<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
Stefanie V. Chang
Michael F. Klein VICE PRESIDENT
PRESIDENT AND DIRECTOR
Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR
Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR
Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR
Joanna M. Haigney
Graham E. Jones TREASURER
DIRECTOR
Belinda A. Brady
John A. Levin ASSISTANT TREASURER
DIRECTOR
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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
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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FIRST QUARTER REPORT
MARCH 31, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISOR
<PAGE>
LETTER TO SHAREHOLDERS
For the three months ended March 31, 1998, The Pakistan Investment Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of -11.31%
compared to -10.39% for the IFC Global Pakistan Total Return Index (the
"Index"). For the one year ended March 31, 1998, and for the period from the
Fund's commencement of operations on December 27, 1993 through March 31, 1998,
the Fund had a total return, based on net asset value per share, of -5.25% and
- -61.96%, respectively, compared with -6.75% and -42.70%, respectively, for the
Index. On March 31, 1998, the closing price of the Fund's shares on the New
York Stock Exchange was $4 7/16 ,representing a 16.7% discount to the Fund's net
asset value per share.
The slight underperformance in the first quarter of 1998 can be attributed
primarily to the overweight position in the telecom and banking sectors.
Pakistan Telecommunications Corp. Ltd. (PTCL) underperformance was largely due
to the initial delay in the appointment of a financial adviser for its
privatization. Banking sector stocks like Muslim Commercial Bank (MCB) took the
brunt of underperformance, as foreign investors generally steered clear of
banking stocks in the aftermath of the Asian Crisis.
In view of continuing market weakness, the Fund remains defensively positioned
in large cap liquid blue chips. As of March 31, 1998 the ten largest holdings
of the Fund constituted 74.5% of the Fund's assets. In the first quarter of
1998, we reduced the weight of Pakistan State Oil from 11.3% in December, 1997
to 4.3% at March 31, in view of the deterioration in medium-term earnings
outlook. Further in view of the problems in the power sector, Hubco's weight was
also reduced from 19.5% to 16.3%. On the other hand the weight of the fixed
line telecom operator, PTCL was raised from 12.0% to 18.0% based on the
expectations of progress in its privatization. Exposure to Lever Brothers,
Pakistan, the largest listed consumer non-durables company was also increased.
On the macroeconomic front, GDP growth is expected to pick up in 1997-98 to
reach 5.2% compared to 3.1% in the previous financial year, primarily on the
back of robust growth in agriculture. Inflation is expected to come down this
year to 9% compared to 12% last year. This is largely due to a tight monetary
policy stance taken by the central bank (SBP), a general freeze in utility
prices as well as a sharp fall in international commodity prices, particularly
petroleum products. The budget deficit in the current fiscal year ending June
1998 is likely to be around 5.6% compared to 6.3% last year, thanks to the gain
accruing due to the differential between international oil prices and
those charged by the government to domestic users. Going into the next fiscal
year the main focus of fiscal policy is going to be raising the revenue
generation base. We should be seeing new initiatives on documenting the
economy, broadening the tax base, reducing subsidies as well as imposing the
long awaited GST at the retail stage in the forthcoming June budget.
A key concern for investors in Pakistan is the large debt servicing burden and
the vulnerability of forex reserves. The total external debt of Pakistan is
around $30 billion U.S. dollars, out of which U.S. $6 billion is in short term
debt. Reserves are likely to remain between U.S. $1-1.5 billion over the next
quarter or two until some progress is made on the privatization front. Fast
track privatization and concurrent restructuring of Pakistan's debt profile
whereby short term debt is retired and substituted by 5-10 year obligation is
the need of the hour to ease pressure on forex reserves.
On the political front, we feel that the government is likely to contain the
damage done by the departure of ANP from the NWFP provincial assembly and should
find a consensus solution to its sindh assembly partner, MQM's complaints
against its rival group in Karachi. The relationship with the main opposition
party PPP however is likely to deteriorate further since the issuance of arrest
warrants by the provincial court. Bouts of political instability cannot be
ruled out and these will lead to volatility in the stock market.
