The COVID-19 pandemic and subsequent drop in global oil prices continue to reverberate in Iraq. The Iraqi government has been covering a large fiscal deficit by borrowing domestically and drawing on its foreign reserves. In December 2020, the GOI devalued Iraq’s dinar by 22% to forestall a liquidity crisis. This has raised domestic prices for food and other commodities in Iraq’s import-dependent economy.
Widespread protests in October 2019 caused the resignation of then PM Adil Abdul-Mahdi and his government. After a lengthy period of government formation, the current government of PM Mustafa al-Kadhimi came to power in May 2020. Sporadic violent protests continue, especially in the country’s south, and Kadhimi has called for early elections, currently scheduled for October.
In October 2020, Iraq’s cabinet approved an economic reform agenda known as the “white paper,” which identified over 200 reforms, legislative amendments, subsidy cuts, and e-government measures that are broadly in line with previous World Bank and IMF reform recommendations. The white paper acknowledges the scope of Iraq’s structural economic problems and aims to place Iraq on a private sector-driven economic growth path. While it is clear that Kadhimi and key advisors are intent on reform, it is less clear that these efforts will overcome other long-standing, entrenched political opposition whose stakeholders profit from GOI opacity and inefficiency.
An uneven security environment, including the threat of resurgent extremist groups, remains an impediment to investment in many parts of the country. Other lingering effects of the fight against ISIS include major disruptions of key domestic and international trade routes and the destruction of economic infrastructure. Many militia groups that participated in the fight against ISIS remain deployed and are only under nominal government control. Several militias have been implicated in a range of criminal and extralegal activities in commercial sectors, including extortion. However, the security situation varies throughout the country and is generally less problematic in the Iraqi Kurdistan Region (IKR).
Investors in Iraq continue to face extreme challenges resolving issues with GOI entities, including procurement disputes, receiving timely payments, and winning public tenders. Difficulties with corruption, registration, customs regulations, irregular and high tax liabilities, unclear visa and residency permit procedures, arbitrary application of regulations, lack of alternative dispute resolution mechanisms, electricity shortages, and lack of access to financing remain common complaints from companies operating in Iraq. Shifting and unevenly enforced regulations create additional burdens for investors.
Despite these challenges, the Iraqi market offers some potential for U.S. exporters. Iraq regularly imports agricultural commodities, machinery, consumer goods, and defense articles. While non-oil bilateral trade with the United States was $771.9 million in 2020, Iraq’s economy had an estimated GDP of $200 billion. Government contracts and tenders are the source of most commercial opportunities in Iraq in all sectors, including the significant oil and gas sectors, and have been financed almost entirely by oil revenues. Increasingly, the GOI has asked investors and sellers to provide financing options and allow for deferred payments.
Investors in the IKR face many of the same challenges as investors elsewhere in Iraq, but the IKR has a traditionally more stable security situation. However, the region’s economy has struggled to recover from the 2014 ISIS offensive, the drop in oil prices, the aftermath of the 2017 Kurdish independence referendum, and ongoing disputes with the central government over revenue sharing.
The U.S. government and the GOI have revived the 2008 U.S.-Iraq Strategic Framework Agreement and the Trade and Investment Framework Agreement (TIFA) and held the second TIFA meeting in June 2019 and Strategic Dialogue in 2020 with good success. The American Chamber of Commerce in Iraq provides a platform for commercial advocacy for the U.S. business community. Local businesses also are re-energizing an American Chamber of Commerce presence in the IKR.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment (FDI)
The GOI has publicly and repeatedly stated its desire to attract foreign investment as part of national plans to strengthen local industries and promote the “Made in Iraq” brand. The GOI has yet to follow through on commitments made at the Kuwait International Conference for the Reconstruction of Iraq in February 2018 to reform processes and regulations that hinder investment. Iraq has claimed that countries have not followed through on their financial pledges either.
Iraq operates under its National Investment Law (Investment Law), amended in December 2015. The Investment Law outlines improved investment terms for foreign investors, the purchase of land in Iraq for certain projects, and an investment license process. The purchase of land for commercial or residential development remains extremely difficult. Since 2015, Iraq has been a party to the International Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID).
Foreign investors continue to encounter bureaucratic challenges, corruption, and a weak banking sector, which make it difficult to successfully conclude investment deals. State-owned banks in Iraq serve predominantly to settle the payroll of the country’s public sector. Privately-owned banks, until recently, served almost entirely as currency exchange businesses, with the exception of a handful of mostly regionally owned commercial banks. Some privately-owned banks have commercial lending programs, but Iraq’s lack of a credit monitoring system, insufficient legal guarantees for lenders, and limited connections to international banks hinder commercial lending. The financial sector in the IKR is still recovering from years of financial instability, and the Central Bank of Iraq (CBI) levied sanctions against the IKR’s financial institutions immediately following the Kurdistan independence referendum in September 2017.
Recently, the GOI has been exploring multi-year financing options to pay for large-scale development projects rather than relying on its previous practice of funding investments entirely from current annual budget outlays.
According to Iraqi law, a foreign investor is entitled to make investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, and the amount of foreign participation is not limited. However, Iraq’s Investment Law limits foreign direct and indirect ownership of most natural resources, particularly the extraction and processing of natural resources. It does allow foreign ownership of land to be used for residential projects and co-ownership of land to be used for industrial projects when an Iraqi partner is participating.
