Pakistan’s current government has sought to foster inward investment since taking power in August 2018, pledging to restructure tax collection, boost trade and investment, and fight corruption. However, the government also inherited a balance of payments crisis, forcing it to prioritize measures to build reserves and shore up its current account rather than medium to long-term structural reforms. The government entered a $6 billion IMF Extended Fund Facility in July 2019, promising to carry out structural reforms that have been delayed due to the COVID crisis. In March 2021, the IMF Board authorized release of the latest tranche under the EFF program, and Pakistan successfully accessed global bond markets for the first time since 2017.
Pakistan has made significant progress since 2019 in transitioning to a market-determined exchange rate and reducing its large current account deficit, while inflation has been under 10 percent for the entire reporting period. 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 negatively impacted Pakistan’s economy, particularly during the spring/summer of 2020, but Pakistan fared relatively well compared to other economies in the region. Pre-COVID, the IMF had predicted Pakistan’s GDP growth would be 2.4 percent in FY 2020. However, Pakistan’s economy contracted by 0.5 percent in FY 2020, which ended June 30, 2020.
Despite a relatively open formal regime, Pakistan remains a challenging environment for investors with foreign direct investment (FDI) declining by 29 percent in the first half of FY 2021 compared to that same time period in FY 2020. An improving but unpredictable security situation, 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 FDI as compared to regional competitors. The government aims to grow FDI to $7.4 billion by FY2023 from $2.56 billion in FY2020.
The United States has consistently been one of the largest sources of FDI in Pakistan. In 2020, China was Pakistan’s number one source for FDI, largely due to projects under the China-Pakistan Economic Corridor (CPEC) for which only PRC-approved companies could bid. Over the last two years, U.S. companies have pledged more than $1.5 billion of investment in Pakistan. American companies have profitable operations across a range of sectors, notably fast-moving consumer goods, agribusiness, 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, a local affiliate of the U.S. Chamber of Commerce, has 61 U.S. member companies, most of which are Fortune 500 companies and spanning a wide range of sectors. The Lahore-based American Business Forum – which has 23 founding members and 22 associate members – also assists U.S. investors. The U.S.-Pakistan Business Council, a division of the U.S. Chamber of Commerce, supports U.S.-based companies who do business with Pakistan. In 2003, the United States and Pakistan signed a Trade and Investment Framework Agreement (TIFA) as the primary forum to address impediments to bilateral trade and investment flows and to grow commerce between the two economies.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Pakistan seeks inward investment in order to boost economic growth, particularly in the energy, agribusiness, 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. CPEC Phase II, which is ongoing, is pivoting away from infrastructure development to mainly focus on promoting Pakistan’s industrial growth by establishing special economic zones throughout the country. The PRC has also pledged to provide $1 billion in socio-economic initiatives focused on agriculture, health, education, poverty alleviation, and vocational training by 2024. However, progress on Phase II is significantly delayed due to the COVID pandemic, fiscal constraints, and regulatory issues including the government’s inability so far to pass legislation formalizing the CPEC Authority (a centralized federal body charged with CPEC implementation across the country). Some opportunities are only open to approved Chinese companies, and CPEC has ensured those projects and their investors receive the authorities’ attention.
To support its Investment Policy, Pakistan also has implemented sectoral policies designed to provide additional incentives to investors in those specific sectors. The Automotive Policy 2016, Strategic Trade Policy Framework (STPF) 2015-18, Export Enhancement Package 2019, Alternative and Renewable Energy Policy 2019, Merchant Marine Shipping Policy 2019 with 2020 updates, the Electric Vehicle Policy 2020-2025, and the Textile Policy 2021 (still awaiting final approval) are a few examples of sector-specific incentive schemes. Sector-specific incentives typically include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services. A new STPF 2020-25 and the Textile Policy 2021 have been approved by the Prime Minister but are still awaiting final Cabinet approvals.
In the absence of the new STPF 2020-2025, incentives introduced through STPF 2015-18 remain in place. Nonetheless, 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.
The Foreign Private Investment Promotion and Protection Act (FPIPPA), 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection for foreign investors and investment in Pakistan. The FPIPPA 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.
Pakistan’s investment promotion agency is the Board of Investment (BOI). BOI is responsible for attracting investment, facilitating local and foreign investor implementation of projects, and enhancing Pakistan’s international competitiveness. BOI assists companies and investors who seek to invest in Pakistan and facilitates the implementation and operation of their projects. BOI is not a one-stop shop for investors, however.
