Since the 2010 introduction of the 18th amendment to Pakistan’s constitution, foreign companies must address provincial, and sometimes local, government laws in addition to national law. Foreign businesses complain about the inconsistencies in laws and policies from different regulatory authorities. There are no rules or regulations in place that discriminate specifically against U.S. investors, however.
The SECP is the main regulatory body for foreign companies in Pakistan, but it is not the sole regulator. Company financial transactions are regulated by the SBP, labor by the Social Welfare or EOBI, and specialized functions in the energy sector are overseen by bodies such as the National Electric Power Regulatory Authority, the Oil and Gas Regulatory Authority, and Alternate Energy Development Board. Each body is overseen by autonomous management but all are required to go through the Ministry of Law and Justice before submitting their policies and laws to parliament or, in some cases, the executive branch; parliament or the Prime Minister is the final authority for any operational or policy related legal changes.
The SECP is empowered to notify accounting standards to companies in Pakistan, however, execution and implementation of the notifications is poor. Pakistan has adopted most, though not all, International Financial Reporting Standards. Though most of Pakistan’s legal, regulatory, and accounting systems are transparent and consistent with international norms, execution and implementation is inefficient and opaque.
The government publishes limited debt obligations in the budget document in two broad categories: capital receipts and public debt, which are published in the “Explanatory Memorandum on Federal Receipts.” These documents are available at http://www.finance.gov.pk, http://www.fbr.gov.pk, and http://www.sbp.org.pk/edocata. The government does not publicly disclose the terms of bilateral debt obligations.
International Regulatory Considerations
Pakistan is a member of the South Asian Association for Regional Cooperation (SAARC), the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO). However, there is no regional cooperation between Pakistan and other member nations on regulatory development or implementation. 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. In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA). Pakistan is one of 23 WTO countries negotiating the Trade in Services Agreement. Pakistan notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade, albeit at times with significant delays.
Legal System and Judicial Independence
Most international norms and standards incorporated in Pakistan’s regulatory system, including commercial matters, are influenced by British law. Laws governing domestic or personal matters are strongly influenced by Islamic Sharia Law. Regulations may be appealed within the court system and enforcement actions may also be appealed through the courts. 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. Decisions by the courts of the superior judiciary (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) have national standing. 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, tax law, environmental law, consumer protection, insurance, and cases of corruption. Pakistan’s judiciary is influenced by the government and other stakeholders. The lower judiciary is influenced by the executive branch and seen as lacking competence and fairness. It currently faces a significant backlog of unresolved cases.
Pakistan has a written contractual/commercial law with the Contract Act of 1872 as the main source for regulating Pakistani contracts. British legal decisions, where relevant, are also cited in courts. While Pakistan’s legal code and economic policy do not discriminate against foreign investments, enforcement of contracts remains problematic due to a weak and inefficient judiciary.
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, subject to obtaining relevant permissions. In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed. In the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.
A majority of foreign companies operating in Pakistan are “private limited companies,” which are incorporated with a minimum of two shareholders and two directors registered with the SECP. While there are no regulatory requirements on the residency status of company directors, the chief executive must reside in Pakistan to conduct day-to-day operations. If the chief executive is not a Pakistani national, she or he is required to obtain a multiple-entry work visa. Companies operating in Pakistan are statutorily required to retain full-time audit services and legal representation. Companies must also register any changes to the name, address, directors, shareholders, CEO, auditors/lawyers, and other pertinent details to the SECP within 15 days of the change. To address long process delays, in 2013, the SECP introduced the issuance of a provisional “Certificate of Incorporation” prior to the final issuance of a “No Objection Certificate” (NOC). The Certificate includes a provision noting that company shares will be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fails to obtain a NOC.
There is no “single window” website for investment which provides relevant laws, rules and reporting requirements for investors.
Competition and Anti-Trust Laws
Established in 2007, the Competition Commission of Pakistan (CCP) ensures private and public sector organizations are not involved in any anti-competitive or monopolistic practices. Complaints regarding anti-competition practices can be lodged with CCP, which conducts the investigation and is legally empowered to award penalties; complaints are reviewable by the CCP appellate tribunal in Islamabad and the Supreme Court of Pakistan. The CCP appellate tribunal is required to issue decisions on any anti-competition practice within six months from the date in which it becomes aware of the practice.
