<PAGE>
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THE
PAKISTAN
INVESTMENT
FUND, INC.
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THIRD QUARTER REPORT
SEPTEMBER 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
THE PAKISTAN INVESTMENT FUND, INC.
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DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
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 LLP
200 Park Avenue
New York, New York 10166
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
<PAGE>
LETTER TO SHAREHOLDERS
- ----------------------
For the nine months ended September 30, 1998, The Pakistan Investment Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of -51.36%
compared to -51.63% for the IFC Global Pakistan Total Return Index (the
"Index"). For the one year ended September 30, 1998, and for the period from
the Fund's commencement of operations on December 27, 1993 through September 30,
1998, the Fund had a total return, based on net asset value per share, of
- -55.86% and -79.14%, respectively, compared with -56.65% and -69.07%,
respectively, for the Index. On September 30, 1998, the closing price of the
Fund's shares on the New York Stock Exchange was $1 15/16 representing a 33.3%
discount to the Fund's net asset value per share.
For the one month ended September 30, 1998, the Fund had a total return, based
on net asset value per share, of 6.39% compared to 11.91% for the Index. On
September 4, 1998, in view of the restrictions that had been placed on the
repatriation of currency from Pakistan, the Fund began discounting the U.S.
Dollar equivalent value of its Pakistan investments. This fair valuation
procedure contributed to the Fund's underperformance since that date. The
balance of underperformance for the month came from the Fund's inability to
match the weight of Pakistan Telecom in the Index, as well as the
underperformance during the quarter of the food and energy sectors where we were
overweight.
The Fund continues to operate under "abnormal" circumstances. Foreign investors
are still prevented, through bureaucratic obstacles, to repatriate U.S. dollars
for any equity sales. As such, the Fund cannot hold any U.S. dollars in cash and
reduce risks in the event of an eventual currency devaluation, which in our view
is imminent. The exchange rate mechanism in Pakistan has collapsed; all U.S.
dollar deposits have been frozen and risk premiums are at an absolute high as
the country has been downgraded by S&P to CCC- or "junk" status. There are
multiple exchange rates working in the country at this point. The so-called
official rate is approximately 46 rupee to the dollar, the interbank rate is at
54 rupee to the U.S. dollar and the composite rate (which is what our benchmark
index uses) is 50 rupee to the dollar. At this point, we are conservatively
using the interbank rate to value our equity portfolio, thus reflecting the
heightened risk premium. However, many dollar transactions are only being done
at the 'kerb rate', which is around 62 at this point. Going forward, we will
continue to monitor the appropriateness of these rates in determining the net
asset value of the Fund.
POLITICS
The political outlook for Pakistan has become more fluid both on external and
internal fronts. Internally, the law and order situation has witnessed a visible
deterioration, particularly in the commercial hub of Karachi. At the same time
differences have cropped up between the Federal Government and the provincial
assemblies over an increasing number of issues. The recent resignation of the
Army Chief three months prior to his scheduled retirement date, has highlighted
the defense establishment's lack of comfort with the present socio-political and
economic situation. On the foreign policy front, sufficient international
pressure is being created for both Pakistan and India to indicate positive
direction in eventually signing the Comprehensive Test Ban Treaty (CTBT) and
make greater efforts to improve bilateral relations.
On the economic front, one positive development is that agricultural output is
likely to be reasonably healthy in the current fiscal year (June 98-99).
Consensus forecasts put agricultural growth around 4%. On the fiscal front,
however, tax collection still remains a contentious issue. The lower tax
collection means fiscal deficit is unlikely to fall below 5-5.6% of gross
domestic product. With monetization of this deficit and effective devaluation of
15-20% which we anticipate, inflation is likely to revert back to double digits
after having fallen 8.3% last year.
However, the most critical factor in assessing the future economic outlook and
investment climate is the outcome of negotiations between the government of
Pakistan and the IMF. Pakistan appears to be a one-event market - IMF or bust.
While positive noises are being made on both sides, any deal with the
multilateral financing agencies would involve fairly tough conditions and would
need to be significantly larger than previous packages and also include some
external debt restructuring. Without that, it is impossible for Pakistan to come
out of a debt trap. The release of IMF funds is very likely to be delayed until
December while the government attempts to dilute stringent IMF targets through
negotiations.
What all this means for investment outlook and stock market sentiment is
continuation of the high volatility witnessed in the third quarter of 1998.
Indeed market behavior is dominantly speculative in character at the moment. We
expect the KSE-100 to remain range bound between 800-1100 for the next few
months.
In terms of portfolio strategy and given the constraints under which the Fund
operates, we continue to maintain a two-pronged investment strategy. The bulk
of
2
<PAGE>
the portfolio remains defensive in nature, comprised mainly of large cap, blue
chips and multinational corporations. At the same time, we continue to keep
around a 5-10% rupee cash position. This allows us greater flexibility to take
advantage of selective trading opportunities when the market touches the
extremes of its trading range, thus improving performance and mitigating some of
the adverse impacts of rupee depreciation. We continue to remain underweight in
the financial sector in view of the sharply weakened earnings outlook for the
current fiscal year as well as the potential threat of rising non-performing
loans.
We hope to outperform the Index during the next two quarters based on our longer
term view on key sectors and stocks, as well as some adjustments to the Fund's
portfolio. On a positive note, if the same exchange rate is used for both the
Fund and the Index, the Fund outperformed the Index for nine months ending
September 30, 1998 by 340 basis points.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
October 1998
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
3
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of September 30, 1998 (Unaudited)
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<TABLE>
<CAPTION>
HISTORICAL Total Return (%)
INFORMATION -----------------------------------------------------------------------------------
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 -24.39% -- -51.36% -- -51.63% --
One Year -67.13 -67.13% -55.86 -55.86% -56.65 -56.65%
Since Inception* -86.11 -33.94 -79.14 -28.04 -69.07 -21.85
</TABLE>
Past performance is not predictive of future performance.