Despite this legal equity between foreign and domestic investment, the GOI reserves the right to screen FDI. The screening process is vague, although it does not appear to have been used to block foreign investment. Still, bureaucratic barriers to FDI, such as a requirement to place a significant portion of the capital investment in an Iraqi bank prior to receiving a license, remain significant.
The IKR operates under a 2006 investment law and its supporting regulations. Under the law, foreign investors are entitled to incentives, including full property ownership, and capital repatriation and tax holidays for 10 years. The KRG is generally open to public-private partnerships and long-term financing, as demonstrated by the KRG’s oil and gas sector contracts that increase production. In 2020, the KRG Ministry of Planning (MOP) published a framework for creating public-private partnerships in the region but has not drafted legislation to codify it. Legislation to amend the investment law to broaden its reach to potential investors remains pending in the Iraqi Kurdistan Parliament (IKP).
The GOI established the National Investment Commission (NIC) in 2007, along with its provincial counterparts Provincial Investment Commissions (PICs), as provided under Investment Law 13 (2006). This cabinet-level organization provides policy recommendations to the Prime Minister and support to current and potential investors in Iraq. The NIC’s “One Stop Shop” is intended to guide investors through the investment process, though investors have reported challenges using NIC services.
Limits on Foreign Control and Right to Private Ownership and Establishment
Iraqi law stipulates that 50% of a project’s workers must be Iraqi nationals in order to obtain an investment license (National Investment Regulation No. 2, 2009). Investors must prioritize Iraqi citizens before hiring non-Iraqi workers. The GOI pressures foreign companies to hire more local employees and has encouraged foreign companies to partner with local industries and purchase Iraqi-made products. The KRG permits full foreign ownership under its 2006 investment law.
The GOI generally favors State Owned Enterprises (SOE) and state-controlled banks in competitions for government tenders and investment. This preference discriminates against both local and foreign investors.
Other Investment Policy Reviews
In the past three years, the GOI did not conduct any investment policy reviews through the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the UN Conference on Trade and Development (UNCTAD).
Foreign investors interested in establishing an office in Iraq or bidding on a public tender are required to register as a foreign business with the Ministry of Trade’s (MOT) Companies Registration Department. The procedure costs and time to obtain a business license can be found at https://baghdad.eregulations.org/procedure/108?l=en. Many international companies use a local agent to assist in this process due to its complexity. The GOI is working with UNCTAD to streamline the business registration process and make it available online, as per procedures of obtain investment licenses from NIC according to the amount of capital can be found at:
The KRG offers business registration for companies seeking business only in the IKR; however, companies that seek business in both the IKR and greater Iraq must register with both the GOI MOT and the KRG MOT.
Iraqi laws give the NIC and PICs authority to provide information, sign contracts, and facilitate registration for new foreign and domestic investors. The NIC offers investor facilitation services on transactions including work permit applications, visa approval letters, customs procedures, and business registration. Investors can request these services through the NIC website: http://investpromo.gov.iq/. The NIC does not exclude businesses from taking advantage of its services based on the number of employees or the size of the investment project. The NIC can also connect investors with the appropriate provincial investment council.
These official investment commissions do struggle to operate amid unclear lines of authority, budget constraints, and the absence of regulations and standard operating procedures. Importantly, the investment commissions lack the authority to resolve investors’ bureaucratic obstacles with other Iraqi ministries.
The Kurdistan Board of Investment (KBOI) manages an investment licensing process in the IKR that can take from three to six months and may involve more than one KRG ministry or entity, depending on the sector of investment. Due to oversaturated commercial and residential real estate markets, the KBOI has moved away from approving licenses in these sectors but may still grant them on a case-by-case basis. The KBOI has prioritized industrial and agricultural projects. Businesses reported some difficulties establishing local connections, obtaining qualified staff, and meeting import regulations. Some businesses have reported that the KRG has not provided all of the promised support infrastructure such as water, electricity, or wastewater services, as required under the investment law framework. Additional information is available at the KBOI’s website: http://www.kurdistaninvestment.org/.
Iraq does not restrict domestic investors from investing abroad.
2. Bilateral Investment Agreements and Taxation Treaties
Iraq does not have a bilateral investment treaty (BIT) or a bilateral taxation treaty with the United States. The United States and Iraq signed an Agreement for Economic and Technical Cooperation on July 11, 2005, and it entered into force December 18, 2013.
The U.S.-Iraq Strategic Framework Agreement (SFA) provides for bilateral mechanisms to address trade and investment issues. A second TIFA meeting was held under the auspices of the SFA in 2019, with special emphasis on visa facilitation, customs, and taxes. Both governments held a Strategic Dialogue in August 2020 to discuss progress in these areas. The U.S. International Development Finance Corporation signed a $1 billion MOU with the Ministry of Finance (MOF) to enable private sector investment in Iraq. In March 2021, the Council of Representatives (COR) voted to ratify the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention); at the time of this report, the GOI still needs to formalize its ratification with the UN. Also, in March 2021, Iraq’s Ministry of Interior (MOI) issued a new directive that would allow visitors from more than 30 countries, including the United States, to obtain visas on arrival at Iraq’s ports of entry, rather than having to do so prior to traveling there.
Iraq is a signatory to investor protection agreements or MOUs with 35 bilateral partners and nine multilateral groups. The agreements include arrangements within the Arab League, as well as arrangements with Afghanistan, Armenia, Bangladesh, France, Germany, India, Iran, Japan, Jordan, Kuwait, Mauritania, the Republic of Korea, Sri Lanka, Syria, Tunisia, Turkey, the United Kingdom, Vietnam, and Yemen.