Pakistan prioritizes investment retention through “business dialogues” (virtual or in-person engagements) with existing and potential investors. BOI plays the leading role in initiating and managing such dialogues. However, Pakistan does not have an Ombudsman’s office focusing on investment retention.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreigners, except Indian and Israeli citizens/businesses, can establish, 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 domestic private entities to adopt articles of incorporation discriminating against foreign investment.
Pakistan does not place any limits on foreign ownership or control. The 2013 Investment Policy eliminated minimum initial capital requirements across sectors so that there is no minimum investment requirement or upper limit on the allowed share of foreign equity, 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,” and 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 agriculture 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 $1.9 million) is restricted to Pakistani investors.
Foreign banks may establish locally incorporated subsidiaries and branches, provided they have $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 $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 where 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 past three years.
The government utilizes the World Bank’s “Doing Business” criteria to guide its efforts 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 expanding electronic submissions and processing of trade documents. Starting a business in Pakistan normally involves five procedures and takes at least 16.5 days – as compared to an average of 7.1 procedures and 14.5 days for the group of countries comprising the World Bank’s South Asia cohort. Pakistan ranked 72 out of 190 countries in the Doing Business 2020 report’s “Starting a Business” category. Pakistan ranked 28 out of 190 for protecting minority investors. (Note: the 2020 Doing Business Report is the last available report. End Note.)
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 also 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 can be used by foreign investors.
Pakistan does not promote nor incentivize outward investment. Pakistan does not explicitly restrict domestic investors from investing abroad. However, cumbersome and time consuming approval processes, involving multiple entities such as the SBP, SECP, and the Ministries of Finance, Economic Affairs, and Foreign Affairs, generally discourage outward investors. Despite the cumbersome processes, larger Pakistani corporations have made 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, although only 27 have entered into force. U.S.-Pakistan BIT negotiations began in 2004 and the text closed in 2012; however, the agreement has not been signed. The government has declared its intention to pull out of BITs currently in force.
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). A revised China-Pakistan Free Trade Agreement entered into force January 1, 2020. 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 (up to one-third of revenue collected by the FBR, according to reports by the Overseas Investors Chamber of Commerce and Industry.) 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, according to the 2020 Doing Business report, businesses spend over 283 hours per year calculating these payments.
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
Pakistan generally lacks transparency and effective policies and laws that foster market-based competition in a non-discriminatory manner. The Competition Commission of Pakistan has a mandate to ensure market-based competition. In spite of this, however, the “rules of the game” in Pakistan are opaque and variable, and sometimes applied to benefit domestic businesses.
All businesses in Pakistan are required to adhere to certain regulatory processes managed by the chambers of commerce and industry. Rules, for example on the requirement for importers or exporters to register with a chamber, are equally applicable to domestic and foreign firms. To date, Post is not aware of any incidents where such rules have been used to discriminate against foreign investors in general or U.S. investors specifically.
The Pakistani government is responsible for establishing and implementing legal rules and regulations, but sub-national governments have a role as well depending on the sector. Prior to implementation, non-government actors and private sector associations can provide feedback to the government on regulations and policies, but governmental authorities are not bound to follow their input. Regulatory authorities are required to conduct in-house post-implementation reviews of 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, which delegated significant authorities to provincial governments, foreign companies must comply with provincial, and sometimes local, laws in addition to federal law. Foreign businesses complain about the inconsistencies in the application of laws and policies from different regulatory authorities. There are no rules or regulations in place that discriminate specifically against U.S. firms or investors, however.
The SECP is the main regulatory body for foreign companies operating in Pakistan, but it is not the sole regulator. Company financial transactions are regulated by the State Bank of Pakistan (SBP), labor by Social Welfare or the Employee Old-Age Benefits Institution (EOBI), and specialized functions in the energy sector are administered by bodies such as the National Electric Power Regulatory Authority (NEPRA), the Oil and Gas Regulatory Authority (OGRA), and Alternate Energy Development Board (AEDB). Each body has independent management but all must submit draft regulatory or policy changes through the Ministry of Law and Justice before any proposed rules or regulations may be submitted to parliament or, in some cases, the executive branch.
The SECP is authorized to establish accounting standards for companies in Pakistan, however, execution and implementation of those standards 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.
