<PAGE>
THE PAKISTAN INVESTMENT FUND, INC.
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DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Michael F. Klein James W. Grisham
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones Joanna M. Haigney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
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U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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PAKISTAN INVESTMENT ADVISER
International Asset Management Company Limited
Nacon House
Maulana Din Mohammed Wafar Road
Karachi, Pakistan
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ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
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CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
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LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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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.
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THE
PAKISTAN
INVESTMENT
FUND, INC.
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THIRD QUARTER REPORT
SEPTEMBER 30, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- ----------
For the nine months ended September 30, 1997, The Pakistan Investment Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 39.20%
compared to 40.73% for the IFC Global Pakistan Total Return Index (the "Index").
For the one year ended September 30, 1997, the Fund had a total return, based on
net asset value per share, of 21.84% compared to 27.26% for the Index. For the
period from the Fund's commencement of operations on December 27, 1993 through
September 30, 1997, the Fund had a total return, based on net asset value per
share, of -52.74% compared with -28.65% for the Index. On September 30, 1997,
the closing price of the Fund's shares on the New York Stock Exchange was $5
15/16 representing a 10.5% discount to the Fund's net asset value per share.
Performance wise, our large holdings in Hubco, PTCL and PSO all outperformed the
market on a quarterly and year-to-date basis. Nevertheless, the narrow breadth
of the rally -- focusing primarily on the large caps mentioned above -- has
meant that many of our smaller holdings have lagged the market so far, despite
strong fundamentals. While we expect the large caps to continue to lead the
liquidity driven rally, we also expect a broader market increase in the coming
months.
During the third quarter of 1997, the Fund's holdings continued to be adjusted
to take advantage of improving stock market conditions as well as corporate
fundamentals. Weightings of quality blue chips were increased, particularly
Lever Brothers (from 4.2% to 4.9%) and Muslim Commercial Bank (from 3.4% to
5.3%). Both of these companies are set to benefit from the impending real
economic recovery in Pakistan.
Third quarter 1997 was indeed a momentous one for the Pakistan market with the
IMF's official approval of the $1.6 billion structural adjustment facility
serving as a clear endorsement of the Sharif government's ambitious reform
program. The relief package will also go a long way to increasing confidence and
triggering a growth recovery in the real economy.
While GDP growth has finally bottomed out at 3% for the year ended June 1997,
the recovery is by no means complete. Agriculture is expected to show a strong
recovery with all major crops, including the all important cotton, likely to
register a sharp rise in production. Industrial growth however continues to be
sluggish although confidence is improving. With interest rates having declined
substantially this quarter, we expect that increased bank lending in line with a
strong agricultural recovery will result in GDP growth of 5.5% for the coming
fiscal year.
On the reform front, progress continues -- particularly within the financial
sector. The newly independent State Bank of Pakistan has pushed both public
sector and private sector banks to aggressively recover past due loans. The
results have been very positive so far. Out of an estimated Rs. 130 billion non
performing loans, up to Rs. 15 billion has been recovered while another Rs. 15
billion has been written off. The positive liquidity effects of such substantial
recoveries will be significant as public sector banks begin slowly to expand
their under-utilized balance sheets.
With regard to revenue collection, a key reform area where past governments have
failed to make progress, signs of progress are emerging. With corporate and
individual tax cuts in the last budget plus a reduction in import tariffs and
the sales tax, there were concerns that revenue collection might be
significantly lower than targeted. Surprisingly however, the first quarter
revenue collection was Rs. 61 billion against a target of Rs. 63 billion.
Whether this momentum is maintained going forward remains to be seen. However,
for now this is the clearest evidence of the government's commitment to adhere
to the IMF's strict conditions.
The government has also moved forward briskly on the privatization front with
the final bidders for the First Women Bank having being short listed and
financial advisors for United Bank, National Bank and Sui Southern Gas Company
now being solicited. Publicly, the government has set a deadline of June 1998
for the privatization of these entities. Though this appears a bit optimistic,
there is a high probability that these privatizations will go through by the
latter half of 1998.
While the above developments are all positive for the medium-term growth of
the economy, some concerns still remain. The main one being that foreign
exchange reserves remain at the lower end of their past five year historical
range, while exports have yet to show any significant improvement. We believe
however, that with the release of the first tranche of IMF's ESAF loan in the
fourth quarter of 1997, plus the government's move to securitize U.S.$500
million worth of expatriate Pakistani workers remittances, float U.S.$300
million medium-term sovereign bonds, export around U.S.$400 million of
surplus raw cotton and receive up to U.S.$500 million soft loan from the
Asian Development bank for capital market reforms, the foreign exchange
position will improve sufficiently by the first quarter of 1998. Beyond then,
proceeds from privatizations should further augment reserves going into
fiscal 98/99. All this will allow the government to repay some of its high
cost short-term debt which has been the core cause of past foreign exchange
crises.
