Investment challenge.

Byline: Afshan Subohi

THE government appears too self-involved to care but Pakistan can't afford to alienate the private sector. With the economy contracting at a steep pace and households in immense stress, it is whimsical to imagine a turnaround without fresh significant doses of investment.

Sadly, the rate of investment in the country has slumped further from an already low base. According to the Economic Survey 2018-19, private investment as a percentage of GDP dropped to 9.8 per cent from 10.3pc a year before while public investment also edged lower to 4pc from 4.8pc. This amounts to one third of average investment rates in India and Bangladesh.

The government appears to lack both capacity and capability to fund investment. The foreign investor does not lead but follow the local business, which is currently reluctant to commit resources. The biggest economic challenge, therefore, is to stimulate investment by taking whatever steps possible to restore the fast waning confidence of the private sector in the ongoing stabilisation phase and creating fiscal space to ramp up public investment.

Despite flaws and limitations, the private sector of Pakistan has grown over the past few decades to dominate the new total investment in both real and service sectors.

Dr Hafiz Pasha, a former commerce minister, highlighted this aspect in his recent book Growth and Inequality in Pakistan: 'Private investment now accounts for over 70pc of total investment. As such, the overall level of investment is influenced more by the behaviour of the private investor. ...almost the entire investment in six sectors, viz. agriculture, housing, wholesale and retail trade, private services, manufacturing and construction is by the private sector. Over 80pc investment in the transport and communications sector is also by the private sector.'

Currently, however, unsustainable inventories amid falling consumer demand and a rising cost of input and credit are sapping the animal spirit of Pakistani entrepreneurs to spring into action for securing their share in the market.

There are three more obvious factors that suppressed private investment and combined to push businesses to the sidelines: a high interest rate of 13.25pc, a massive currency devaluation (since the PTI government took charge in October 2018) jacking up the cost of the import component in inputs and machinery, and the crowding out of businesses in advances because of banks' preference to opt for secure...