Expropriation and Compensation
Two Acts, the Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976, protect foreign investment in Pakistan from expropriation, while the 2013 Investment Policy reinforced the government’s commitment to protect foreign investor interests. Pakistan does not have a strong history of expropriation.
ICSID Convention and New York Convention
Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID). Pakistan ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 2011 under its “Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act.
Investor-State Dispute Settlement
In 2008, the Pakistani government instituted a Rental Power Plant (RPP) plan to help alleviate the chronic power shortages throughout the country. Walters Power International Limited was a participant in three RPP plants and brought power generation equipment into Pakistan to service these plants. Subsequently, in 2010, the Supreme Court of Pakistan nullified all RPP contracts due to widespread corruption in cash advances made to RPP operators. Walters Power International Limited settled with the Pakistan National Accountability Bureau (NAB) and the Central Power Generation Company Limited by returning advance payments plus interest. In mid-2012, NAB formally acknowledged that settlement with the Walters Power International Limited had been made, which under Pakistani law released Walters Power International Limited from any further liability, criminal or civil, and should have permitted re-export of equipment. However, the Government of Pakistan (a) has refused to allow the equipment to be exported so that some salvage value could be obtained, and (b) prevented the plant from operating despite a critical need for power in the country during the disputed period. Despite repeated efforts by Walters Power International Limited, NAB has declined to instruct the appropriate parties to issue a Notice of Clearance to Pakistan Customs to allow the re-export of the equipment. Walters Power International Limited alleges that the unreasonable delay in permitting re-export of equipment following settlement constitutes expropriation. The case is still pending with NAB.
International Commercial Arbitration and Foreign Courts
Arbitration and special judicial tribunals do exist as alternative dispute resolution (ADR) mechanisms for settling disputes between two private parties. Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but cases typically take years to resolve. To mitigate such risks, most foreign investors include contract provisions that provide for international arbitration. Pakistan’s judicial system also allows for specialized tribunals as a means of alternative dispute resolution. Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes. However, foreign investors lament the lack of clear, transparent, and timely investment dispute mechanisms. Protracted arbitration cases are a major concern. Pakistani courts have not upheld some international arbitration awards.
In 2019 the International Center for Settlement of Investment Disputes awarded a consortium of foreign companies which had invested in the “Reko Diq” mining project USD 5.84 billion in damages for Pakistan’s breach of contract. The government is currently in discussions with the consortium to arrive at an out-of-arbitration settlement.
Pakistan does not have a single, comprehensive bankruptcy law. Foreclosures are governed under the Companies Act 2017 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. On average, Pakistan requires 2.6 years to resolve insolvency issues and has a recovery rate of 42.8 percent. Pakistan was ranked 58 of 190 for ease of “resolving insolvency” rankings in the World Bank’s Doing Business 2020 report.
The Companies Act 2017 regulates mergers and acquisitions. Mergers are allowed between international companies, as well as between international and local companies. In 2012, the government enacted legislation for friendly and hostile takeovers. The law requires companies to disclose any concentration of share ownership over 25 percent.
Pakistan has no dedicated credit monitoring authority. However, SBP has authority to monitor and investigate the quality of the credit commercial banks extend.
4. Industrial Policies
The government’s investment policy provides both domestic and foreign investors the same incentives, concessions, and facilities for industrial development. Though some incentives are included in the federal budget, the government relies on Statutory Regulatory Orders (SROs) – ad hoc arrangements implemented through executive order – for industry specific taxes or incentives. The government does not offer research and development incentives. Nonetheless, certain technology-focused industries, including information technology and solar energy, benefit from a wide range of fiscal incentives. Pakistan currently does not provide any formal investment incentives such as grants, tax credits or deferrals, access to subsidized loans, or reduced cost of land to individual foreign investors.
In general, the government does not issue guarantees or jointly finance foreign direct investment projects. The government made an exception for CPEC-related projects and provided sovereign guarantees for the investment and returns, along with joint financing for specific projects.
