Chapter 2

Literature Review

2.1 Introduction

analyzing the literature review critically was highly essential for my research in order to find accurate
relationships and importance of each particular aspect of the study. In order to do this, I researched a
number of articles in order to enhance my knowledge and to fully understand my research topic. I went
through many papers, some of them broadly highlighted the investment climate and the cement sector
and then there were some important papers that narrowed down my research topic. A lot of data was
gathered to theoretically and statistically back my research topic. The overall investment climate is
highly important for the success of any sector. That is why the investment climate is emphasized in my
research and an effort has been made to show the cause and effect relationship between investment
climate and the cement sector. Thus I have tried to find papers that provide evidence for this
relationship.
A good investment climate means that the there is a favorable environment for growth. There are many
important factors that come into a good investment climate. Availability of basic things required for a
manufacturing sector to perform efficiently is necessary. A good investment climate is one in which
there is flow of funds both domestic and foreign. The lending rate is low which triggers growth as the
cost of borrowing is less and project success is high. The lending rate plays an important role in
forming a good investment climate which then facilitates higher production. Currently the general
investment climate of Pakistan is not the way we wish it to be. There is low investment in every sector.
Investors are not investing in Pakistan because of various reasons. Firstly the political unstability in
Pakistan is hampering the growth of manufacturing sector of pakistan. In stable government and
political feather firstly result in weak policies in every aspect from economic to social policies. Next it
results in the policies to be changed quiete often thus making investment decision difficult. Investors
hasitATE IN INVESTING AS THEIR are chances of policy change which can result in losses. Apart
from this Pakistan is facing one more major issue that is the terrorism which is making all the investor
not to invest in Pakistan and some other country. Secondly the governemt expenditure in development
is at its lowest. The government is not able to invest due to limited resources. Very few development
projects are being run these days. Expenditure on development project is falling and with it demand of
cement. Despite the enormous potential and attractive business opportunities exist in Pakistan, the

potential investors did not come out with money at the desired level due to various reasons especially
the unpredictable policies and attitude of the past governments in this country. As the trade rule says,
"investment in any business, any area and any country calls for careful judgment".
Recently, the size of the Foreign Direct Investment (FDI) has however inched up slightly as compared
to the previous couple of years as the expected size of the FDI at the end of the current financial year
was estimated at around $500 million. This amount of FDI however does not reflect the actual depth
the economy of this country has. In the year 1998-1999 the size of the FDI was estimated at $472
million, 1999-2000 $472 million, and 2000-2001 $322 million.
The overseas investors doing business in Pakistan view of business environment in Pakistan from
various angles. Their major concern seems to be frequent change in policies, lack of follow up for
effective implementation of the good decisions, unfriendly attitude of government officials, corruption,
international political situation and above all the law and order situation.
2.2Theoratical Framework

The business community, local and foreign investors, is however pinning hopes for stability in the
situation that seems in the offing due to repeated assurance held out by the present government for
continuation of the policies, level playing field for local and foreign investors and strong signals for
improvement at macro-economic level. Energy sector in Pakistan has been the focal point of the
investors since last many years and evens in the current scenario the major part of the foreign
investment is coming in this sector. Sources in business circles are attaching great importance to the
current scenario of economic activity including Chinese investment in the deep-sea Gwadar port, power
generating units at Lakhra and Thar coal fields, and political stability in neighbouring Afghanistan as
these two factors have every potential to create infinite economic activity not only for Pakistan but in
the entire region. The Asian Development Bank (ADB) while commenting on the state of economy has
observed that Pakistan's economy seems to have weathered the effects of the post-September
developments and global recession well, and agriculture sector has also adjusted to continuing
conditions of drought. Price stability observed during the current fiscal year is also likely to continue,
and the current fiscal year is expected to end with an annual inflation of about 3 per cent which is
substantially below from last year.
The downward trends in exports, particularly in terms of value, observed during the current fiscal of
2001-2002 are likely to continue in the final quarter as well. But the trend should be turning around

