<PAGE>
THE PAKISTAN INVESTMENT FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs J. Antonio Quila
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS Altaf M. Saleem
Frederick B. Whittemore DIRECTOR
VICE-CHAIRMAN OF THE BOARD OF DIRECTORS James W. Grisham
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Michael F. Klein
Peter J. Chase VICE PRESIDENT
DIRECTOR Harold J. Schaaff, Jr.
John W. Croghan VICE PRESIDENT
DIRECTOR Joseph P. Stadler
David B. Gill VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Graham E. Jones SECRETARY
DIRECTOR James R. Rooney
John A. Levin TREASURER
DIRECTOR Belinda A. Brady
William G. Morton, Jr. ASSISTANT TREASURER
DIRECTOR
- ---------------------------------------------
U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- -----------------------------------------------------------------
PAKISTANI INVESTMENT ADVISER
International Asset Management Company Limited
Sidco Avenue Centre
6th Floor
Strachen Road
Karachi, Pakistan
- -----------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- -----------------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
- -----------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- -----------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
- -----------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- -----------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
----------------------------------
THE
PAKISTAN
INVESTMENT
FUND, INC.
---------------------
THIRD QUARTER REPORT
SEPTEMBER 30, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the nine months ended September 30, 1996 the total return for The Pakistan
Investment Fund, Inc. (the "Fund"), based on net asset value per share, was
- -17.05% compared to -11.04% for the IFC Global Pakistan Total Return Index (the
"Index"). For the period since the Fund's inception on December 27, 1993, the
Fund's total return, based on net asset value per share, was -61.21% compared
with -43.96% for the Index. On September 30, 1996, the closing price of the
Fund's share on the New York Stock Exchange was $5.25, representing a 3.7%
discount to the Fund's net asset value per share.
Despite relative outperformance in the Fund's key overweight sectors such as
telecommunications, fertilizer and oil and gas, the narrow scope of the market's
rally compared to the breadth of the Fund's portfolio contributed to the
relative underperformance.
For the three months ended September 30, 1996, the Fund had a total return,
based on net asset value per share, of -23.78% compared with -22.22% for the
Index. The third quarter was a difficult one for the Pakistan market as
political and macro-economic concerns continued to plague the market -- pushing
it down to new lows. Even market stalwarts such as Pakistan State Oil, Pakistan
Telecom (PTCL) and Fauji Fertilizer underperformed over the period.
Through the first three quarters of 1996, we have continued with the extensive
restructuring of PKF's portfolio -- with the focus being on larger
capitalization blue chip issues which are expected to be the main beneficiaries
of the long-awaited but inevitable recovery of the Karachi stock market. Given
the illiquidity of the market this year, on top of the bearish sentiment, this
has not been an easy task. There are now 27 companies in the portfolio, as
opposed to 55 at the beginning of the year. With this project near completion,
our top five core holdings -- Fauji Fertilizer, Hubco, PTCL, PSO and Engro --
now comprise 56% of the Fund's net assets, compared to 41% at the beginning of
the year. Given the still uncertain micro/macro economic operating environment
in Pakistan these days, a portfolio focused on such well-managed, cash
generative businesses will pay off in the long-run.
The nascent democratic process in Pakistan is passing through a delicate period.
The current government of Benazir Bhutto, while striving to balance the
conflicting demands of its two key constituencies -- the rural versus the urban
and industrial classes -- has stumbled on the economic front despite good
intentions. Thus, the crucial
structural reform process has slowed down, and the
associated privatization program, with a few exceptions in the power generation
sector, has fallen behind schedule.
A cursory look at key economic indicators since the present government came into
power (in November 1993) shows that progress has been made in reducing the
budget deficit from 8% of GDP in 1992-93 to 5% in 1995-96. Inflation, after
rising to 13% last year, has declined to 11% in 1996. The growth of credit and
money supply has been held in check and a respectable GDP growth rate of 6% has
been managed. However, this was achieved through improving fortunes of the
agricultural sector, particularly cotton, which helped ease supply side
pressures, and short-term measures which have not addressed the critical
structural imbalances in the economy.
The key issue stressed by both the IMF and the World Bank is simple in
conceptual terms -- less government. Unless the sprawling bureaucracy is
curtailed, defense spending rationalized, excessive state ownership of potential
productive assets reduced and government spending and thus borrowings
controlled, structural reform cannot be successfully implemented.
With the IMF having clearly taken the position that any future assistance will
be linked directly to concrete and visible progress on structural reforms, we
are hopeful that a new package will soon be devised to make the economy more
attractive for private sector investment in the medium term. Indeed it looks now
as if the Bhutto government is finally preparing to accede to some of the key
IMF conditions -- such as an agricultural tax and possibly even a reduction in
defense expenditures.
Looking beyond much of the current 'noise' regarding low foreign exchange
reserves, potential devaluations, rising bank defaults and excessive government
borrowing, an austerity-minded mini-budget seems to be the only way forward.