Most draft legislation is made available for public comment but there is no centralized body to collect public responses. The relevant authorities, usually the ministry under which a law may fall, gathers public comments, if it deems it necessary; otherwise legislation is directly submitted by the government to the legislative branch. For business and investment laws and regulations, the Ministry of Commerce relies on stakeholder feedback obtained from local chambers and associations – such as the American Business Council (ABC) and Overseas Investors Chamber of Commerce and Industry (OICCI) – rather than publishing regulations online for public review.
There is no centralized online location where key regulatory actions are published. Different regulators publish their regulations and implementing actions on their respective websites. However, in most cases, regulatory implementing actions are not published online.
Businesses impacted by non-compliance with government regulations may seek relief from the judiciary, Ombudsman’s offices, and the Parliamentary Public Account Committee. These forums are designed to ensure the government follows required administrative processes.
Pakistan did not announce any enforcement reforms during the last year. Pakistan is in the process of fully implementing IPR Customs rules to improve IPR enforcement. However, delayed legislative amendments in IP laws restricts full and effective implementation of such rules.
If fully implemented, IPR Customs rules will improve IPR enforcement and will boost foreign innovators’ confidence in introducing their innovations in Pakistan.
Enforcement processes are legally reviewable – initially by specialized IP Tribunals, but also through the High and Supreme Courts of Pakistan.
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’s judicial system incorporates British standards. As such, most of Pakistan’s regulatory systems use British norms to meet international standards.
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 and enforcement actions may be appealed through the court system. 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’s Contract Act of 1872 is the main law that regulates contracts with Pakistan. British legal decisions, under some circumstances, are also been cited in court rulings. 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.
Theoretically, Pakistan’s judicial system operates independently of the executive branch. However, the reality is different, as the military wields significant influence over the judicial branch. As a result, there are doubts concerning the competence, fairness, and reliability of Pakistan’s judicial system. However, fear of contempt of court proceedings inhibit businesses and the public generally from reporting on perceived weaknesses of the judicial process.
Regulations and enforcement actions are appealable. Specialized tribunals and departmental adjudication authorities are the primary forum for such appeals. Decisions made by a tribunal or adjudication authority may be appealed to a high court and then to the Supreme Court.
Laws and Regulations on Foreign Direct Investment
Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in most sectors of the economy. 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. Corporations operating in Pakistan are statutorily required to retain full-time audit services and legal representation. Corporations 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 of incorporation 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.
No new law, regulation, or judicial decision was announced or went into effect during the last year which would be significant to foreign investors.
There is no “single window” website for investment in Pakistan which provides direct access to all relevant laws, rules and reporting requirements for investors.
Competition and Antitrust Laws
Established in 2007, the Competition Commission of Pakistan (CCP) is designed to ensure private and public sector organizations are not involved in any anti-competitive or monopolistic practices. Complaints regarding anti-competitive practices can be lodged with CCP, which conducts the investigation and is legally empowered to impose 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-competitive practice within six months from the date in which it becomes aware of the practice.
The CCP is currently investigating a cement sector cartel. While the CCP has found that cement manufacturers in Pakistan established a cartel and kept prices at an artificially high level raising excess revenues worth $250 million, a review is not yet final. The CCP also conducted a recent inquiry into sugar prices and submitted a report to the prime minister’s office. That report has not yet been made public and no action has been taken on the report’s findings. The CCP generally adheres to transparent norms and procedures.
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
Pakistan has Bilateral Investment Treaties (BIT) with 32 countries. The BITs include binding international arbitration of investment disputes. Since foreign investors generally distrust Pakistan’s domestic courts to enforce commercial contracts, they often include clauses requiring binding international arbitration of investment disputes in contracts with the Government of Pakistan.
Pakistan does not have a BIT or FTA with the United States.
A U.S. industrial services company has an ongoing issue regarding the re-possession of its property – three gas compressors – which remain at Pakistan’s Bhikhi power grid station and have an estimated worth of $2 million. The company entered into a three-year lease agreement with Pakistan Power Resources (PPR) LLC whereby the three compressors were installed at the Bhikki Rental Power Plant on November 1, 2007. PPR had entered into a contract with Pakistan’s Water and Power Development Authority (WAPDA) to supply 136MW of electricity under a Government of Pakistan rental power project scheme. The compressors, with WAPDA identified as the importing entity, were brought in under a “temporary import” scheme of Pakistan’s Federal Bureau of Revenue (FBR), which allowed for lower assessed import duties on the compressors with the understanding that the compressors would be re-exported within a pre-defined time period. To date, WAPDA has not released the compressors due to outstanding penalties/duties assessed by the FBR for the company’s alleged failure to comply with “temporary import” rules. The FBR has not granted a requested waiver from the parties, continuing to bar their export.