soon, as increased access to the European Union markets results in higher exports, and the impact of
growth in the economics of Pakistan's major trading partners feeds through. The imports may pick up
in the remaining part of the current year due to higher petroleum prices, some increase in investment
and higher consumer spending. As a result of increasing trend in international oil prices, the
improvement seem in the first nine months of the year is unlikely to continue in coming months.
The trade deficit is expected to be around $1.3 billion for the year as a whole. The improvement in the
current account balance in the first half of the current year was partly due to exceptional inflows like
grant assistance from the USA. Therefore the further improvement in the overall balance of payment is
not likely in the second half of the year but the year can end with a current account surplus of about
$800 million.
The fiscal balance, which has worsened in the first half of the current financial year is likely to further
deteriorate in the second of the year, as expenditure on mobilization of troops on the eastern border
with India since December 2001 is reflected in the budget.
Tax collection may improve due to increase in imports and revival of economic activity, but that will
only partially offset the impact of higher defense budget. The overall fiscal deficit to exceed 5.5 per
cent of the GDP.
The output in the manufacturing sector has not been significantly affected by global recession, and the
farming sector also adjusted to continuing conditions of drought, so, the overall economic growth for
the year is likely to be 3.5 per cent. The medium term prospects for Pakistan economy have improved
recently and the investor confidence has been restored by number of post-September developments.
Increased access to European Union markets and rescheduling of debt are likely to have the greatest
medium and long-term benefits for the economy. Besides modernization of textile industry under way
for the last couple of years has started showing results in the form of substantial increase in the
industry's output and in the export volumes despite global recession.
If the government continues to pursue sound macro-economic policies and to implement the planned
economic and governance reforms, it could fairly quickly achieve rapid and sustainable economic
growth and poverty reduction. The growth target of 5.2 per cent set for the fiscal year now looks
achievable, even a higher growth rate of 5.5 per cent seems possible.
On December 13, 2001, Pakistan signed the third debt restructuring agreement with the Paris Club,
interest rates to be applied to restructured loans, are to be negotiated between the government of

Pakistan and each creditor country. Interest rate on ODA loans will be a below market rate and not
higher than the interest of the original credit. Non-ODA loans will be rescheduled at a market interest
rate determined on the basis of risk free rates for the concerned currency, plus a management margin.
Depending on what the finally agreed rates are, Pakistan will get a saving of $2.7 billion to $3 billion in
the three year PRFG period and $8.5 billion to $11.1 billion over the grace period. Expected reduction
in the net present value ranges from 27 per cent to 43 per cent.
2.3 What Determines Investment? The Case of Pakistan

Sajawal Khan
Pakistan Institute of Development Economics, Islamabad
Muhammad Arshad Khan
Pakistan Institute of Development Economics, Islamabad(2011)
This study is an attempt to analyse the determinants of private investment
in Pakistan over the period 1972-2005. The ARDL co-integration approach is
employed to check the existence of a long-run relationship as well as short-run
dynamics of investment. The results show that most traditional factors have little
or no impact on private investment. These results may support the idea that nontraditional
factors such as quality of institutions, governance, entrepreneurial
skill, etc., are prerequisites for private investment to flourish.
The article highlights all the determinant of private investment in Pakistan in two categories, the
economic determinants and other factors. The article enables us to see the relation of different variable
on the investment mainly private investment but fails to recognize some other variables that do effect
private investment. The factors mentioned are a bit general in nature and are appropriate in perfect
environment settings. Large sample size and time period is taken to find long run relationships. The
paper enables us to understand the fact that how sensitive is investment on different aspects of the
economy and thus how difficult is it to maintain a stable investment climate.
Overview of cement Industry of Pakistan