Foreign Trade Zones/Free Ports/Trade Facilitation
Providing unique fiscal and institutional incentives exclusively for export-oriented industries, the government established the first Export Processing Zone (EPZ) in Karachi in 1989. Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, Reko Diq, and Duddar; today, only 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,” which facilitates import and export authorizations.
The 2012 Special Economic Zones Act, amended in 2016, allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs. According to the country’s 2013 Investment Policy, manufacturers introducing new technologies that are unavailable in Pakistan receive the same incentives available to companies operating in Pakistan’s SEZs.
Pakistan has a total of 23 designated special economic zones (SEZs); 10 of these were recently established by the government. All potential investors in SEZs are provided with a basket of incentives, including a ten-year tax holiday, one-time waiver of import duties on plant materials and machinery, and streamlined utilities connections. Despite offering substantial financial, investor service, and infrastructure benefits to reduce the cost of doing business, Pakistan’s SEZs have struggled to attract investment due to lack of basic infrastructure. None of the identified SEZs are fully developed, but they have attracted some investment and are available to any company, domestic or foreign. KP’s Peshawar Economic Zone Office, in an attempt to attract additional foreign investor interest, opened an Industrial Facilitation Center to provide potential investors with timely services and a one-stop shop for existing and new foreign investors. Pakistan intends to establish nine SEZs under CPEC’s second phase, which is focused on promoting Pakistan’s industrial growth and exports. The government plans to open the first CPEC SEZs in Rashakai, Khyber Pakhtunkhwa (KP); Faisalabad, Punjab; and Dhabeji, Sindh in 2020. Most CPEC SEZs remain in nascent stages of development and currently lack basic infrastructure.
Apart from SEZ-related incentives, the government offers special incentives for Export-Oriented Units (EOUs) – a stand-alone industrial entity exporting 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 business officials have struggled to get business visas for travel to Pakistan. When permitted, business people typically receive single-entry visas with short-duration validity. Technical and managerial personnel working in sectors that are open to foreign investment are typically not required to obtain special work permits. In 2019 Pakistan announced updates to its visa and no objection certification (NOC) policies to attract foreign tourists and businesspeople; however, the new visa policies do not apply to U.S. passport holders. The new NOC policy implemented in May 2019 permits visitor travel throughout Pakistan, though travel near Pakistan’s borders still requires a NOC.
Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information. 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. Similarly, there are no special performance requirements on the basis of origin of the investment. However, onerous requirements exist for foreign citizen board members of Pakistani companies, including additional documents required by the SECP as well as obtaining security clearance from the Ministry of Interior. Such requirements discourage foreign nationals from becoming board members of Pakistani companies.
Companies operating in Pakistan have not registered complaints with the embassy regarding encryption issues. Officially, accreditation from the Electronic Certification Accreditation Council (under the Ministry of Information Technology) is required for entities using encryption and cryptography services, though it is not consistently enforced. The Pakistan Telecommunication Authority (PTA) initially demanded unfettered access to Research in Motion’s BlackBerry customer information, but the issue was resolved in 2016 when the company agreed to assist law enforcement agencies in the investigation of criminal activities. PTA and SBP prohibit telecom and financial companies from transferring customer data overseas. Other data, including emails, can be legally transmitted and stored outside the country. Recent draft regulations requiring social media companies to maintain local servers in Pakistan received significant criticism in the press and from service providers. The government subsequently allowed for additional comment and revisions to draft data protection legislation; the comment and revision process remains ongoing.
5. Protection of Property Rights
Though Pakistan’s legal system supports the enforcement of property rights and both local and foreign owner interests, it offers incomplete protection for the acquisition and disposition of property rights. With the exception of the agricultural sector, where foreign ownership is limited to 60 percent, no specific regulations regarding land lease or acquisition by foreign or non-resident investors exists. Corporate farming by foreign-controlled companies is permitted if the subsidiaries are 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 with insufficient 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.
Though protection for legal purchasers of land are provided, even if unoccupied, clarity of land titles remains a challenge. Improvements to land titling have been made by the Punjab, Sindh, and Khyber Pakhtunkhwa provincial governments dedicating significant resources to digitizing land records.