Discipline in government expenditure and enhanced revenue collection,
rationalization of taxation and tariff regimes along with the continuation of a
tight monetary policy, will pave the way for private enterprise. As credible
policies emerge, IMF support should be forthcoming. This will boost investor
confidence, leading to a stock market rebound. Such a scenario could emerge as
early as the end of the fourth quarter. One encouraging feature is that despite
the recent onslaught of negative developments, the KSE-100 index managed to
remain above the 1300 support level and has bounced back from there three times
over the
2
<PAGE>
last fifteen months. Investors who have already exited the market will, in all
likelihood, be looking for positive news on the macro-front for re-entry
opportunities.
In contrast to a number of Asian markets where the reality of deteriorating
export conditions is only now beginning to be fully realized (i.e., Thailand,
Malaysia and Korea) the counter-cyclical movement of the Pakistan market
relative to the region could very-well turn out to be the positive surprise for
the region in 1997. As the macro economic and political uncertainties lessen,
the attractive valuations offered by the KSE should allow investors to re-focus
on healthy earnings growth in the core universe of large cap, blue-chip stocks.
The market is currently trading at 8.5 times 1997's estimated earnings, with a
consensus EPS growth forecast of over 30%.
The most significant change in terms of portfolio composition during the third
quarter was the increased weighting of PTCL from 12.6% to 15.8%. This will allow
the Fund to position itself for the expected increase in PTCL's weighting in the
KSE-100 Index from 8.5% at present to over 25% in the first quarter of 1997. At
9 times 1997 estimated earnings, PTCL is by far the cheapest telecom in all of
Asia; it continues to invest aggressively; it is slated for an eventual if not
belated privatization; and with line penetration at only 1% in Pakistan, the
potential for future growth is substantial.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Marianne L. Hay
SENIOR PORTFOLIO MANAGER
[SIGNATURE]
Landon Thomas
PORTFOLIO MANAGER
October 22, 1996
3
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of September 30, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION (UNAUDITED)
TOTAL RETURN (%)
----------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO DATE 0.00% -- -17.05% -- -11.04% --
ONE YEAR -20.75 -20.75% -32.72 -32.72% -25.92 -25.92%
SINCE INCEPTION* -62.63 -29.98 -61.21 -29.03 -43.96 -18.98
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31: NINE MONTHS
ENDED SEPTEMBER
30, 1996
1993* 1994 1995 (UNAUDITED)
<S> <C> <C> <C> <C>
Net Asset Value Per Share $ 14.03 $ 11.42 $ 6.57 $ 5.45
Market Value Per Share $15.50 $9.00 $5.25 $ 5.25
Premium/(Discount) 10.5% -21.2% -20.1% -3.7%
Income Dividends - $0.03 $0.00# -
Cap Gains Distributions - - $0.00# -
Fund Total Return (2) -0.50% -18.36% -42.43% -17.05%
Index Total Return
(1)(3)** N/A -8.51% -31.14% -11.04%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value of
the Fund.
(3) The IFC Global Pakistan Total Return Index is an unmanaged index of common
stocks.
* The Fund commenced operations on December 27, 1993.
** Unaudited.
# Amount is less than $0.01 per share.
4
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of September 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Equity Securities 97.8%
Short-Term Investments 2.2%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Appliances & Household Durables 1.7%
Automobiles 1.4%
Banking 6.7%
Chemicals 24.6%
Energy Sources 12.3%
Food & Household Products 2.0%
Forest Products & Paper 2.4%
Telecommunications 16.0%
Textiles & Apparel 4.1%
Utilities - Electrical & Gas 21.5%
Other 7.3%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
-------------
<C> <S> <C>
1. Pakistan Telecommunications 15.8%
2. Fauji Fertilizer Co. Ltd. 13.6
3. Pakistan State Oil Co. 11.3
4. Hub Power Co. Ltd. 10.4
5. Engro Chemicals Ltd. 5.4
<CAPTION>
PERCENT OF
NET ASSETS
-------------
<C> <S> <C>
6. Sui Northern Gas Co. 5.2%
7. Sui Southern Gas Co. 4.8
8. Fauji Jordan Fertilizer Co. Ltd. 4.2
9. Muslim Commercial Bank Ltd. 3.4
10. Faysal Bank Ltd. 2.5
-------------
76.6%
-------------
-------------
</TABLE>
5
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
------------
<S> <C> <C>
PAKISTANI COMMON STOCKS (95.5%)
(Unless otherwise noted)
- ----------------------------------------------------------------------------------
- ------------
APPLIANCES & HOUSEHOLD DURABLES (1.7%)
Pel Appliances Ltd. 814,010 U.S.$ 1,102
--------------
- ---------------------------------------------------------
- ------------
AUTOMOBILES (1.4%)
Indus Motor Co. Ltd. 2,500 1
Pak Suzuki Motor Co. Ltd. 835,000 876
--------------
877
--------------