Iraq currently has BITs with Armenia, France, Germany, Japan, Jordan, and Kuwait. Only the BITs with Japan and Kuwait are in force. Iraq’s investment agreements include general provisions on promoting and protecting investments, including clauses on profit repatriation, access to arbitration and dispute settlements, fair expropriation rules, and compensation for losses. The GOI’s ability and willingness to enforce such provisions is unclear.
U.S. companies have raised significant concerns about the use by the MOF’s General Commission for Taxes (GCT), of the “deemed tax” method to calculate corporate taxes, which applies a standard deduction to every company, regardless of the firm’s actual profit. U.S. investors also complain about the application of the social tax, equivalent to 5% of employees’ pay and a 12% employer contribution, to third country national employees who cannot receive benefits from the Iraqi health and pension systems.
3. Legal Regime
Transparency of the Regulatory System
Iraq’s overall regulatory environment remains opaque, and the Investment Law does not establish a full legal framework governing investment. Corruption, unclear regulations, and bureaucratic bottlenecks are major challenges for companies that bid on public procurement contracts or seek to invest in major infrastructure projects. The KRG procurement reform measures, beginning in 2016, sought to address these problems, but with little result. Iraq’s commercial and civil laws generally fall short of international norms.
The GOI’s rulemaking process can be opaque and lends itself to arbitrary application. To illustrate, while ministries must publish regulations imposing duties on citizens or private businesses in the official government gazette, internal ministerial regulations have no corresponding requirement. This loophole allows officials to create internal requirements or procedures with little or no oversight, which can result in additional burdens for investors and businesses. Furthermore, the lack of regulatory coordination between GOI ministries and national and provincial authorities can result in conflicting regulations, which makes it difficult to accurately interpret the regulatory environment. In addition, accounting and legal procedures are opaque, inconsistent, and generally do not meet international standards.
Draft bills, including investment laws, are not available for public comment. The promulgation of new regulations with little advance notice and requirements related to investment guarantees have also slowed projects.
The GOI encourages private sector associations but these associations are generally not influential, given the dominant role of SOEs in Iraq’s economy. In the IKR, private sector associations have some influence and many, such as the contractors’ union, are very active in advocacy with the KRG.
Iraq has limited transparency of its public finances or government held debt. Publicly available budgets did not include expenditures by ministry or revenues by source and type. The budget provided limited details regarding allocations to, and earnings from, SOEs. Financial statements for most SOEs were generally not publicly available. Limited information on debt obligations was available on the Central Bank and MOF websites.
International Regulatory Considerations
Iraq is not a member of the WTO and is not a signatory to the Trade Facilitation Agreement.
Legal System and Judicial Independence
Iraq has a civil law system, although Iraqi commercial jurisprudence is relatively underdeveloped. Over decades of war and sanctions, Iraqi courts did not keep up with developments in international commercial transactions. Corruption and bureaucratic bottlenecks remain significant problems. As trade with foreign parties increases, Iraqi courts have seen a significant rise in complex commercial cases. Although contracts should be enforceable under Iraqi law, such enforcement remains a challenge due to unclear regulations, lack of decision-making authority, and rampant corruption.
Laws and Regulations on Foreign Direct Investment (FDI)
Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983). Iraq formally joined the ICSID Convention on December 17, 2015, and on February 18, 2017, Iraq joined the Investor-State Dispute Settlement (ISDS) process agreement between investors and states.
The COR passed a Competition Law and a Consumer Protection Law in 2010. However, the Iraqi government has yet to form the Competition and Consumer Protection Commissions authorized by these laws. The COR has also amended Iraqi law several times to promote fair competition and “competitive capacities” in the local market (2010, 2015).
The COR has also issued many recommendations regarding the amendments of investment licenses and to improve the investment and businesses environment in Iraq. The August 2019 Resolution 245 announced investment opportunities through the NIC.
The prominent role of SOEs and corruption undermine the competitive landscape in Iraq.
Expropriation and Compensation
The Iraqi Constitution prohibits expropriation, unless done for the purpose of public benefit and in return for just compensation. The Constitution stipulates that expropriation may be regulated by law, but the COR has not drafted specific legislation regarding expropriation. Article 9 of the Investment Law guarantees non-seizure or nationalization of any investment project that the provisions of this law cover, except in cases with a final judicial judgment. The law prohibits expropriation of an investment project, except in cases of public benefit and with fair compensation. Iraq’s Commercial Court is charged with resolving expropriation cases. In recent years, there have not been any government actions or shifts in government policy that would indicate possible expropriations in the foreseeable future.
In the IKR, the KBOI can impose fines and potentially confiscate land if it determines that investors are using land awarded under investment licenses for purposes other than those outlined in the license or if the projected was not started during the specified time limits. The IKR investment law (Article 17) outlines an investor’s arbitration rights, which fall under the civil court system, as the IKR lacks a commercial court system. Arbitration clauses should be written into local contracts in order to facilitate enforcement in the event of a dispute.
ICSID Convention and New York Convention
In March 2021 the COR voted to ratify the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention); the GOI still needs to formalize its ratification with the UN for it to go into effect. Until then, the enforcement of arbitral awards must comply with the special requirements set forth in current Iraqi civil procedure law and other related laws.
