Investment in Special Economic Zones

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Muhammad Abbas Hassan

The current year has been catastrophic and it is evident that living under the fear of COVID-19 would be the new normal. This is something that no future scenario predicted and has destroyed every strategic strategy and short-term plan. The global lockdown has now practically entered into its third month and the global economy has taken a major hit. A number of companies have laid off staff, some big names have closed down, export driven industries have contracted, oil prices have taken a nose-dive and as many as five airlines have declared bankruptcy. The future outlook for now is questionable and it seems that living with the virus will be the new normal.

For Pakistan the scenario is no different and the pandemic has taken a heavy toll on the economy. On top of that with almost one quarter of the country’s population living under poverty, the situation is even worse. Understanding the sensitivity of the issue, the government has acted proactively to come up with support packages for not only the poor but also for the industrialists to keep the wheels of economy on track. On top of that the financial regulator of the country; State Bank has significantly slashed the interest rates in the country to make investment in multiple ventures attractive. China has also stepped up to help Pakistan in this time of need and has maintained a steady stream of medical supplies to the country. This shows the depth of relationship between the two countries. The work on China-Pakistan Economic Corridor (CPEC) projects has also started and both sides have expressed a resolve to catch on the time wasted due to the lockdown. While the cases in Pakistan are rising, the authorities have not deterred in keeping the project running.

One of the main relief packages that were announced was for the construction industry of Pakistan. The package is layered with multiple options and is designed to not only revive the industry but also bring in new investment from investors and enable them to earn some capital gains. If the package is seen through a broad lens it is in fact a blessing for the special economic zones built under the CPEC. One of the top points in this package states ‘Those who will invest in the industry this year will not be questioned about their source of income’. This term is a reflection of the vision the current government has for the future of this country.

In Pakistan, a lot of people have made money through legal means but at a time when the economy was not documented properly. This includes initial investment in real estate before the surge in prices after 9/11 and capital market before the recession of 2008. A number of families have big land holdings and make money from agriculture. As the taxation laws on agricultural income are not that strict in Pakistan, most of the money is reinvested in agriculture again. As a result, a number of people have the money but are not registered in the system. Now complying with the Financial Action Task Force (FATF), regulations have tightened the screws on investments and NAB has also become extremely vigilant about the source of the money. As a result the rich elites of Pakistan have stopped circulating their money into the system. This actually had a negative impact on the economy and the growth of industry came to a halt as new investors decided to back track. It also put a cap on the export limit of the country and Pakistan export basket also contracted.

Now with the government offering a no questions asked investment in industry, this is high time to attract investors to step forward and invest in the special economic zones. On 3rd January 2020, the ground breaking of first SEZ called Allama Iqbal Industrial City took place in Faisalabad. Faisalabad is an industrial city known for its contribution in the textile sector of Pakistan. Under the Special Economic Zones Act, the industries in the zones will enjoy a 10-year tax break and duty-free import of plants, machinery, raw material and other equipment. Another term in the package states, ‘The tax rate will be fixed for the construction sector, and constructors will be charged tax per square foot or square yard.’ This term can be exploited for the allied housing required for the Special Economic Zones. Now with no questions asked on the initial investment, the special economic zones offer a lucrative opportunity to the investors to not only invest but also create employment opportunities in the country.

Before the pandemic it was expected that the Special Economic Zone in Rashakai would be inaugurated by August and Dhabeji by September. The Bostan Industrial Zone being built in Baluchistan also needs special attention from the authorities. It would increase the involvement of Baluchistan into this magnum opus project. The government on a priority basis needs to expedite these ground breakings to the earliest so that the investors can gain confidence on the government policies. It will open new avenues for investors to invest and the local elite can also use this to mobilize their resources into investing in the Special Economic Zones. As a result, not only the locals would be integrated into CPEC but would also be helping the country to overcome the menace of unemployment. In the next step the government can extend the same terms to the other special economic zones that are planned under CPEC.

The special economic zones present an opportunity to Pakistan to expand its exports exponentially and the announcement of construction package is a reflection of the government resolve to make CPEC a success. Without the successful economic zones, the purpose of CPEC is not fulfilled. Instead of looking the COVID outbreak as a challenge, one need to follow the Chinese proverb of every challenge is an opportunity. If the government is able to attract investment under the relief scheme, it will make the projects a success and with that CPEC will be a success.