A California-based information technology company responded to the Capital Development Authority (CDA)’s Expression of Interest for the construction, development, and management of an information technology university in Islamabad in 2008. According to the Expression of Interest, the CDA would provide the land on a 99-year lease to the highest bidder, on agreed yearly payments. The company was selected, entered into a lease agreement for approximately 200,000 square yards, and made regular payments to CDA. Upon taking possession of the land, the company determined that the land area was less than the area agreed in the lease contract. CDA was unsuccessful in clearing access to the leased land due to unlawful encroachment by local dwellers. Since 2015, the company has attempted to have CDA either clear the land or reimburse the company its lease payments with interest.
A large U.S. insurance company has sought U.S. support to repatriate approximately $4 million (approximate value based on the dollar-rupee exchange rate) from the sale of its shares in its former Pakistani operations. The company purchased the Pakistani operations in 2010, which included business entities in the U.S. and Pakistan, and sold its Pakistani interest (worth 81 percent of the Pakistani business) in two tranches in 2014 and 2015. The company has requested the State Bank of Pakistan (SBP) and Ministry of Finance permit the repatriation of the proceeds. In the past, the Finance Ministry has held that proceeds from the sale of its Pakistani interests could not be repatriated because they were earned prior to the liberalization of the foreign exchange regime in 1997.
Local courts do not recognize and enforce foreign arbitral awards issued against the government. Any award involving domestic enforcement component needs an additional affirmative ruling from a local court.
There is no history of extrajudicial action against foreign investors.
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.
Pakistan’s local courts do not recognize and enforce foreign arbitral awards. Any such award, involving local enforcement, requires direction from a local court. The Reko Diq mining dispute is an example where an international arbitral award against Pakistan was not enforced by local Pakistani courts and remains unresolved.
Generally, domestic courts favor SOEs for their investment disputes against foreign entities on the basis of “public interest.” However, there has not been a relevant case in the past ten years. In the 2006 Pakistan Steel Case, the Supreme Court struck down the contract between the Privatization Commission of Pakistan and the foreign investor who won the bid. The Supreme Court decided the bidder should have furnished a guarantee that it would make future investments to raise production capacity. Despite the fact that this was not a condition specified in the bid documents, the Supreme Court invalidated the contract. Since then, the government has not been able to find a serious investor/buyer for Pakistan Steel.
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.
To encourage use of electrical vehicles (EV), the Government of Pakistan incentivized imports of EVs via the Electric Vehicles Policy 2020-2025 as completely built up (CBU)/finished vehicles and EV specific parts in complete knock down (CKD)/unassembled vehicles. Incentives include rebates on customs duties, regulatory duties, exemptions from sales tax, and lower tariff rates. (Note: sector contacts state that implementation of the EV policy is delayed as the government has yet to finalize the draft finance bill to introduce the duty exemptions. Full implementation is expected in 3Q 2021. End Note.)
Foreign Trade Zones/Free Ports/Trade Facilitation
To boost exports, the government established fiscal and institutional incentives for export-oriented industries who located operations in Export Processing Zones (EPZ), the first of which was established in Karachi in 1989. Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, Reko Diq, and Duddar. However, today, only Karachi, Risalpur, Sialkot, and Saindak EPZs remain operational. These zones 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 (SEZ) Act, amended in 2016, allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs. According to the Pakistan’s 2013 Investment Policy, any manufacturer that introduces technologies that are unavailable in Pakistan can receive the same incentives available to companies operating in Pakistan’s SEZs.
