<PAGE>
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THE
PAKISTAN
INVESTMENT
FUND, INC.
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FIRST QUARTER REPORT
MARCH 31, 1999
MORGAN STANLEY DEAN WITTER INVESTMENT 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 AND ACTING
SECRETARY
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
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U.S. INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment 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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CUSTODIAN
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 or visit our website at
www.msdw.com/institutional/investmentmanagement.
<PAGE>
LETTER TO SHAREHOLDERS
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For the three months ended March 31, 1999, The Pakistan Investment Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 17.30%
compared to 15.91% for the IFC Global Pakistan Total Return Index (the "Index").
For the period from the Fund's commencement of operations on December 27, 1993
through March 31, 1999, the Fund had a total return, based on net asset value
per share, of -78.49% compared to -67.30% for the Index. On March 31, 1999, the
closing price of the Fund's shares on the New York Stock Exchange was $2.00,
representing a 28.1% discount to the Fund's net asset value per share.
The Pakistan stock market was the second best performing emerging market in Asia
after India, during the first quarter of 1999. More interestingly, the KSE-100
Index chalked up an impressive gain of 24% from its recent low of 852 on
February 8, 1999. While this was exclusively a domestic rally driven by easier
liquidity, the lowering trend of interest rates and improving sentiment towards
the Hubco situation, there are reasons to believe that the macro economic
fundamentals of Pakistan are also beginning to show initial signs of
improvement.
Official inflation as measured by CPI (Consumer Price Index) has been well
controlled at below 8% for the last six months against an average of 12% during
the last three years. Foreign exchange reserves have been maintained at $1.7
billion, a substantial improvement from a low of $400 million in the first
quarter of 1998. Current account deficit has narrowed to 3.5% of gross domestic
product from 6.5-7.0% in 1996 and 1997 and the budget deficit as a percentage of
gross domestic product is trending down to 4.8% from an average of 6.0% during
1994-1998.
The overall investment theme for Pakistan is fairly straightforward at present.
Investors need to basically address three critical questions:
First, will the government continue adhering to IMF conditions without
substantive deviation and thus ensure continuation of the Enhanced Structural
Adjustment Facility/Enhanced Financial Facility ("ESAF/EFF") program,
particularly after the recent missile tests? Second, how successful can the
government be in using the 18-24 month breathing space provided by the Paris
Club debt rescheduling for implementing meaningful structural reforms? Third,
depending on the answers to the above two questions, what is the likely impact
on underlying growth, specific industry and corporate sector financial health
and the earnings outlook?
Our assessment of the first question is that with the country credit rating at
its lowest ebb, the government no longer has other venues for seeking foreign
funding available to it except the multilateral and bilateral support
represented by the IMF, Paris Club/Pakistan Development Forum and the World Bank
group. What this implies is that in order to continue enjoying their support,
the government must show real progress on their conditionalities and associated
economic reforms. There have been concerns that economic support from G-7
countries may suffer due to the missile tests. We believe that investors should
focus on the fact that as long as Pakistan adheres to the original time line
agreed with the U.S. for signing the Comprehensive Test Ban Treaty ("CTBT"), G-7
support is likely to remain intact although there may be delays in some
concessional finance disbursements in order to raise pressure on Pakistan.
Some indication that policy direction is beginning to turn positive can be
discerned by the following developments:
1) Maximum import tariffs have been brought down to 35% from 45% within the
agreed timetable. This fulfills a long-standing conditionality in several IMF
programs, which Pakistan initiated but never followed through in the past.
2) The power sector crisis is finally beginning to be handled with greater
seriousness than before. Induction of the army into the Water and Power
Development Authority ("WAPDA") and its reported success in recovering up to 4.0
billion rupees from defaulters and saving 1000 MW of electricity by cracking
down on power theft within a few months is a commendable achievement. It only
proves the fact that tremendous resource mobilization and efficiency enhancement
is possible through improving governance and administration. The tariff
re-balancing proposed by WAPDA and approved by the National Electric Power
Regulatory Authority ("NEPRA") is also a positive sign in so far as it should
raise overall revenues of WAPDA. Detailed analysis will indicate there has not
been a tariff reduction as suggested by the popular press. In fact, the tariff
re-balancing is industry friendly and should be positive for corporate margins.
3) The government - IPP conflict on tariffs has entered its final phase and with
a nudge from international development agencies as well as some concessional
fi-
2
<PAGE>
nance, there is rising likelihood of resolution by the second half of
calendar 1999.
4) The foreign exchange regime has been significantly liberalized with 95% of
the export-import related foreign currency requirement being met through the
interbank determined market. The State Bank of Pakistan (SBP) has done an able
job of keeping this market stable and orderly. This is especially commendable
given that its experience of flexible exchange rate regime is still very new.