Investor-State Dispute Settlement
In November 2010, Iraq’s Higher Judicial Council established the First Commercial Court of Iraq — a court of specialized jurisdiction for disputes involving foreign investors — as part of a national strategy to improve Iraq’s investment climate.
In the IKR, commercial disputes are handled through the civil court system. Additional
International Commercial Arbitration and Foreign Courts
Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983). Iraq formally joined the ICSID on December 17, 2015, and on February 18, 2017, Iraq joined the ISDS process agreement between investors and states.
Under Iraqi law, an Iraqi debtor may file for bankruptcy, and an Iraqi creditor may file for liquidation of the debtor. Bankruptcy is not criminalized. The Iraqi Companies Law regulates the process for the liquidation of legal entities. Nevertheless, the mechanism for resolving insolvency remains opaque. Iraq ranks 168 out of 190 countries in the category of Resolving Insolvency, according to the World Bank’s 2020 Doing Business Report.
4. Industrial Policies
The Iraqi Investment Law offers foreign investors several exemptions for qualified investments, including a 10-year exemption from taxes, exemptions from import duties for the necessary equipment and materials throughout the period of project implementation, and exemption from taxes and fees for primary materials imported for commercial operations. The exemption increases to 15 years if Iraqi investors own more than 50% of the project. The law allows investors to repatriate capital brought into Iraq, along with proceeds. Foreign investors are able to trade in shares and securities listed on the Iraqi Stock Exchange. Hotels, tourist institutions, hospitals, health institutions, schools, and colleges enjoy additional exemptions from duties and taxes for the import of furniture, tools, equipment, machinery, and means of transportation, but foreign companies that sell goods or services to any entity in Iraq may be subject to Iraqi taxes.
Foreign and domestic companies may have tax-exempt profits if their project is with the GOI and the project is listed in the National Investment Plan, which the MOP prepares annually. The GOI ministries overseeing investment projects provide updates for the list of investment contracts to the MOF, including its tax commission, the GCT. Foreign and domestic companies that have registered businesses in order to execute contracts outside the National Investment Plan do not receive tax exemptions. Companies have reported difficulties obtaining favorable tax treatment after deals are struck. However, in some cases, GOI entities have negotiated partial or short-term tax exemptions for companies as part of a project contract.
Income tax language is included in GOI petroleum contracts with the MOO and applies to each consortium and its partners. The Council of Ministers (COM) ratified the contract language, which supersedes the Tax Code. Secondary contracts that a consortium issues are treated differently. The consortium is required to withhold 7 percent from secondary contracts for remittance to the GOI. Companies pay a profit tax of 15 percent unless they operate in the oil sector, which has a 35 percent tax profit rate. The definition of “petroleum activities” is subject to interpretation. Any business or individual considering doing business in Iraq should obtain competent advice from a private accountant and attorney.
Under the IKR’s investment law, foreign and national investors are treated equally and are eligible for the same benefits. Foreign investors may choose to invest in the IKR with or without local partners, and full repatriation of profits is allowed. While investors have the right to employ foreign employees in their projects, priority is given to awarding projects that employ a high share of local staff and involve significant knowledge transfer. Additionally, the law allows an investor to transfer his investment totally or partially to another foreign investor with the approval of the KBOI.
Foreign Trade Zones/Free Ports/Trade Facilitation
Free Trade Zones (FZs) are permitted under Iraqi law per the Free Zone Authority Law No. 3/1998, for industrial, commercial, and service projects. The Free Zone Commission in the MOF administers the law but lacks a specific mandate to develop the FZs. Under the law, capital, profits, and investment income from projects in an FZ are exempt from all taxes and fees throughout the life of the project. Goods entering into Iraq’s market from FZs are subject to normal import tariffs; no duty is levied on exports from FZs.
Activities permitted in FZs include industrial activities such as assembly, installation, sorting, and refilling processes; storage, re-export, and trading operations; service and storage projects and transport of all kinds; banking, insurance, and reinsurance activities; and supplementary and auxiliary professional and service activities. Prohibited activities include weapons manufacture and environmentally polluting industries.
Iraq currently has four FZs with tax exemptions and other incentives for the transportation, industrial, and logistics sectors. The largest is the Basrah/Khor al-Zubair FZ, comprising 18 square km and located southwest of Basrah at the Khor al-Zubair seaport. Operational since June 2004, it hosts a number of local and foreign companies. The Ninewa/Falafel Free Zone is located in the north. Plans to develop the FZ in Fallujah are ongoing. The Falafel and Fallujah zones are located in formerly ISIS-held areas, and the possibility of continued political instability makes further development in the near future unlikely. There is also an FZ in Baghdad. In May 2019, Iraq and Kuwait announced a new joint FZ project in Safwan port, pending approvals.
In the IKR, there are currently no FZs. The KRG has approved plans for zones in all IKR provinces.
Performance and Data Localization Requirements
Iraqi labor law describes two categories of workers: local Iraqis and foreign workers whom the GOI and other Iraqi entities employ. The Investment Law stipulates that foreign workers may be hired for investment projects, after priority has been given to Iraqi workers. At least 50 percent of an investment project’s workers must be Iraqi nationals. International companies have noted that Iraq lacks skilled labor, and it can be a challenge to meet this requirement. Foreign investors are expected to help train Iraqi employees to increase their efficiency, skills, and capabilities.