Pakistan has a total of 23 designated SEZs. All investors in SEZs are offered a number of incentives, including a ten-year tax holiday, one-time waiver of import duties on plant materials and machinery, and streamlined utilities connections. Despite these benefits to both foreign and domestic firms, Pakistan’s SEZs have struggled to attract investment due their lack of basic infrastructure. Khyber Pakhtunkhwa’s Peshawar Economic Zone Office opened in 2020 an Industrial Facilitation Center to provide potential investors with a one-stop shop for existing and new foreign investors. Pakistan also intends to establish nine SEZs under CPEC. 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 businesspeople often struggle to obtain business visas for travel to Pakistan. When visas are issued, they are typically only 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 separate work permits. While Pakistan announced in 2019 its visa and no objection certification (NOC) policies would be changed to attract foreign tourists and businesspeople, the new visa policies do not apply to U.S. passport holders. In February 2021, Pakistan shifted to a 100-percent e-visa policy to facilitate business (and tourism) travel. Pakistan also started a 30-day single entry “Business Visa in Your Inbox” Electronic Travel Authorization that allows visa on arrival.
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 vetting by the Ministry of Interior. Such requirements discourage foreign nationals from becoming board members of Pakistani companies.
There are currently no requirements for foreign IT providers to turn over source code or provide access to encryption. However, the Government of Pakistan has plans to introduce regulations requiring this.
Currently Pakistan does not restrict data transfer outside of the economy or country’s territory except when involving the banking industry. State Bank of Pakistan (SBP) requires financial institutions to have local data storage and any transfer of data outside of Pakistan requires formal approval from SBP.
Currently, Pakistan is in the process of approving a “personal data protection” bill and in 2020 approved the “Removal and Blocking of Unlawful Content Rules.” Each requires data localization and requires platforms with more than 500,000 Pakistani users to register with the Pakistan Telecommunication Authority (PTA) and establish a physical office in Pakistan within nine months of the implementation of the rules. Within three months of the local office’s establishment, a person must be appointed for coordination, and a data server system must be set up within 18 months. The rules are also slated to be applied to internet service providers. All companies and providers are instructed to restrict content contrary to the “security, prestige, and defense of the country.”
The government agencies involved are: the State Bank of Pakistan, the Ministry of Information Technology and Telecommunications, and the Pakistan Telecommunication Authority.
5. Protection of Property Rights
Although Pakistan’s legal system includes the enforcement of property rights and both local and foreign owner interests, it offers incomplete protection for the acquisition and disposition of real property. There is no data with respect to the percentage of land with clear title and land title issues are common. With the exception of the agricultural sector, where foreign ownership is limited to 60 percent, no specific regulations regarding the leasing of land 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 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.
Though protections for legal purchasers of land are provided, even if unoccupied, land titles remains a challenge. Improvements to land titling have been made by the Punjab, Sindh, and Khyber Pakhtunkhwa provincial governments who have dedicated significant resources to digitizing land records. In the newly merged tribal districts of Khyber Pakhtunkhwa, land rights are held collectively by the tribes, not privately by individuals and there are functionally no ownership records. However, the provincial government is currently undertaking a long-term land registration process in the newly merged districts for tribally owned land.
In urban centers, undocumented possession of unoccupied land, squatting, is a continuing issue. However, if it can be proven that the land was acquired legally, government agencies are supportive of the legal owner taking possession of their property.
Intellectual Property Rights
The Government of Pakistan has identified protecting intellectual property (IP) rights as a reform priority and has taken concrete steps over the last two decades to strengthen its 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, confusion surrounding enforcement agencies’ roles still constrains performance on IP enforcement, leaving IP rights holders struggling to elicit action to address IP infringement. Although IPO established ten enforcement coordination committees to improve IP enforcement, and has signed an MOU with the FBR, CCP, Collective Management Office, Pakistan Agricultural Research Council, and SECP to share information, the agency labors to coordinate disparate bodies under current laws. Weak penalties and the agencies’ redundancies allow counterfeiters to evade punishment, while companies struggle to identify the correct forum in which to file a complaint.
The Intellectual Property Office 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.” 2020 was a challenging year due to complications from the COVID-19 pandemic and resultant lockdowns. As a result, no policy board meeting was held during the year. 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 once these rules are approved by the Ministry of Law.
The Intellectual Property Office is also charged with increasing public awareness of IP rights through collaboration with the private sector. COVID-19 slowed IPO’s momentum in this area with only 20 webinars and virtual interactions concluded during 2020 (down from more than 100 in 2019) – a significant portion of which focused on Pakistan’s new Geographical Indication (GI) Law. 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 IP rights-specific course in its curriculum and Lahore University of Management Sciences has content-specific courses as part of its 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 had initiated a plan to create additional tribunals in 2019, however, the proposal is still 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, consisting 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 incomplete bid 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 updating Pakistan’s IPR laws to minimize inconsistencies and improve enforcement, but progress has been slow.