Cement is one of major industries of Pakistan. Pakistan is rich in cement raw material. Currently many
cement plants are operating in private sector. Pakistan Cement Industry has huge potential for export of
cement to neighbouring countries like India, U.A.E, Afghanistan, Iraq & Russian States. There has
been a robust growth of cement demand seen both in domestic and exports market during the financial
year ended June 30, 2007. The industry achieved an overall growth of 32% with domestic demand of
cement increased by 24.95% whereas the exports increased by 111.86%. The overall growth achieved
by many cement factories for the year under review was 111.29% consisting of domestic and export
markets at 71.02% and 335.12% respectively.Cement industry as per the cement industry update and
various articles is one of the most important sector of Pakistan. Pakistan currently has 28 cement
sectors. Most of the ones are engaged in export as well to meet local demand. The cement sector is a
source of foreign exchange in Pakistan . there is huge market both India and Afghanistan as well as the
African continent. The oppurtunities are immense if only we can chanalize are efforts and work toward
consistent effort to survive and grow. Cement fact5ories are located at various parts of Pakistan each
having certain geographic advantages. If lucky cement is located on karach port and has the advantage
of saving transport cost then maple leaf and Pakistan cement are closest to lime stone resources a dn
thus benefit from it. Cement Industry is affected by various factors.
2.4 Capacity utilization

Having growth in any productive unit is good but it is important to utlize the capacity in a matter to
achieve maximum efficiency. For this the capacity utilization is an important variable and the studies
show that instability has resulted in fall of this capacity and hence the the sector has under performed.
It is important for4 the sector to increase its capacity utilization because only then it per Kg cost will
fall ang profit will increase. Currently the sector is a heavily debted one and it is essential that all the
factories perform at their optimal level .
Price of cement.
As from the studies and the literature gone through with the data collected from various authentic
sources we can see that the one problem or issue for the sector is the price of cement bag. It is unstable,
and is unpredictable in nature. Cement prices have been changing very often affecting the performance
of the cement sector of Pakistan. We see price changes from an approximate of 420 in 2007 to just rs
235 in 2009 all resulting in hampering ther growth of cement sector. Such low price result in heavy
losses for the cement factory and durin g a cartel formation they obtain abnormal profits. So the profit
changes a lot. For a consisitent long term performance it is important for us to to have a stable price

independent of other factors with a normal profit ratio covering all the cost and benefiting the company.
The analysis from the literature tendsa to reflect the importance and give idea of the poor selling price
technique which results in the poor performance.
From the literature the cement sector is influenced by other factors like surplus capacity as well as the
export sector. Export is a new market of Pakistan which started in early 2000 and is growing
immensily. Studies show that Pakistan can export it totlal capacity production if it wants too. This is
very important considering the fact that the curre3ntly the economic situation in pakistaqn is not good
and there are problems regarding the sale of cement. The construction sector is also not working in the
desired manner.
Specific factors that affect the cement industry of Pakistan
Sarah junejo (2013)
This papers gives a complete detail condition performance and some future prospects of the cement
sector of Pakistan. It highlights various key factors that are related to the performance of the cement
sector of Pakistan. It gives the cause and effect of changes in various things on the cement sector for
example the growing export sector, exchange rat effect, increase in production capacity with same facts
and figures.
Next the paper gives the complete industry overview, demand and supply relations and the trend in
consumption of cement locally. Some graphs helps to understand the trend cement sector has seen in
the past few years. Effect of import materials like the coal for instance is also highlighted in the paper.
Coal prices, Exchange rate, Interest rate, demand and supply trends, competitiveness, policy
favouribility, and investment in cement sector are variables the update report mention with complete
backing of theory. The update report lacks to give some qualitative research analysis which is essential
for a complete determination of current cement sector and helps the future policies to be tilted toward
the cement sector after appropriate addressing. It is very important for us to analyse all these variables
in detail and to work effectively. Surplus capacity may seem an un related variable for some but if we
go into the the relationships detail we will see that surplus capacity means that the the increase of
demand in cement could be easily met up. This is very essential for growth perspective as surplus
capacity means that one can look for new market to provide cement and increase its sales. Similarly
there are many things that must be taken into account to evaluate the performance of the sector.