In the IKR, hiring locally is encouraged, but not mandated. Before applying for the residency permit required for legal employment, foreign workers must obtain a security clearance from the KRG MOI, a medical clearance which includes an HIV test, and a work permit from the KRG Ministry of Labor and Social Affairs (MOLSA). Some foreign companies have reported prolonged delays in obtaining necessary residency permits for foreign workers. In 2020, the KRG significantly increased its fees for foreign residency permits. The appointment of foreign nationals as managers of foreign-owned limited liability companies requires additional clearances.
In March 2021, Iraq’s MOI issued a new directive that would allow visitors from more than thirty countries, including the United States, to obtain visas on arrival at Iraq’s ports of entry, rather than having to do so prior to traveling to Iraq. In announcing the policy, the GOI said the move aimed to “encourage investment and support jobs.” At the time of this report the GOI had yet to publicize the details of the policy on any official website. Preliminary information indicates the visa-on-arrival will cost $75 and permit a single entry for a maximum two-month stay.
At the time of this report, Iraq’s entry policy requires all airline passengers to provide a negative COVID-19 PCR and/or serology result less than 72 hours prior to departure for Iraq. Some reports indicate that even if passengers provide a negative PCR or serology test result at the port of entry, some have had to pay for and submit to new tests in Iraq.
U.S. citizens traveling to the IKR can obtain a visa upon arrival at the airport, valid for 30 days. This visa is not valid for travel in Iraq outside the IKR, as the GOI does not honor KRG-issued visas. U.S. citizens who plan to stay for longer than 30 days must extend their IKR visa or obtain a residency permit. The KRG does not require HIV tests if the travel is shorter than 15 days. Additional information can be found on the U.S. Department of State’s website: www.travel.state.gov.
The GOI does not follow any forced localization policy in which foreign investors must use domestic content in their goods and technology. There are no requirements for IT providers to turn over source code and/or provide access to surveillance.
The GOI strongly resists offering ownership or profit sharing with any potential foreign investor. The GOI prefers to structure foreign investments as contracts by which it agrees to pay for services or equipment at a price that a clause in the annual budget law guarantees, as opposed to a price based on profits or returns. The KRG, in contrast, has employed “build-own-operate” project structures and production sharing contracts in its management of the energy, oil, and gas sectors.
5. Protection of Property Rights
Since 2009, Iraqi law has allowed foreigners to own land and the amended Investment Law expressly provides foreigners the right to own land for the purpose of developing residential real estate projects. It also allows foreign investors to own land for industrial projects if they have an Iraqi partner. Additionally, foreign investors are permitted to rent or lease land for up to 50 years, with an option to renew. The GOI approved implementing regulations in 2010 that allow investors to obtain land for residential housing projects free of charge on the condition that land value is excluded from the sales price. The land registration can be revoked if the domestic or foreign investor does not carry out the obligations of their agreement.
For non-residential, commercial investment projects — including agriculture, services, tourism, commercial, and industrial projects — investors can lease government land. The terms and duration of these leases vary by project type and the result of negotiations between the parties. Land for non-residential projects will be leased free of initial down payment, and compensation will be either a percentage of pre-tax revenue or a specified percentage of the “rent allowance” for the land. These smaller percentages of the “rent allowance” rate, ranging from 1 percent to 25 percent, amount to significant rent reductions for leased land.
In the IKR, foreign land ownership is allowed under Law Number 4 (2006). The KBOI initially awarded more than half of all investment licenses to housing projects, but that percentage has declined in favor of priority sector development areas of agriculture, industry, and tourism. Delays in the transfer of land title have sometimes slowed projects.
Mortgages and liens exist in Iraq, and there is a national record system. However, mortgages are not common. Iraq ranks 121 out of 190 countries in the World Bank’s “registering property” index of its 2020 Doing Business report.
Intellectual Property Rights
Legal structures that protect intellectual property (IP) rights in Iraq are inadequate and infringements are common. Counterfeit products are widespread in the Iraqi marketplace, including pharmaceutical drugs. According to a 2018 study (latest data available) by the Business Software Alliance on self-reported piracy, 85 percent of Iraq’s software was unlicensed in 2017, consistent with the levels found in each survey since 2009. During the past year, the COR has not enacted any new IP-related laws or regulations. The GOI attempts to track seizures of counterfeit medicines. Reporting is inconsistent. The IKR has no independent IP protections, and outsources all IP complaints to the GOI.
The GOI’s ability to enforce IP protections remains weak and spread across several ministries. The Ministry of Culture handles copyrights, and the Ministry of Industry and Minerals (MIM) houses the trademarks office. The Central Organization for Standardization and Quality Control, an agency under the MOP, handles the patent registry and the industrial design registry. The MOP’s patent registry office has occasionally included Arab League Israel Boycott questionnaires in the patent registry application, which U.S. companies are not allowed to complete under U.S. law. IP infringement cases are primarily heard in commercial courts, although infrequently transferred to the criminal courts.
A draft IP law, which would comply with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and consolidate all IP responsibilities into a single body, has been redrafted several times but has not progressed in the COR.
In 2018, the COM Secretariat reviewed IP forms and processes for simplification. As a result, the patent application is now based on World Intellectual Property Organization (WIPO) standards. However, the application processes for all classes of IP protection favor domestic applicants through requirements for local Iraqi-national agents and optional, but advantageous, in-person review committee meetings.