Intellectual Property Rights
The Government of Pakistan has identified intellectual property rights (IPR) protection as a key economic reform and has taken concrete steps over the last two decades to strengthen its intellectual property (IP) regime. In 2005, Pakistan created the Intellectual Property Office (IPO) to consolidate government control over trademarks, patents, and copyrights. IPO’s mission also includes coordinating and monitoring the enforcement and protection of IPR through law enforcement agencies. Enforcement agencies include the local police, the Federal Investigation Agency (FIA), customs officials at the FBR, the CCP, the SECP, the Drug Regulatory Authority of Pakistan (DRAP), and the Print and Electronic Media Regulatory Authority (PEMRA). Although the creation of IPO consolidated policy-making institutions, confusion surrounding enforcement agencies’ roles still constrains performance on IPR enforcement, leaving IP rights holders struggling to identify the right forum to address IPR infringement. Although IPO established 10 enforcement coordination committees to improve IPR enforcement, and has signed an MOU with the FBR to share information, the agency labors to coordinate disparate bodies under current laws. IPO has been in discussions with CCP and SECP for more than a year on data sharing and enforcement MOUs that remain unsigned. Weak penalties and the agencies’ redundancies allow counterfeiters to evade punishment.
IPO as an institution has historically suffered from leadership turnover, limited resources, and a lack of government attention. Since 2016, the Government of Pakistan has taken steps to improve the IPO’s effectiveness, starting with bringing IPO under the administrative responsibility of the Ministry of Commerce. The IPO Act 2012 stipulates a three-year term, 14-person policy board with at least five seats dedicated to the private sector. Section 8(2) of the IPO Act also stipulates, “the board shall meet not less than two times in a calendar year.” No board meeting was held in 2018 due to the political transition which occurred that year, but two board meetings were held in 2019. IPO is severely under-resourced in human capital, currently working at only 52 percent of its approved staffing. New hiring rules await final approval from the Ministry of Law. IPO aims to start recruiting new staff in the first half of 2020.
IPO is also charged with increasing public awareness of IPR through collaboration with the private sector. In 2019, in collaboration with various academic institutions and chambers of commerce, IPO conducted over 100 public awareness sessions. Academics and private attorneys have noted that the creation of the IPO has improved public awareness, albeit slowly. While difficult to quantify, contacts have also observed increased local demand for IPR protections, including from small businesses and startups. Private and public sector contacts highlight that the educational system is a “missing link” in IPR awareness and enforcement. Pakistani educational institutions, including law schools, have rarely included IPR issues in their curricula and do not have a culture of commercializing innovations. However, the International Islamic University now includes an IPR-specific course in its curriculum and Lahore University of Management Sciences has content-specific courses as part of their MBA program. IPO officials have expressed interest in collaborating with Pakistani universities to increase IPR awareness. IPO is working with the Higher Education Commission to offer IPR curricula at other universities but has achieved limited traction. In collaboration with the World Intellectual Property Organization (WIPO), Technology Innovation Support Centers have been established at 47 different universities in Pakistan.
In 2016, Pakistan established three specialized IP tribunals – in Karachi covering Sindh and Balochistan, in Lahore covering Punjab, and in Islamabad covering Islamabad and Khyber Pakhtunkhwa. IPO plans to create two more tribunals, with the proposal awaiting approval from the Ministry of Law. These tribunals have not been a priority in terms of assigning judges. They have experienced high turnover, and the assigned judges do not receive any specialized technical training in IP law.
Pakistan’s IPR legal framework remains inadequate as well. Pakistan’s IP legal framework consists of 40-year-old subordinate IP laws on copyright, patents, and trademarks alongside the 2012 IPO Act. The IPO Act provides the overall legal basis for IP licensing and enforcement while subordinate laws apply to specific IP fields, but inconsistencies in the laws make IP enforcement difficult. Since 2000, Pakistan has made piecemeal updates to IPR laws in an unsuccessful attempt to bring consistency to IPR treatment within the legal system. With the help of Mission Pakistan, CLDP, and the U.S. Patent and Trademark Office (USPTO), IPO is in the process of updating Pakistan’s IPR laws to minimize inconsistencies and improve enforcement.
The U.S. Mission in Pakistan, with the support of the United States Trade Representative (USTR), the Department of Commerce, and USPTO, has been engaged with the Government of Pakistan over several years seeking resolution of long-standing software licensing and IPR infringements committed by offices within the Government of Pakistan which undermine Pakistan’s credibility with respect to IPR enforcement.