In February 2021, Pakistan acceded to the Madrid Protocol on Trademarks.
The U.S. Mission in Pakistan, with the support of USTR, the Department of Commerce, and USPTO, has engaged with the Government of Pakistan over several years seeking resolution of long-standing software licensing and IP infringements committed by offices within the Government of Pakistan which undermine Pakistan’s credibility with respect to IP enforcement. In early 2021, several U.S. agencies, including the Commercial Law Development Program, United States Patent and Trademark Office, USAID, and the U.S. Food & Drug Administration, launched a six-month, 16-part capacity building series with Pakistani IP enforcement and relevant officials focused on curbing the flow of counterfeit pharmaceuticals within and through Pakistan. The program provides instruction on forensic tools, pharmaceutical supply chain integrity, cyber intelligence, and the identification of transnational criminal organizations exploiting trade routes. The program seeks to address intellectual property rights enforcement issues while protecting public health and safety.
Pakistan is currently on the Special 301 report Watch List.
Pakistan does not track and report on its seizures of counterfeit goods.
Resources for Intellectual Property Rights Holders:
Intellectual Property Counselor for South Asia
U.S. Patent and Trademark Office
Foreign Commercial Service
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
Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSX) in January 2016. As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSX 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 PSX 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 a 15 percent tax 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 SBP and SECP provide regulatory oversight of financial and capital markets for domestic and foreign investors. Interest rates depend on the reverse repo rate (also called the policy rate).
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 a bank’s equity. 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 (2021), only 24 percent of the adult population uses formal banking channels to conduct financial transactions while 25 percent are informally served by the banking sector; women are financially excluded at higher rates than men. The remaining 51 percent of the adult population do not utilize formal financial services.
Pakistan’s financial sector has been described by international banks and lenders as performing well in recent years. According to the latest review of the banking sector conducted by SBP in July 2020, 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 7.8 percent during 2020 due to a surge in banks’ investments, which increased by 22.8 percent (or PKR 2 trillion). The five largest banks, one of which is state-owned, control 50.4 percent of all banking sector assets.
SBP conducted the 6th wave of the Systemic Risk Survey in August-2020. The survey results indicated respondents perceived key risks for the financial system to be mostly exogenous and global in nature. Importantly, the policy measures rolled out by SBP to mitigate the effects of COVID-19 have been very well received by the stakeholders.
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 9.7 percent at the end of FY 2020 (June 30, 2020). In 2020, total assets of the banking industry were estimated at $151.9 billion and net non-performing bank loans totaled approximately $1 billion– 1.9 percent of net total loans.
The penetration of foreign banks in Pakistan is low, making a small contribution to the local banking industry and the overall economy. According to a study conducted by the World Bank Group in 2018, (the latest data available) 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 Citibank, Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the 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 foreign banks to hold at minimum $300 million in capital reserves at their Pakistani flagship location, and maintain at least an 8 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.
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 adopt 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. However, 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 $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.
In September 2020, Prime Minister Imran Khan launched the Roshan Digital Account (RDA) project aimed at providing digital banking facilities to overseas Pakistanis. Customers can use both PKR and USD for transactions and the accounts receive special tax treatment.
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
Pakistan has 197 state-owned enterprises (SOEs) in the power, oil and gas, banking and finance, insurance, and transportation sectors. They provide stable employment and other benefits for more than 420,000 workers, but a number require annual government subsidies to cover their losses.
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 $7 billion in 2019. Note: IMF and WB data for 2020 regarding SOEs is not yet available, however, according to SBP provisional data from December 2020, the total debt of Pakistani SOEs is $14.62 billion. End Note. 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 $8.2 billion in CPEC loans and grants to modernize its rail lines. PR relies on monthly government subsidies of approximately $2.8 million to cover its ongoing obligations. In 2019, government payments to PR totaled approximately $248 million. The government provided a $37.5 million bailout package to PR in 2020. In 2019, the Government of Pakistan extended bailout packages worth $89 million to PIA. Established to avoid importing foreign steel, PSM has accumulated losses of approximately $3.77 billion per annum. The government has provided $562 million to PSM in bailout packages since 2008. The company loses $5 million a week, and has not produced steel since June 2015, when the national gas company shut off supplies to PSM facilities due to its greater than $340 million in outstanding unpaid utility 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 are the same for both foreign and local investors. The government on March 7, 2019 announced plans to carry out a privatization program but postponed plans because of 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% 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 (RBC) in Pakistan. Though large companies, especially multi-national corporations, have an awareness of RBC standards, broader awareness is lacking. 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.