Iraq is a signatory to several international intellectual property conventions and to regional and bilateral arrangements, which include: 1) the Paris Convention for the Protection of Industrial Property (1967 Act), ratified by Law No. 212 of 1975; 2) the WIPO Convention, ratified by Law No. 212 of 1975 (Iraq became a member of the WIPO in January 1976); 3) the Arab Agreement for the Protection of Copyrights, ratified by Law No. 41 of 1985; and 4) the Arab Intellectual Property Rights Treaty (Law No. 41 of 1985). GOI recently approved joining the Patent Cooperation Treaty (PCT) in March 2021.
Iraq is not listed in USTR’s Special 301 Report, but it was noted in the 2020 notorious market report for online piracy available at:
For additional information about treaty obligations 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
Iraq remains one of the most under-banked countries in the Middle East. The Iraqi banking system includes around 68 private banks and seven state-owned banks. As of early 2021, 20 foreign banks have licensed branches in Iraq and several others have strategic investments in Iraqi banks. The three largest banks in Iraq are Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq (TBI), which account for roughly 85 percent of Iraq’s banking sector assets. Iraq’s economy remains primarily cash based, with many banks acting as little more than ATMs. Rafidain and Rasheed offer standard banking products but primarily provide pension and government salary payments to individual Iraqis.
Credit is difficult to obtain and expensive. Iraq ranks 186 out of 190 in terms of ease of getting credit in the World Bank’s 2020 Doing Business Report. Although the volume of lending by privately-owned banks is growing, most privately-owned banks do more wire transfers and other fee-based exchange services than lending. Businesses are largely self-financed or between individuals in private transactions. State-owned banks mainly make financial transfers from the government to provincial authorities or individuals, rather than business loans.
The CBI introduced a small and medium enterprise lending program in 2015, in which 35 private banks have reportedly participated. In early 2020, the CBI launched a real estate lending initiative and an Islamic finance consolidation program.
The main purpose of TBI is to provide financial and related services to facilitate trade, particularly through letters of credit. Although CBI granted private banks permission to issue letters of credit below $50 million, TBI continues to process nearly all government letters of credit.
Money and Banking System
Although banking sector reform was a priority of Iraq’s IMF Stand-By Arrangement, the GOI has had only incremental success reforming its two largest state-owned banks, Rafidain and Rasheed. Private banks are mostly active in currency exchanges and wire transfers. CBI is headquartered in Baghdad, with branches in Basrah and Erbil. CBI’s Erbil branch, and the IKR’s state-owned banking system, are now electronically linked to the CBI system. The CBI now has full supervisory authority over the financial sector in the IKR, including the banks and non-bank financial institutions.
Foreign Exchange and Remittances
The currency of Iraq is the dinar (IQD). Iraqi authorities confirm that in practice, there are no restrictions on current and capital transactions involving currency exchange as long as valid documentation supports underlying transactions. The Investment Law allows investors to repatriate capital brought into Iraq, along with proceeds. Funds can be associated with any form of investment and freely converted into any world currency. The Investment Law also allows investors to maintain accounts at banks licensed to operate in Iraq and transfer capital inside or outside of the country.
The GOI’s monetary policy since 2003 has focused on ensuring price stability primarily by maintaining a de facto peg between the IQD and the U.S. dollar, while seeking exchange rate predictability by supplying U.S. dollars to the Iraqi market. In December 2020, the GOI announced that it would officially devalue the dinar’s peg to the U.S. dollar by 22 percent. Banks may engage in spot transactions in any currency; however, they are not allowed to engage in forward transactions in Iraqi dinars for speculative purposes through auction but can do so through wire transfer. There are no taxes or subsidies on purchases or sales of foreign exchange.
There are no recent changes to Iraq’s remittance policies. Foreign nationals are allowed to remit their earnings, including U.S. dollars, in compliance with Iraqi law. Iraq does not engage in currency manipulation.
Sovereign Wealth Funds
Iraq does not have a sovereign wealth fund.
7. State-Owned Enterprises
SOEs are active across all sectors in Iraq. GOI ministries currently own and operate over 192 SOEs, a legacy of the state planning system. The GOI’s continued support of unprofitable entities places a substantial fiscal burden on Iraq, as many SOEs are unproductive. These firms employ over half a million Iraqis, many of whom are underemployed. The degree to which SOEs compete with private companies varies by sector; SOEs face the most competition in the market for consumer goods. The GOI had expressed a commitment to reforming the SOEs and taking steps toward privatization as part of its previous international financing programs.
Iraqi law permits SOEs to partner with foreign companies. When parent ministries wish to initiate a partnership for an SOE under their purview, they generally advertise the tender on their ministry’s website. Partnerships are negotiated on a case-by-case basis and require the respective minister’s approval. The MIM, which oversees the largest number of Iraq’s SOEs, established the following requirements for partnerships: minimum duration to three years, the foreign company must register a company office in Iraq, and the foreign company must participate in the production of goods. Foreign companies have faced challenges in partnerships because the GOI has, at times, cut subsidies to SOEs after partnerships were formed and due to conflicts between the parent ministry and the GOI’s official policy. In addition, the MIM has often required that the foreign investor pay all SOE employees’ salaries regardless of whether they are working on the agreed project.