Pakistan is currently on the USTR Special 301 Report Watch List Pakistan is not included in the Notorious Markets List.
Pakistan does not track and report on its seizures of counterfeit goods.
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.
6. Financial Sector
Capital Markets and Portfolio Investment
Foreign portfolio investment halted its decline and increased in the last three months of 2019 and into early 2020 as investor confidence increased due to improvement in Pakistan’s current account deficit, relatively high interest rates, and the initiation of Pakistan’s most recent IMF program, according to the SBP. Prior to the COVID-19 pandemic, indicators had pointed to improved inflows of foreign investment. The full impact of COVID-19 on foreign portfolio investment remains to be seen.
Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSE) in January 2016. As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSE is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions. Per the Foreign Exchange Regulations, foreign investors 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. In 2017, the government modified the capital gains tax and imposed 15 percent on stocks held for less than 12 months, 12.5 percent on stocks held for more than 12 but less than 24 months, and 7.5 percent on stocks held for more than 24 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.
The free flow of financial resources for domestic and foreign investors is supported by financial sector policies, with the SBP and SECP providing regulatory oversight of financial and capital markets. Interest rates depend on the reverse repo rate (also called the policy rate). Interest rates reached a high of 13.25 percent in July 2019 but by May 2020 had decreased to eight percent.
Pakistan has adopted and adheres to international accounting and reporting standards – including IMF Article VIII, with comprehensive disclosure requirements for companies and financial sector entities.
Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits. Banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 25 percent of banks’ equity with effect from December 2013. Foreign-controlled (minimum 51 percent equity stake) semi-manufacturing concerns (i.e., those producing goods that require additional processing for consumer marketing) are permitted to borrow up to 75 percent of paid-up capital, including reserves. For non-manufacturing concerns, local borrowing caps are set at 50 percent of paid-up capital. While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending. Pakistan’s domestic corporate bond, commercial paper and derivative markets remain in the early stages of development.
Money and Banking System
The State Bank of Pakistan (SBP) is the central bank of Pakistan.
According to the most recent statistics published by the SBP, only 23 percent of the adult population uses formal banking channels to conduct financial transactions while 24 percent are informally served by the banking sector; women are financially excluded at higher rates than men. The remaining 53 percent of the adult population do not utilize formal financial services.
Pakistan’s financial sector has been recognized by international banks and lenders for performing well in recent years. According to the latest review of the banking sector conducted by SBP in December 2018, improving asset quality, stable liquidity, robust solvency and slow pick-up in private sector advances were noted. The asset base of the banking sector expanded by 11.7 percent during 2019. The five largest banks, one of which is state-owned, control 50.4 percent of all banking sector assets. The risk profile of the banking sector remained satisfactory and moderation in profitability and asset quality improved as non-performing loans as a percentage of total loans (infection ratio) was recorded at 8.6 percent at the end of December 2019. In 2019, total assets of the banking industry were estimated at USD 140.1 billion. As of December 2019, net non-performing bank loans totaled approximately USD 900.3 million – 1.7 percent of net total loans.
The penetration of foreign banks in Pakistan is low, having minimal contribution to the local banking industry and the overall economy. According to a study conducted by the World Bank Group in 2018, the share of foreign bank assets to GDP stood at 3.5 percent while private credit by deposit to GDP stood at 15.4 percent. Foreign banks operating in Pakistan include Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the newly established Bank of China. International banks are primarily involved in two types of international activities: cross-border flows, and foreign participation in domestic banking systems through brick-and-mortar operations. SBP requires that foreign banks hold at minimum $300 million in capital reserves at their Pakistan flagship location, and maintain at least an 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: USD 28 million in assigned capital;
6 to 50 branches: USD 56 million in assigned capital;
Over 50 branches: USD 94 million in assigned capital.
Foreigners require proof of residency – a work visa, company sponsorship letter, and valid passport – to establish a bank account in Pakistan. There are no other restrictions to prevent foreigners from opening and operating a bank account.