According to NGOs, international organizations, and civil society contacts, children continued to work in conditions of forced and bonded labor. In rural areas, forced child labor appeared to occur most frequently in the agriculture and brick making industries. Pakistan does not have domestic measures which require supply chain due diligence for companies sourcing minerals originating from conflict-affected areas. In 2021, DOL started a pilot project to support tracing in supply chains for cotton in Punjab. It does not participate in the Extractive Industries Transparency Initiative (EITI) and/or the Voluntary Principles on Security and Human Rights.
Pakistan ranked 124 out of 180 countries on Transparency International’s 2020 Corruption Perceptions Index. The organization noted corruption problems persist due to the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotions, and relatively low salaries.
Bribes are classified as criminal acts under the Pakistani legal code and are punishable by law, but are widely believed to be given across all levels of government. Although higher courts are widely viewed as more credible, lower courts are often considered corrupt, inefficient, and subject to pressure from prominent wealthy, religious, political, and military 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 professionalism, and is viewed by Pakistan’s opposition as politically biased. Fear of NAB prosecution has also deterred agency action on legitimate regulatory issues affecting the business sector.
Resources to Report Corruption
Justice (R) Javed Iqbal
National Accountability Bureau
Ataturk Avenue, G-5/2, Islamabad
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. Baloch militant groups continue to target the Pakistani military as well as Chinese and CPEC installations in Balochistan, where Gwadar port is being developed under CPEC. 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, can coordinate airport-to-airport security and secure lodging for foreign investors. To inquire about this service, investors can contact the BOI for additional information – https://www.invest.gov.pk/
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 Balochistan, the minimum wage for unskilled workers is PKR 17,500 (c.$110) per month. In Sindh, it is PKR 17,000 (c. $105) per month. However, the minimum recommended living wage by the Pakistan Institute of Labor Education and Research (PILER) is PKR 31,000 (c. $200) whereas ILO has recommended a reference wage of at least PKR 25,000 (c. $165) per month. 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. In July 2020, the Pakistani government amended the Employment of Children Act 1991 to include child domestic labor as hazardous work. The decision applies to the Islamabad Capital Territory; provinces are able to adopt the measure via a provincial assembly resolution. 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 far 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 2019 “Export of Manpower Analysis,” (the latest report available) the bureau had registered more than 11 million Pakistanis going abroad for employment since 1971, with more than 96 percent traveling to GCC countries. Pakistanis working overseas have sent more than $20 billion in remittances each year since 2015. Remittances of more than $2 billion per month have continued from mid-2020 through February 2021 despite the negative impacts of COVID-19 that has resulted in many overseas Pakistanis returning to Pakistan over the last year.
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 2016 Decent Work Country Profile states that in 2015, 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.” A report compiled by ILO in 2018 noted there were a total of 7,906 registered trade unions with a total membership of 1,414,160. However, this may underreport the actual figure because it pertains to the number of members declared at the time of union registration. As membership grows over time, provincial labor departments and the National Industrial Relations Commission (NIRC) do not regularly update their records. According to worker representative organizations, the estimated unionized workforce is approximately two million, which would represent roughly three percent of the total workforce in Pakistan. 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 labor practices in the form of child and bonded labor remain pervasive…” and notes “the absence of reliable and comprehensive data to accurately assess the situation of hazardous child labor, worst forms of child labor, or forced labor.” 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 beneficiary of the U.S. Generalized System of Preferences (GSP) program, (Note: As of April 2021, the GSP program has lapsed pending review. End Note), as well as the EU’s GSP+ program, both of which require labor standards to be upheld.
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance and Development Finance Programs
The Development Finance Corporation is active in Pakistan with a current portfolio in excess of $400 million as of June 2020, including investments in, insurance for, or financing of microfinance, wind energy, and healthcare projects, among others, with more in the pipeline. An Investment Incentive Agreement was signed between the United States and Pakistan in 1997.