GOI entities are required to give preferential treatment to SOEs, under multiple laws. A 2009 COM decision requires all Iraqi government agencies to procure goods from SOEs unless SOEs cannot fulfill the quality and quantity requirements of the tender. A Board of Supreme Audit decision requires government agencies to award SOEs tenders if their bids are no more than 10% higher than other bids. Furthermore, some GOI entities, including the MIM, have also issued their own internal regulations requiring tenders to select Iraqi SOEs, unless Iraqi SOEs state that they cannot fulfill the order. Sometimes a foreign firm must form a partnership with an Iraqi firm to fulfill SOE-promulgated tenders. Further, SOEs are exempt from the bid bond and performance bond requirements that private businesses are subject to.
Iraq is not a party to the Government Procurement Agreement within the framework of the WTO.
Iraqi law supports a degree of autonomy in the selection process of an SOE’s board of directors. For example, it requires that a minister’s sole appointment to a board of directors receive the approval of an “opinion board.” Nevertheless, in practice, the majority of board members have close personal and political connections to their parent ministry’s leadership.
SOEs do not adhere to OECD guidelines. Iraq does not have a centralized ownership entity that exercises ownership rights for each of the SOEs. SOEs are required to seek their parent ministry’s approval for certain categories of financial decisions and operation expansions. However, in practice, SOEs defer to the parent ministry for the vast majority of decisions. SOEs submit financial reports to their parent ministry’s audit departments and the Board of Supreme Audit. These reports are not published and sometimes exclude salary expenses.
The GOI has repeatedly announced that it plans to reorganize failing SOEs across multiple sectors. Additionally, the GOI is eager to modernize Iraq’s financial and banking institutions. There are, however, no concrete timelines for these initiatives, and entrenched patronage networks tying SOEs to ministries remain a stumbling block.
8. Responsible Business Conduct
The international oil companies active in Iraq are required to observe international best practices in corporate social responsibility (CSR) as part of their contracts with the GOI. Nevertheless, the GOI does not have policies in place to promote Responsible Business Conduct (RBC) and raise awareness of environmental and social issues among investors. The concept of RBC is not widely recognized in Iraq and few NGOs and business associations are monitoring it. Iraq has not subscribed to the OECD’s guidelines for multinational enterprises.
In the IKR, oil companies are mandated in their production sharing contracts with the KRG to give back to the communities in which they work through corporate responsibility agreements. These agreements require yearly payments from which the KRG prioritizes and allocates funds for projects such as improved roads, university training for local youth in the geotechnical and energy fields, and health clinics.
Investors are required to protect the environment and adhere to quality control systems. These include soil testing requirements on the land designated for the project as well as conducting an environmental impact study. In practice, the GOI lacks a mechanism to enforce environmental protection laws and implementation is limited.
Iraq became a member of the Extractive Industries Transparency Initiative (EITI) in 2009. The GOI established a 15-person committee to work on EITI, including several directors general within the Ministry of Oil (MOO), four representatives from NGOs, and oil company executives. The committee provided required reports through 2013. In November 2017, the EITI Board concluded Iraq had made inadequate progress and temporarily suspended Iraq’s membership.
Iraq ranked 160 out of 180 on Transparency International’s 2020 Corruption Perception Index. Public corruption is a major obstacle to economic development and political stability. Corruption is pervasive in government procurement, in the awarding of licenses or concessions, dispute settlement, and customs.
While large-scale investment opportunities exist in Iraq, corruption remains a significant impediment to conducting business, and foreign investors can expect to contend with corruption in many forms, at all levels. While the GOI has moved toward greater effectiveness in reducing opportunities for procurement corruption in sectors such as electricity, oil, and gas, credible reports of corruption in government procurement are widespread, with examples ranging from bribery and kickbacks to awards involving companies connected to political leaders. Investors may come under pressure to take on well-connected local partners to avoid systemic bureaucratic hurdles to doing business. Similarly, there are credible reports of corruption involving large-scale problems with government payrolls, ranging from “ghost” employees and salary skimming to nepotism and patronage in personnel decisions.
Moving goods into and out of the country continues to be difficult, and bribery of or extortion by port officials is commonplace; Iraq ranks 181 out of 190 countries in the category of “Trading Across Borders” in the World Bank’s 2020 Doing Business report.
U.S. firms frequently identify corruption as a significant obstacle to FDI, particularly in government contracts and procurement, as well as performance requirements and performance bonds. U.S. companies operating in the energy and other sectors continue to be obligated to follow U.S. laws such as the Foreign Corrupt Practices Act (FCPA).
Several institutions have specific mandates to address corruption in Iraq. The Commission of Integrity (COI), initially established under the Coalition Provisional Authority (CPA), is an independent government agency responsible for pursuing anti-corruption investigations, upholding the enforcement of laws, and preventing crime. The COI investigates government corruption allegations and refers completed cases to the Iraqi judiciary. In 2004, the COR abrogated CPA Order 57, which had established Inspectors General (IGs) for each of Iraq’s ministries. Similar to the role of IGs in the U.S. government, these offices had been responsible for inspections, audits, and investigations within their ministries, although detractors claimed they in fact added another layer of bureaucracy and corruption. In 2019, the GOI dismantled the IG offices in all of the ministries after a parliamentary decision citing their lack of effectiveness. In August 2020, PM Kadhimi announced the formation of a new higher committee on anti-corruption staffed with new judges and a force from MOI that reportedly led to several senior officials’ arrests.