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RETURNS AND PER SHARE INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
Ended
September 30,
1993* 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
[PLOT POINTS TO COME]
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
Ended
September 30,
1993* 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . . . . $ 14.03 $ 11.42 $ 6.57 $ 4.77 $ 6.01 $ 2.91
Market Value Per Share . . . . . . . . . $ 15.50 $ 9.00 $ 5.25 $ 5.13 $ 4.88 $ 1.94
Premium/(Discount) . . . . . . . . . . . 10.5% -21.2% -20.1% 7.5% -18.8% -33.3%
Income Dividends . . . . . . . . . . . . -- $ 0.03 $ 0.00# -- $ 0.01 $ 0.01
Capital Gains Distributions. . . . . . . -- -- $ 0.00# -- -- --
Fund Total Return (2). . . . . . . . . . -0.50% -18.36% -42.43% -27.40% 26.32% -51.36%
Index Total Return (3) . . . . . . . . . N/A -8.51% -31.14% -19.46% 26.13% -51.63%
</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, 1998 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Short-Term Investments (9.4%)
Equity Securities (90.6%)
</TABLE>
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SECTORS
[CHART]
<TABLE>
<S> <C>
Other (10.2%)
Forest Products & Paper (1.1%)
Insurance (2.3%)
Automobiles (2.5%)
Banking (5.0%)
Textiles & Apparel (7.6%)
Health & Personal Care (9.4%)
Utilities -- Electrical & Gas (10.1%)
Telecommunications (23.1%)
Chemicals (17.3%)
Energy Sources (11.4%)
</TABLE>
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TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C> <C>
1. Pakistan Telecommunications Corp. 23.1%
2. Lever Brothers Pakistan Ltd. 9.4
3. Fauji Fertilizer Co., Ltd. 9.0
4. Hub Power Co. 6.4
5. Pakistan State Oil Co., Ltd. 5.6
6. Nishat Mills Ltd. 4.6
7. Engro Chemicals Ltd. 4.4
8. Shell Pakistan Ltd. 4.3
9. ICI Pakistan Ltd. 3.9
10. Muslim Commercial Bank Ltd. 2.5
----
73.2%
----
----
</TABLE>
5
<PAGE>
FINANCIAL STATEMENTS
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STATEMENT OF NET ASSETS (Unaudited)
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SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Shares Value
(000)
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<S> <C> <C>
COMMON STOCKS (89.8%)
(Unless otherwise noted)
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AUTOMOBILES (2.5%)
Pak Suzuki Motor Co., Ltd. 1,579,000 U.S. $ 831
------------
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BANKING (5.0%)
Askari Bank 1,524,092 424
Faysal Bank Ltd. 1,861,150 433
Muslim Commercial Bank Ltd. 2,222,770 848
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1,705
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BUILDING MATERIALS & COMPONENTS (0.0%)
Dandot Cement Co. (Rights) 62 --@
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CHEMICALS (17.3%)
Engro Chemicals Ltd. 1,233,459 1,484
Fauji Fertilizer Co., Ltd. 3,243,300 3,028
ICI Pakistan Ltd. 5,577,400 1,334
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5,846
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ENERGY SOURCES (11.4%)
Pakistan Oilfields Ltd. 471,462 505
Pakistan State Oil Co., Ltd. 1,075,800 1,876
Shell Pakistan Ltd. 427,800 1,462
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3,843
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FINANCIAL SERVICES (0.0%)
Trust Modaraba Ltd. 100 --@
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FOREST PRODUCTS & PAPER (1.1%)
Packages Ltd. 564,062 385
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HEALTH & PERSONAL CARE (9.4%)
Lever Brothers Pakistan Ltd. 225,160 3,161
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INSURANCE (2.3%)
Adamjee Insurance Co., Ltd. 966,456 772
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TELECOMMUNICATIONS (23.1%)
Pakistan Telecommunications Corp. 'A' 15,191,600 7,814
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TEXTILES & APPAREL (7.6%)
Artistic Denim Mills Ltd. 1,250,000 254
Crescent Textile Mills Ltd. 1,325,192 220
Gadoon Textile Mills Ltd. 670,000 181
Ibrahim Fibre Ltd. 3,390,000 347
Nishat Mills Ltd. 7,987,428 1,564
Saif Textiles Mills Ltd. 110 --@
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2,566
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UTILITIES -- ELECTRICAL & GAS (10.1%)
Hub Power Co. 7,764,200 U.S. $2,173
Sui Northern Gas Co. 2,272,270 460
Sui Southern Gas Co. 4,116,192 794
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3,427
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TOTAL COMMON STOCKS
(Cost U.S.$65,423) 30,350
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Face
Amount
(000)
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FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (9.3%)
Pakistani Rupee
(Cost U.S.$3,328) PKR 171,133 3,161
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TOTAL INVESTMENTS (99.1%)
(Cost U.S.$68,751) 33,511
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OTHER ASSETS AND LIABILITIES (0.9%)
Other Assets U.S. $ 802
Liabilities (500) 302
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NET ASSETS (100%)
Applicable to 11,604,792 issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 33,813
------------
------------
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NET ASSET VALUE PER SHARE U.S.$ 2.91
------------
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</TABLE>
@ -- Value is less than U.S.$500.
6