Foreign Exchange and Remittances
As a prior action of its July 2019 IMF program, Pakistan agreed to a flexible market-determined exchange rate. The SBP regulates the exchange rate and monitors foreign exchange transactions in the open market, with interventions limited to safeguarding financial stability and preventing disorderly market conditions. Other government entities can influence SBP decisions through their membership on the SBP’s board; the Finance Secretary and the Board of Investment Chair currently sit on the board.
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. While cross-border payments of interest, profits, dividends, and royalties are allowed without submitting prior notification, banks are required to report loan information so SBP can verify remittances against repayment schedules. Although no formal policy bars profit repatriation, U.S. companies have faced delays in profit repatriation due to unclear policies and coordination between the SBP, the Ministry of Finance and other government entities. Mission Pakistan has provided advocacy for U.S. companies which have struggled to repatriate their profits. Exchange companies are permitted to buy and sell foreign currency for individuals, banks, and other exchange companies, and can also sell foreign currency to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees.
There is no clear policy on convertibility of funds associated with investment in other global currencies. The SBP opts for an ad-hoc approach on a case-by-case basis.
The 2001 Income Tax Ordinance of Pakistan exempts taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels. Remittance of full capital, profits, and dividends over USD 5 million are permitted while dividends are tax-exempt. No limits exist for dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law. However, large transactions that have the potential to influence Pakistan’s foreign exchange reserves require approval from the government’s Economic Coordination Committee. Similarly, banks are required to account for outflows of foreign currency. Investor remittances must be registered with the SBP within 30 days of execution and can only be made against a valid contract or agreement.
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.
7. State-Owned Enterprises
The second round of the Government of Pakistan’s extensive 15-year privatization campaign came to an abrupt halt after 2006 when the Supreme Court reversed a proposed deal for the privatization of Pakistan Steel Mills, setting a precedent for future offerings. As a result, large and inefficient state-owned enterprises (SOEs) retain monopolistic powers in a few key sectors, requiring the government to provide annual subsidies to cover SOE losses. There are 197 SOEs in the power, oil and gas, banking and finance, insurance, and transportation sectors. Some are profitable; others are loss-making. They provide stable employment and other benefits for more than 420,000 workers. According to the IMF, in 2019, Pakistan’s total debts and liabilities for SOEs exceeded USD 7 billion, or 2.3 percent of GDP – a 22 percent increase since 2016, but roughly the same since 2017. Some SOEs have governing boards, but they are not effective.
Three of the country’s largest SOEs include: Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM). According to the IMF, the total debt of SOEs now amounts to 2.3 percent of GDP – just over USD 7 billion in 2019. The IMF required audits of PIA and PSM by December 2019 as part of Pakistan’s IMF Extended Fund Facility. PR is the only provider of rail services in Pakistan and the largest public sector employer with approximately 90,000 employees. PR has received commitments for USD 8.2 billion in CPEC loans and grants to modernize its mail rail lines. PR relies on monthly government subsidies of approximately USD 2.8 million to cover its ongoing obligations. In 2019, government payments to PR totaled approximately USD 248 million. In 2019, the Government of Pakistan extended bailout packages worth USD 89 million to PIA. Established to avoid importing foreign steel, PSM has accumulated losses of approximately USD 3.77 billion per annum. The company loses USD 5 million a week, and has not produced steel since June 2015, when the national gas company cut its power supplies due to over USD 340 million in outstanding bills.
SOEs competing in the domestic market receive non-market based advantages from the host government. Two examples include PIA and PSM, which operate at a loss but continue to receive financial bailout packages from the government. Post is not aware of any negative impact to U.S firms in this regard.
The Securities and Exchange Commission of Pakistan (SECP) introduced corporate social responsibility (CSR) voluntary guidelines in 2013. Adherence to the OECD guidelines is not known.
Terms to purchase public shares of SOEs and financial institutions for both foreign and local investors are the same. The government announced plans to carry out a privatization program but postponed plans due to significant political resistance. Even though the government is still publicly committed to privatizing its national airline (PIA), the process has been stalled since early 2016 when three labor union members were killed during a violent protest in response to the government’s decision to convert PIA into a limited company, a decision which would have allowed shares to be transferred to a non-government entity and pave the way for privatization. A bill passed by the legislature requires that the government retain 51 percent equity in the airline in the event it is privatized, reducing the attractiveness of the company to potential investors. The Privatization Commission claims the privatization process to be transparent, easy to understand, and non-discriminatory. The privatization process is a 17-step process available on the Commission’s website under this link http://privatisation.gov.pk/?page_id=88.