The corporate sector, after undergoing a sharp squeeze over the last two years,
is expected to begin stabilizing by the end of calendar year 1998. This should
be driven by improving GDP growth, a rise in development expenditure,
significant restructuring in the textile sector as well as recapitalization of
public sector banks. In terms of sector focus, we believe that domestically
oriented industries are safer bets for the time being.
The Pakistan market has declined, 2.5% in the first quarter of 1998, as
corporate earnings are likely to be below expectations and negative sentiments
are generated by unclear government policy. Pakistan continues to trade at a
discount to regional markets. This is di-
2
<PAGE>
rectly linked to heightened country risk perception. While there may be a
budget driven rally, any sustainable upward move is not likely until top down
risk perception reduces and local and foreign liquidity flows pick up. In view
of this outlook, we believe the Fund remains well positioned to protect the
downside.
Finally, beginning with this report, we are discontinuing our practice of
designating an individual portfolio manager to sign our reports to shareholders
in order to better reflect the "Team" investment approach of the Fund's
investment adviser, Morgan Stanley Asset Management Inc. (MSAM). The global
emerging markets team at MSAM, led by Madhav Dhar and Robert Meyer and
consisting of investment professionals specializing in countries and regions
throughout the developing world, continues to exercise both overall and
day-to-day responsibility of the investment management of the Fund. We would
also like to inform you that Landon Thomas, who has previously appeared in these
reports, has left MSAM's global emerging markets team and management of your
Fund.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
April 1998
3
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of March 31, 1998 (Unaudited)
<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 -8.97% -- -11.31% -- -10.39% --
ONE YEAR -15.26 -15.26% -5.25 -5.25% -6.75 -6.75%
SINCE INCEPTION* -68.33 -23.65 -61.96 -20.30 -42.70 -12.26
Past performance is not predictive of future performance.
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</TABLE>
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31: THREE MONTHS
ENDED
MARCH 31,
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 $ 5.33
Market Value Per Share . . . . . . . . . . . $ 15.50 $ 9.00 $ 5.25 $ 5.13 $ 4.88 $ 4.44
Premium/(Discount) . . . . . . . . . . . . . 10.5% -21.2% -20.1% 7.5% -18.8% -16.7%
Income Dividends . . . . . . . . . . . . . . -- $ 0.03 $ 0.00# -- $ 0.01 --
Capital Gains Distributions. . . . . . . . . -- -- $ 0.00# -- -- --
Fund Total Return (2). . . . . . . . . . . . -0.50% -18.36% -42.43% -27.40% 26.32% -11.31%
Index Total Return (3) . . . . . . . . . . . N/A -8.51% -31.14% -19.46% 26.13% -10.39%
</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 $0.01 per share.
4
<PAGE>
The Pakistan Investment Fund, Inc.
Portfolio Summary as of March 31, 1998 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
<TABLE>
[CHART]
<S> <C>
Short-Term Investments 6.5%
Equity Securities 93.5%
</TABLE>
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SECTORS
<TABLE>
[CHART]
<S> <C>
Other 9.7%
Utilities -- Electrical & Gas 21.3%
Textiles & Apparel 6.1%
Telecommunications 18.0%
Automobiles 2.3%
Banking 8.7%
Chemicals 12.5%
Energy Sources 9.2%
Forest Products & Paper 1.1%
Health & Personal Care 8.8%
Insurance 2.3%
</TABLE>
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TEN LARGEST HOLDINGS*
<TABLE>
Percent of
Net Assets
----------
<C> <S> <C>
1. Pakistan Telecommunications Corp. 18.0%
2. Hub Power Co. 16.3
3. Fauji Fertilizer Co. Ltd. 9.0
4. Lever Brothers 8.8
5. Muslim Commercial Bank Ltd. 4.3
6. Pakistan State Oil Co., Ltd. 4.3
7. Shell Pakistan Ltd. 3.6
8. Nishat Mills Ltd. 3.5
9. Engro Chemicals Ltd. 3.5
10. Sui Northern Gas Co. 3.2
----
74.5%
----
----
</TABLE>
*Excludes short-term investments.