A government think tank in the planning ministry has estimated that exports need
to grow by at least 15% per annum for 4-5 years for the structural imbalance in
foreign trade to be rectified. In the first quarter of the current fiscal year,
exports registered a year-on-year growth of 9% compared to the budgetary target
of 15% growth for the full year. If cotton production exceeds 9.0 million bales,
as widely expected, there is a good chance that the export growth in fiscal
96-97 could reach 12-13%. This would go a long way in helping the
2
<PAGE>
government to meet the IMF requirement of achieving an average foreign exchange
reserve balance of US$1.5 billion. Further, lower international oil prices as
well as lower fertilizer and power plant machinery imports this year have
already helped to reduce the trade deficit by 17% on a year to year basis in the
first quarter of this fiscal year.
The second area of concern relates to the currency. The government's recent
preemptive 8% devaluation of the rupee came in marked contrast to South East
Asian currency adjustments. Of primary importance was the fact that the rupee's
adjustment came on the back of a long series of reform measures as well as an
IMF deal: it was, in fact, the icing on the cake and will go a long way towards
removing any remaining doubts regarding the government's willingness to do the
IMF's bidding. We feel quite strongly that this adjustment was a one off and
will not lead to a series of competitive devaluations.
Pakistan does not have capital account convertibility and the domestic kerb
foreign exchange market caters largely to the retail sector as all documented
dollar flows must occur through the State Bank at fixed exchange rates.
Secondly, there is very limited uncovered foreign currency borrowing by local
corporates or financial institutions to create a system wide crisis risk. Third,
there does not appear to be a near term danger of a large competitive
devaluation to boost exports. Only about 20% of Pakistan's exports - mainly
textile garments - compete directly with Thailand, Indonesia and the
Philippines. The bulk of Pakistan's textile exports is that of yarn where the
main competition is from India and China. For different reasons both these
countries are unlikely to devalue their currencies by more than 3-5% in the
current fiscal year. Finally, the government has already built in a 6-7%
devaluation (the average over the past decade has been about 8%) into its budget
estimates for Fiscal Year 97-98. Its supply side policy thrust would be
negatively impacted by anything significantly larger. Instead, it has sought to
enhance exporters' margins by capping input costs of energy and raw materials by
freezing utility charges and lowering import tariffs while also reducing
interest rates on borrowing - especially export refinancing - and lowering
corporate tax rates.
Keeping the above factors in mind, while it will be premature to say that the
Pakistan economy has embarked on a new accelerated growth path, it is clear that
basic elements of stabilization are now in place to halt the economic slide
witnessed over the last 2-3 years. A competent and well respected technocratic
team has boosted both domestic and foreign investor confidence and the
implementation of reform measures has clearly begun.
In view of these developments we are fairly optimistic that the stock market
will remain firm over the coming months. Pakistan equity valuations are now
amongst the most attractive in Asia with Fiscal Year 98 price-earnings ratio of
8.5 times and a three year price to earnings growth multiple (PEG) of 0.5 times
with KSE-100 earnings growth for Fiscal Year 1998 and Fiscal Year 1999 forecast
at 30% and 27% respectively, and risk perceptions likely to further improve as
we move into 1998, there is a high probability of a further re-rating of the
market. This move should be underpinned by improving domestic liquidity,
increasing foreign portfolio funds inflow and a favorable supply/demand scenario
for stocks in the upcoming quarters.
Although the Fund is permitted to temporarily increase its cash position during
periods of market volatility, we intend, consistent with the Fund's long-term
investment objectives, to remain invested in equity securities, even during
market downturns.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Landon Thomas
Landon Thomas
PORTFOLIO MANAGER
/s/ Madhav Dhar
Madhav Dhar
PORTFOLIO MANAGER
/s/ Robert L. Meyer
Robert L. Meyer
PORTFOLIO MANAGER
October 1997
3
<PAGE>
THE PAKISTAN INVESTMENT FUND, INC.
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
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<TABLE>
<CAPTION>
HISTORICAL
INFORMATION TOTAL RETURN (%)
----------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
---------------------- ------------------------- ----------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO DATE 15.85% -- 39.20% -- 40.73% --
ONE YEAR 13.10 13.10% 21.84 21.84% 27.26 27.26%
SINCE INCEPTION* -57.74 -20.47 -52.74 -18.06 -28.65 -8.59
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
NINE MONTHS
ENDED
1993* 1994 1995 1996 SEPTEMBER 30, 1997
----- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . $ 14.03 $ 11.42 $ 6.57 $ 4.77 $ 6.64
Market Value Per Share . . . . . . $ 15.50 $ 9.00 $ 5.25 $ 5.13 $ 5.94
Premium/(Discount) . . . . . . . . 10.5 % -21.2 % -20.1 % 7.5 % -10.5 %
Income Dividends . . . . . . . . . -- $ 0.03 $ 0.00# -- --
Capital Gains Distributions. . . . -- -- $ 0.00# -- --
Fund Total Return (2). . . . . . . -0.50% -18.36% -42.43% -27.40% 39.20%
Index Total Return (3) . . . . . . N/A -8.51% -31.14% -19.46% 40.73%
</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
per share of the Fund.
(3) The IFC Global Pakistan Total Return Index is an unmanaged index of common
stocks, including dividends.