Political stability according to the study is also one variable that can have huge consequenxces on the
cemnent sector performance. Studies show that a stable environment is one that attracts investment of
all kind which inturn results in increasing demand of cement. So political stability is essential for the
growth perspective. Stable economic social and political environment is crucial for the success of our
industries. Also with political stability comes good relations which can be used to get quotas and
enterance in various markets. For example if the governmnet is stable it can a nice policies with india
which can result in a huge market availability. India is deffecit in the production of cement and it is
very important to tap these sources. Also if we look at the sale perspective we can easily see that
currently the price of cement bag in Pakistan is 370 whereas the same cement bag in India is sold for
500 and so we are loosing amazing profit opportunity by not exporting cement to India. Similarly
Afghanistan is also a growing economic environment for us.
Variable that determine the investment climate of Pakistan
Investment in Pakistan: A Critical
Review
Zakaria, Muhammad
Department of Economics, Quaid-i-Azam University,
Islamabad, Pakistan
This research paper critically analyses the investment in Pakistan trying to highlight each and every
aspect, all the prons and cons backed by mathematical and econometric models. Again the paper
mentions all the variables that affect the investment climate of Pakistan. The paper critically evaluates
the nature of each variable and explains the cause and effect relation. The critical review of investment
is essential to determine the nature of investment, general business climate and based on it the proposed
future predictions. The determinants vary to some extent paper to paper. This research paper discusses
more of the qualitative variables.
There are various qualitative and quantitative variable that effect the investment climate of Pakistan.
Foreighn direct investment, political stability, exchange rate, lending rate are some the variables that
effect the investment climate performance. The research paper show that the investment climate is a
crucial determinat for the economic performance of the country. Exchange rate is very important
variable according to the study. It tells that Pakistan gets large amount of foreighn exchange through

remittance and current fiscal it has been around 8 billion dollars. What this show that the exchange rate
fluctuation can have serious consequences on the performance of the economy and thus stable rate
should be a key matter of concern.
Lending rate is again a very important determinant and according to the study we see that the lower the
lending rate more viable it is to install new projects, lesser the risk of default as the cost of borrowing is
low and thus there is greater incentive for the investors to invest and thus the investment increases.
Correlation between investment climate and growth of cement industry
Following the literature and finding some facts has enabled me to follow a direction along which I want
to look for some relation between the cement sector and the investment climate in Pakistan. It has not
been dealt with great detail previously but looking at the literature and the studies I can say that there is
a strong relation that we can see. For any sector of the economy to perform effeciencntly there is a need
of a stable investment environment. If investment in the country keeps on happening, surely
construction, production of goods will also grow2. This will result in all the sector of the economy to
work and facilitate the investment. For example if there is huge amount of investment for the
construction sector in Pakistan. It means that new roads, houses, flyovers,dams factories and buildings
will be made. To make this and meet the demand all the products need for the construction will have
greater oppurtuninties and it will be beneficial for them to utilize their capacity. So as the construction
sector grows it requirements of all the materials and equipment needed for the this growth will also
increase. What this means is that the demand of cement, sand, heavy machinery, building tools will also
go up. This will then benefit the sectors related to construction as well. We see that with the growth of
construction sector demand for cement wil go up. Thus the cement sector will perform at tis optimal
level and will be able to come out of this recessionary periods.
Yes it is true the cement sector has other markets mainly the export sector but that is not enough for
complete utilization and thus investment in the country with stable political social and economic
condition is necessary for long term sustained growth. So the studies show that there is a clear
relationship of investment climate and the growth of cement sector in Pakistan. What the studies show
that has to policies that should favour investment and then work on the improvement of varios
economic sector. For the cement sector of Pakistan investment is necessary both in the cement sector
for achieving efficiency as well as the construction sector.
Some unknown conclusion regarding cement industry and overall environment

With the so much study of the literature review the aim is to be able to find some concluding remarks
regarding the cement sector of Pakistan. The study aims to find solution to the problem of the cement
companies and be able to find solutions to the problems. The overall environment of Pakistan is crucial
for the success of business sectors and it is Important to analyze it and work toward the environment
which favours the cement sector of Pakistan.