5
<PAGE>
INVESTMENTS (UNAUDITED)
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MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
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<S> <C> <C>
PAKISTANI COMMON STOCKS (91.1%)
(Unless otherwise noted)
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AUTOMOBILES (2.3%)
Pak Suzuki Motor Co., Ltd. 1,579,000 U.S.$ 1,430
------------
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BANKING (8.7%)
Askari Bank 2,508,592 1,292
Faysal Bank Ltd. 3,510,650 1,403
Muslim Commercial Bank, Ltd. 3,905,770 2,654
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5,349
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BUILDING MATERIALS & COMPONENTS (0.0%)
Dandot Cement Co. (Rights) 62 -- @
------------
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CHEMICALS (12.5%)
Engro Chemicals Ltd. 924,748 2,136
Fauji Fertilizer Co. Ltd. 2,998,000 5,574
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7,710
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ENERGY SOURCES (9.2%)
Pakistan Oilfields Ltd. 471,462 854
Pakistan State Oil Co., Ltd. 452,800 2,635
Shell Pakistan Ltd. 336,300 2,209
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5,698
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FINANCIAL SERVICES (0.8%)
Orix Leasing 520,090 471
Trust Modaraba Ltd. 100 -- @
------------
471
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FOREST PRODUCTS & PAPER (1.1%)
Packages Ltd. 689,062 688
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HEALTH & PERSONAL CARE (8.8%)
Lever Brothers 166,180 5,464
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INSURANCE (2.3%)
Adamjee Insurance Co., Ltd. 773,165 1,425
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TELECOMMUNICATIONS (18.0%)
Pakistan Telecommunications
Corp. 'A' 16,794,000 11,143
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TEXTILES & APPAREL (6.1%)
Artistic Denim Mills Ltd. 1,250,000 326
Crescent Textile Mills Ltd. 1,325,292 315
Gadoon Textile Mills 670,000 379
Ibrahim Fibre Ltd. 3,390,000 606
Nishat Mills Ltd. 9,157,928 2,136
Saif Textiles 110 -- @
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3,762
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UTILITIES -- ELECTRICAL & GAS (21.3%)
Hub Power Co. 9,458,000 10,066
Sui Northern Gas Co. 3,676,770 1,949
Sui Southern Gas Co. 2,988,692 1,174
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13,189
------------
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TOTAL PAKISTANI COMMON STOCKS
(Cost U.S.$77,584) 56,329
------------
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FACE
AMOUNT
(000)
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SHORT-TERM INVESTMENT (2.3%)
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REPURCHASE AGREEMENT (2.3%)
Chase Securities, Inc., 5.60%, dated
3/31/98, due 4/1/98, to be
repurchased at U.S.$1,445,
collateralized by U.S.$1,450,
United States Treasury Notes,
6.375%, due 3/31/01, valued at
U.S.$1,479 (Cost U.S.$1,445) U.S.$ 1,445 1,445
------------
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FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (4.0%)
Pakistani Rupee
(Cost U.S.$2,450) PKR 108,915 2,466
------------
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TOTAL INVESTMENTS (97.4%)
(Cost U.S.$81,479) 60,240
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OTHER ASSETS AND LIABILITIES (2.6%)
Other Assets U.S.$ 4,317
Liabilities (2,738) 1,579
-------------- ------------
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NET ASSETS (100%)
Applicable to 11,604,792 issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 61,819
------------
------------
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NET ASSET VALUE PER SHARE U.S.$ 5.33
------------
------------
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</TABLE>
@ -- Value is less than U.S.$500.
6