There is no unified set of standards defining responsible business conduct in Pakistan. Though large companies, especially multi-national corporations, have an awareness of RBC standards, there is a lack of wider awareness. The Pakistani government has not established standards or strategic documents specifically defining RBC standards and goals. The Ministry of Human Rights published its most recent “Action Plan for Human Rights” in May 2017. Although it does not specifically address RBC or business and human rights, one of its six thematic areas of focus is implementation of international and UN treaties. Pakistan is signatory to nearly all International Labor Organization (ILO) conventions.
International organization, civil society, and labor union contacts all note that there is a lack of adequate implementation and enforcement of labor laws. Some NGOs, worker organizations, and business associations are working to promote RBC, but not on a wide scale.
Pakistan does not have domestic measures requiring supply chain due diligence for companies sourcing minerals originating from conflict-affected areas and does not participate in the Extractive Industries Transparency Initiative (EITI) and/or the Voluntary Principles on Security and Human Rights.
Pakistan ranked 120 out of 180 countries on Transparency International’s 2019 Corruption Perceptions Index. The organization noted that corruption problems persist due to the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotion, and relatively low salaries.
Bribes are criminal acts punishable by law but are widely perceived to exist at all levels of government. Although high courts are widely viewed as more credible, 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.
The National Accountability Bureau (NAB), Pakistan’s anti-corruption organization, suffers from insufficient funding and staffing and is viewed by political opposition as a tool for score-settling by the government in power. Like NAB, the CCP’s mandate also includes anti-corruption authorities, but its effectiveness is also hindered by resource constraints.
Resources to Report Corruption
Justice (R) Javed Iqbal Chairman
National Accountability Bureau
Ataturk Avenue, G-5/2, Islamabad
Sohail Muzaffar Chairman
5-C, 2nd Floor, Khayaban-e-Ittehad, Phase VII, D.H.A., Karachi
10. Political and Security Environment
Despite improvements to the security situation in recent years, the presence of foreign and domestic terrorist groups within Pakistan continues to pose some threat to U.S. interests and citizens. Terrorist groups commit occasional attacks in Pakistan, though the number of such attacks has declined steadily over the last decade. Terrorists have in the past targeted transportation hubs, markets, shopping malls, military installations, airports, universities, tourist locations, schools, hospitals, places of worship, and government facilities. Many multinational companies operating in Pakistan employ private security and risk management firms to mitigate the significant threats to their business operations. There are greater security resources and infrastructure in the major cities, particularly Islamabad, and security forces in these areas may be more readily able to respond to an emergency compared to other areas of the country.
The BOI, in collaboration with Provincial Investment Promotion Agencies, has coordinated airport-to-airport security and secure lodging for foreign investors. To inquire about this service, investors can contact the BOI for additional information.
Post is not aware of any damage to projects and/or installations. Abductions/kidnappings of foreigners for ransom remains a concern.
While security challenges exist in Pakistan, the country has not grown increasingly politicized or insecure in the past year.
11. Labor Policies and Practices
Pakistan has a complex system of labor laws. According to the 18th Amendment to the Constitution, jurisdiction over labor matters is managed by the provinces. Each province is in the process of developing its own labor law regime, and the provinces are at different stages of labor law development.
In the Islamabad Capital Territory and provinces of Punjab, Khyber Pakhtunkhwa and Baluchistan, the minimum wage for unskilled workers is PKR 17,500 per month (USD 109). In Sindh, it is PKR 17,000 per month (USD 106). Legal protections for laborers are uneven across provinces, and implementation of labor laws is weak nationwide. Lahore inspectorates have inadequate resources, which lead to inadequate frequency and quality of labor inspections. Some labor courts are reportedly corrupt and biased in favor of employers. On January 23, 2019 the Punjab Provincial Assembly passed the Punjab Domestic Workers Act 2019. The law prohibits the employment of children under age 15 as domestic workers, and stipulates that children between 15 and 18 may only perform part-time, non-hazardous household work. The law also mandates a series of protections and benefits, including limits to the number of hours worked weekly, and paid sick and holiday leave. On January 25, 2017 the Sindh Provincial Assembly passed the Sindh Prohibition of Employment of Children Act, 2017. In August 2019, the Balochistan Assembly adopted a resolution to eradicate child labor in coal mines.