* The Fund commenced operations on December 27, 1993.
# Amount is less than $0.01 per share.
4
<PAGE>
THE PAKISTAN INVESTMENT FUND, INC.
PORTFOLIO SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
[CHART]
Short-Term Investments (3.2%)
Equity Securities (96.8%)
- --------------------------------------------------------------------------------
SECTORS
[CHART]
Automobiles (2.1%)
Banking (9.9%)
Chemicals (13.7%)
Energy Sources (15.2%)
Forest Products & Paper (2.7%)
Health & Personal Care (4.9%)
Insurance (1.7%)
Telecommunications (19.5%)
Textiles & Apparel (4.4%)
Utilities - Electrical & Gas (21.8%)
Other (4.1%)
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
PERCENT OF
NET ASSETS
----------
1. Pakistan Telecommunications Corp. 19.5%
2. Hub Power Co. 16.9
3. Pakistan State Oil Co., Ltd. 12.3
4. Fauji Fertilizer Co., Ltd. 8.2
5. Muslim Commercial Bank Ltd. 5.2
6. Lever Brothers 4.9
7. Engro Chemicals Ltd. 3.2
8. Faysal Bank Ltd. 3.1
9. Sui Southern Gas Co. 2.6
10. Sui Northern Gas Co. 2.3
----
78.2%
----
----
*Excludes short-term investments.
5
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
SEPTEMBER 30, 1997
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS (96.7%)
(Unless otherwise noted)
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AUTOMOBILES (2.1%)
Pak Suzuki Motor Co., Ltd. 1,236,000 U.S.$ 1,647
--------------
- -------------------------------------------------------------------------------
BANKING (9.9%)
Askari Bank 1,642,637 1,157
Faysal Bank Ltd. 3,510,650 2,411
Muslim Commercial Bank
Ltd. 4,253,270 4,045
--------------
7,613
--------------
- -------------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS (0.0%)
Dandot Cement Co. (Rights) 62 --@
--------------
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CHEMICALS (13.7%)
Engro Chemicals Ltd. 675,348 2,503
Fauji Fertilizer Co., Ltd. 2,984,000 6,332
Fauji Jordan Fertilizer Co.,
Ltd. 3,391,500 1,747
--------------
10,582
--------------
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ENERGY SOURCES (15.2%)
Pakistan Oilfields Ltd. 471,462 897
Pakistan State Oil Co., Ltd. 906,600 9,451
Shell Pakistan Ltd. 181,900 1,348
--------------
11,696
--------------
- -------------------------------------------------------------------------------
FINANCIAL SERVICES (0.8%)
Orix Leasing 520,090 630
Trust Modaraba Ltd. 180 --@
--------------
630
--------------
- -------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (2.7%)
Century Paper & Board 2,071,465 972
Packages Ltd. 610,700 1,108
--------------
2,080
--------------
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HEALTH & PERSONAL CARE (4.9%)
Lever Brothers 161,180 3,793
--------------
- --------------------------------------------------------------------------------
INSURANCE (1.7%)
Adamjee Insurance Co., Ltd. 473,165 1,321
--------------
- -------------------------------------------------------------------------------
TELECOMMUNICATIONS (19.5%)
Pakistan
Telecommunications
Corp. 'A' 12,904,600 12,465
Pakistan
Telecommunications
Corp. GDS (Euro) 26,650 2,572
--------------
15,037
--------------
- -------------------------------------------------------------------------------
TEXTILES & APPAREL (4.4%)
Artistic Denim Mills 1,250,000 440
Crescent Textile Mills Ltd. 1,262,184 421
Gadoon Textile Mills 670,000 546
Ibrahim Fibre Ltd. 2,000,000 370
Nishat Mills Ltd. 4,190,911 1,605
Saif Textiles 100 --@
--------------
3,382
--------------
- -------------------------------------------------------------------------------
UTILITIES - ELECTRICAL & GAS (21.8%)
Hub Power Co. 9,731,000 13,017
Nishat Tek Ltd. (Rights) 17 --@
Sui Northern Gas Co. 2,197,192 1,753
Sui Southern Gas Co. 2,975,863 1,996
--------------
16,766
--------------
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$84,394) 74,547
--------------
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (2.4%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT (2.4%)
Chase Securities, Inc., 5.75%,
dated 9/30/97, due
10/1/97, to be
repurchased at U.S.$1,852
collateralized by United
States Treasury Bonds,
8.50%, due 2/15/20,
valued at U.S.$1,892
(Cost U.S.$1,852) U.S.$ 1,852 1,852
--------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.8%)
Pakistani Rupee
(Cost U.S.$576) PKR 23,317 576
--------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost U.S.$86,822) 76,975
--------------
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
Other Assets U.S.$ 2,302
Liabilities (2,209) 93
----------------- --------------
- --------------------------------------------------------------------------------
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.$77,068
--------------
--------------
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 6.64
--------------
--------------
- --------------------------------------------------------------------------------
@ -- Value is less than U.S.$500.
GDS -- Global Depositary Shares
6