The Board of Supreme Audit, established in 1927, is an analogue to the U.S. government’s General Accountability Office. It is a financially and administratively independent body that derives its authority from Law 31 of 2011, the Law of the Board of Supreme Audit. It is charged with fiscal and regulatory oversight of all publicly funded bodies in Iraq and auditing all federal revenues, including any revenues received from the IKR.
None of these organizations have provided an effective check on public corruption. Neither the Commission of Integrity nor the IGs has effective jurisdiction within the IKR. The Kurdistan Board of Supreme Audit is responsible for auditing regional revenues with IKP and GOI oversight. The IKP established a regional Commission of Integrity in late 2013 and increased its jurisdiction the next year to include other branches of the KRG and money laundering. In 2021, the IKP ordered the establishment of a Kurdistan Anti-Corruption Court.
Iraq is a party but not a signatory to the UN Anticorruption Convention. Iraq is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
Resources to Report Corruption
According to Iraqi law, any person or legal entity has the right to submit corruption-related complaints to the Commission for Integrity and the inspector general of a GOI ministry or body.
Commission for Integrity
Department of Complaints and Reports
Landline: 07600000030 Hotline@nazaha.iq
10. Political and Security Environment
Iraqi forces continue to carry out counter-terrorism operations against ISIS cells throughout the country. Terrorist attacks within the IKR occur less frequently than in other parts of Iraq, although the KRG, U.S. government facilities, and Western interests remain possible targets. In addition, Iran-aligned militias may threaten U.S. citizens and companies throughout Iraq.
As of its latest Travel Advisory on January 25, the Department of State maintains a Level Four Travel Advisory for Iraq and advises travelers not to travel to Iraq due to COVID-19, terrorism, kidnapping, and armed conflict. U.S. government personnel in Iraq are required to live and work under strict security guidelines. Travelers should review the embassy’s official COVID-19 page, which is updated weekly, before traveling: https://iq.usembassy.gov/covid-19-information/.
State Department guidance to U.S. businesses in Iraq advises the use of protective security details. Detailed security information is available on the U.S. Embassy website: http://iraq.usembassy.gov/. Some U.S. and third country businesspeople travel throughout much of Iraq; however, in general their movement is restricted and most travel with security advisors and protective security teams.
11. Labor Policies and Practices
Iraq continues to face high unemployment, a large informal sector, lack of satisfactory work standards, and a large unskilled labor force. Domestic and foreign investors often cite the lack of skilled Iraqi labor as one of the major impediments to investing in Iraq, as political instability and violence led many highly educated Iraqis to leave the country in recent years. More than 1.7 million Iraqis remained displaced as of April, with most unable to find jobs or pursue livelihood activities to support their families.
Foreign investors tend to rely on foreign workers, although at least 50% of an investment project’s workers must be Iraqi nationals. International companies have noted that it can be a challenge to meet this requirement.
In the IKR, hiring locally is encouraged but not mandated. Foreign employees must obtain a security clearance and a work permit before applying for the residency permit required for legal employment. Some companies have reported prolonged delays in obtaining necessary residency permits for foreign workers.
The Iraqi constitution states that citizens have the right to form and join unions and professional associations. Iraq is a party to both International Labor Organization conventions related to youth employment, including child labor. Iraqi labor laws also regulate working conditions and prohibit all forms of forced or compulsory labor, including by children. However, the GOI has not effectively monitored or enforced the law, which has resulted in unacceptable working conditions for many workers.
Iraqi’s labor law, revised in 2016, is more consistent with current international standards than previous laws and allows for collective bargaining, further limits child labor, and provides improved protections against discrimination at work. The law addresses sexual harassment at work and provides protection against it and enshrines the right to strike, which had been banned since 1987. The GOI no longer limits workers’ affiliation with more than one union or federation, and coverage has been expanded to include all workers not covered by Iraq’s civil service law. The IKR did not implement the new labor law and continues to operate under the 1987 statute.
MOLSA sets a minimum monthly wage for unskilled workers. The private sector sets wages by contract, and the GOI sets wages for those working in the public sector. The COM last approved changes to the public sector pay scale in January 2015, reducing the pay gap between low- and high-ranking employees. In addition, all employers must provide some level of transport, accommodation, and food allowances for each employee, but the law does not fix these allowance amounts. In December 2013, the GOI launched a Social Safety Net program to assist the unemployed and persons with disabilities in gaining access to financial aid and benefits from the government; as of April 2018, MOLSA’s Directorate of People with Disabilities and Special Needs reported the program covers approximately 4 million individuals.
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance and Development Finance Programs
The U.S. International DFC provides debt and equity financing, political risk insurance, and technical development to mobilize private sector investment to advance development in emerging economies. DFC’s current investments in Iraq surpass $280 million across sectors such as energy and financial services.
During the 2020 U.S.-Iraq Strategic Dialogue, the DFC signed a $1 billion MOU with the MOF to enable private sector investment in Iraq.
Iraq is a signatory to the Riyadh Convention and took steps towards ratification of the New York Convention on Arbitration in March 2021, which is typically a requirement for DFC political risk insurance.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
The GOI collects and publishes limited statistics with which to compare international and U.S. investment data. The NIC and PICs granted 1067 licenses between 2008 and 2015 (latest statistics available) with a total potential value of $53.9 billion.
In the IKR, the KBOI granted licenses to 166 projects from the period of January 2019 to March 2021, with a total potential value of $5.11 billion. This represented a capital increase of $1.98 billion (163 percent) compared to 2018.
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)
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.