The Senate passed the Domestic Workers (Employment Rights) Act in March 2016 (http://www.senate.gov.pk/uploads/documents/1390294147_766.pdf), but the bill has not progressed in the National Assembly. An amendment to the federal Employment of Children Act, 1991, which would raise the minimum age of employment to sixteen, has been pending in the National Assembly since January 2016.
According to Pakistan’s most recent labor force survey (conducted 2017-2018), the civilian workforce consists of approximately 65.5 million workers. Women are extremely under-represented in the formal labor force. The survey estimated overall labor participation at approximately 45 percent, with male participation at 68 percent and females at 20 percent. The largest percentage of the labor force works in the agricultural sector (38.5 percent), followed by the services (37.84 percent), and industry/manufacturing (16 percent) sectors. Although the official unemployment rate hovered at roughly 6 percent, pre-COVID-19, the figure is likely significantly higher. Additionally, there are as-yet no reliable unemployment statistics since the COVID-19 outbreak. In 2018, the UN Population Fund estimated that 29 percent of Pakistan’s population was between the ages of 10 and 24 and according to 2017-18 labor force survey estimates unemployment for 15 to 24 year old was 10.5 percent.
Pakistan is a labor exporter, particularly to Gulf Cooperation Council (GCC) countries. According to Pakistan’s Bureau of Emigration and Overseas Employment’s 2018 “Export of Manpower Analysis,” the bureau had registered more than 11.11 million Pakistanis going abroad for employment since 1971, with more than 96 percent traveling to GCC countries. Pakistanis working overseas sent more than USD 19 billion in remittances each year since 2015.
Pakistani government sector contacts say their workforce is insufficiently skilled. Federal and provincial government initiatives such as the National Vocational and Technical Training Commission and the Punjab government’s Technical Education and Vocational Training Authority aim to increase the employability of the Pakistani workforce. However, the ILO’s 2016-2020 Pakistan Decent Work Country Program notes that, “Neither a comprehensive national policy nor coherent provincial policies for skills and entrepreneurship development are being applied.” The ILO report notes that “a small fraction of vulnerable workers are covered by social security in one form or another, while access to comprehensive social protection systems is also limited.” The ILO’s 2014 Decent Work Country Profile states that in 2013, only 9.4 percent of the economically active population – excluding public sector employees – were contributing to formal social security systems such as old age, survivors’, and disability pensions.
Freedom of association is guaranteed under article 17 of Pakistan’s constitution. However, the ILO indicates that the Pakistani state and employers have used “disabling legislation and repressive tactics” to make union formation and collective bargaining “extremely difficult.” The Pakistan Institute of Labour Education and Research in its 2015 “Status of Labour Rights in Pakistan” noted that according to non-official data, there were 949 registered trade unions with a total membership of 1,865,141 – approximately four percent of the total estimated labor force. Provincial labor departments are responsible for managing trade union and industrial labor disputes. Each province has its own industrial relations legislation, and each has labor courts to adjudicate disputes. Recent strikes have been spearheaded by public sector workers, such as teachers and public health workers.
The ILO’s 2016-2020 Pakistan Decent Work Country Program states that “exploitative labour practices in the form of child and bonded labour remain pervasive…” and notes “the absence of reliable and comprehensive data to accurately assess the situation of hazardous child labour, worst forms of child labour, or forced labour.” The report also identifies weak compliance with, and enforcement of, labor laws and regulations as contributing to poor working conditions – including unhealthy and unsafe workplaces –and the erosion of worker rights.
Pakistan is a GSP beneficiary, which requires labor standards to be upheld.
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs
The Development Finance Corporation is active in Pakistan and has provided financing or insurance for projects totaling USD 597.6 million (since 2010), including investments in microfinance and hospital care in rural Pakistan. An Investment Incentive Agreement was signed between the United States and Pakistan in 1997.