- ---------------------------------------------------------
- ------------
BANKING (6.7%)
Askari Commercial Bank Ltd. 809,200 471
Faysal Bank Ltd. 2,883,150 1,581
Muslim Commercial Bank Ltd. 2,321,270 2,168
--------------
4,220
--------------
- ---------------------------------------------------------
- ------------
BUILDING MATERIALS & COMPONENTS (0.1%)
Dandot Cement Co. (Rights) 284,562 39
--------------
- ---------------------------------------------------------
- ------------
CHEMICALS (24.6%)
Engro Chemicals Ltd. 890,000 3,398
Fauji Fertilizer Co. Ltd. 4,619,000 8,629
Fauji Jordan Fertilizer Co. Ltd. 7,500,000 2,681
ICI Pakistan Ltd. (Rights) 385,125 72
Sitara Chemicals Industries Ltd. 689,630 765
--------------
15,545
--------------
- ---------------------------------------------------------
- ------------
ELECTRICAL & ELECTRONICS (0.1%)
Pak Electronics 97,251 37
--------------
- ---------------------------------------------------------
- ------------
ENERGY SOURCES (12.3%)
Pakistan Oilfields Ltd. 377,170 684
Pakistan State Oil Co. Ltd. 792,000 7,120
--------------
7,804
--------------
- ---------------------------------------------------------
- ------------
FINANCIAL SERVICES (1.1%)
National Development Leasing Corp. 192,000 37
Orix Leasing Pakistan Ltd. 520,590 645
PIL Corp. Ltd. 50,600 18
Trust Modaraba Ltd. 147,200 23
--------------
723
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
------------
<S> <C> <C>
FOOD & HOUSEHOLD PRODUCTS (2.0%)
Haseeb Waqas Sugar 240,000 U.S.$ 25
Lever Brothers 73,180 1,268
--------------
1,293
--------------
- ---------------------------------------------------------
- ------------
FOREST PRODUCTS & PAPER (2.4%)
Century Paper & Board 1,883,150 1,504
--------------
- ---------------------------------------------------------
- ------------
INDUSTRIAL COMPONENTS (0.1%)
General Tyres & Rubber Co. 165,500 85
--------------
- ---------------------------------------------------------
- ------------
INSURANCE (1.4%)
Adamjee Insurance Co. Ltd. 378,532 871
--------------
- ---------------------------------------------------------
- ------------
TELECOMMUNICATIONS (16.0%)
Pakistan Telecommunications 67,200 6,086
Pakistan Telecommunications GDR 44,950 3,933
T.F. Payphones Ltd. 350,000 120
--------------
10,139
--------------
- ---------------------------------------------------------
- ------------
TEXTILES & APPAREL (4.1%)
Artistic Denim Mills 1,250,000 575
Crescent Textile Mills Ltd. 1,147,440 350
Gadoon Textile Mills 670,000 490
Nishat Mills Ltd. 4,190,911 1,191
Nishat Mills Ltd. (Rights) 628,636 --
Saif Textiles 72,257 18
--------------
2,624
--------------
- ---------------------------------------------------------
- ------------
UTILITIES -- ELECTRICAL & GAS (21.5%)
Hub Power Co. Ltd. GDR 7,995,000 6,602
Karachi Electric Supply Corp. 1,155,000 660
Nishat Tek Ltd. 555 --
Nishat Tek Ltd. (Rights) 17 --
Sui Northern Gas Pipelines 3,236,000 3,264
Sui Southern Gas Co. Ltd. 3,541,620 3,021
--------------
13,547
--------------
- ----------------------------------------------------------------------------------
- ------------
TOTAL PAKISTANI COMMON STOCKS
(Cost U.S. $94,560) 60,410
--------------
- ----------------------------------------------------------------------------------
- ------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------
------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.1%)
<S> <C> <C>
Pakistani Rupee (Cost U.S. $686) PKR 24,686 U.S.$ 669
--------------
- ----------------------------------------------------------------------------------
- ------------
SHORT-TERM INVESTMENT (1.1%)
- ----------------------------------------------------------------------------------
- ------------
REPURCHASE AGREEMENT (1.1%)
Chase Securities, Inc. 5.40%, dated 9/30/96, due
10/1/96, to be repurchased at U.S. $707,
collateralized by U.S. $520 United States
Treasury Notes 10.625%, due 8/15/15, valued at
U.S.$716 (Cost U.S. $707) U.S.$ 707 707
--------------
- ----------------------------------------------------------------------------------
- ------------
TOTAL INVESTMENTS (97.7%)
(Cost U.S. $95,953) 61,786
--------------
- ----------------------------------------------------------------------------------
- ------------
OTHER ASSETS AND LIABILITIES (2.3%)
Other Assets 2,438
Liabilities (981) 1,457
------------- --------------
- ----------------------------------------------------------------------------------
- ------------
NET ASSETS (100%)
Applicable to 11,604,792, issued and outstanding U.S. $0.01 par
value shares (100,000,000 shares authorized) U.S.$ 63,243
-----------
- ----------------------------------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE U.S.$ 5.45
-----------
- ----------------------------------------------------------------------------------
- ------------
</TABLE>
GDR -- Global Depositary Receipt.
7