More important, SBP has continued to focus on strengthening the regulatory and
operating infrastructure of the foreign exchange market by strict monitoring and
pushing banks to upgrade technology as well as control and reporting systems to
cope with new demands of a liberalizing foreign exchange regime.
5) The new Security and Exchange Commission of Pakistan (SECP) is already taking
a proactive approach towards corporate governance. Several cases have been
brought against companies floating rules within a few months of SECP's
formation. The government has also shown greater awareness regarding capital
market reforms and there is increasing incidence of cooperation between the
stock exchanges and regulators.
Though the above measures are positive at the margin, the country is still a
long way off from reinstating the confidence of foreign investors. Very critical
issues pertaining to medium term policy and economic outlook still need clearing
up. Key issues concern the endemic fiscal deficit where, despite some progress
on expenditure curtailment, no success has been reported for revenue collection.
The inability to substantially increase the tax base and consequent revenue
collection is now the single biggest hurdle facing economic managers.
At the same time, it has become clear that lack of export growth despite an
effective devaluation of over 18% since June 1998, points towards fundamental
structural weakness with respect to the country's ability to generate hard
currency. This is a critical issue because two years hence, when external debt
servicing resumes fully, foreign exchange generating capability will dictate how
much pressure is exerted on external reserves, especially as foreign currency
accounts will no longer be there to prop them up.
Finally, the major policy plank of improving economic efficiency through
privatizing public sector enterprises is still in a state of hibernation.
Despite several deadlines, the privatization process has so far not really
gotten off the ground in any substantial way. There are indicators that progress
might be achieved on this front by the end of 1999 but a more realistic
possibility is that some privatizations could occur in fiscal 2000. That is the
time line which investors need to factor in their investment strategies.
Our prognosis is that the economy is indeed beginning to stabilize after the IMF
package and foreign debt rescheduling as well as some progress on wasteful
expenditure curtailment and import compression.
Domestic liquidity has improved and a growth-oriented environment is beginning
to emerge with stable inflation, lower interest rates, stable exchange rates and
foreign exchange reserves.
Going forward, our view is that the government is likely to follow through on
economic reforms, remain in the ESAF program and approve export repatriation
requests more expeditiously, and we feel that Pakistan's market risk premium
from foreign investors perspective will also begin narrowing in the second half
of calendar 1999. Once the market has absorbed any foreign selling after the
foreign exchange regime is further liberalized, we believe that seasoned
emerging market investors will again begin exploring Pakistan equities, which
offer some of the cheapest valuation seen in global markets.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
April 1999
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.
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DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO CHARACTERISTICS,
CAN NOW BE ACCESSED AT www.msdw.com/institutional/investmentmanagement.
3
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of March 31, 1999 (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 6.67% -- 17.30% -- 15.91% --
One Year -51.14 -51.14% -43.46 -43.46% -42.94 -42.94%
Five Year -81.82 -28.89 -78.57 -26.51 -70.62 -21.73
Since Inception* -84.53 -29.87 -78.49 -25.33 -67.30 -19.15
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
ENDED
1993* 1994 1995 1996 1997 1998 MARCH 31, 1999
----- ---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share..... $ 14.03 $ 11.42 $ 6.57 $ 4.77 $ 6.01 $ 2.37 $ 2.78
Market Value Per Share ....... $ 15.50 $ 9.00 $ 5.25 $ 5.13 $ 4.88 $ 1.88 $ 2.00
Premium/(Discount)............ 10.5% -21.2% -20.1% 7.5% -18.8% -20.7% -28.1%
Income Dividends.............. -- $ 0.03 $ 0.00# -- $ 0.01 $ 0.16 --
Capital Gains Distributions... -- -- $ 0.00# -- -- -- --
Fund Total Return (2)......... -0.50% -18.36% -42.43% -27.40% 26.32% -57.25% 17.30%
Index Total Return (3)........ N/A -8.51% -31.14% -19.52% 26.13% -55.88% 15.91%
</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 $0.01 per share.
4
<PAGE>
The Pakistan Investment Fund, Inc.
Portfolio Summary as of March 31, 1999 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (98.4%)
Short-Term Investments (1.6%)
</TABLE>
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SECTORS
[CHART]
<TABLE>
<S> <C>
Automobiles (2.8%)
Banking (5.6%)
Chemicals (21.2%)
Energy Sources (11.3%)
Forest Products & Paper (1.5%)
Health & Personal Care (11.3%)
Insurance (4.1%)
Telecommunications (13.5%)
Textiles & Apparel (7.2%)
Utilities--Electrical & Gas (17.8%)
Other (3.7%)
</TABLE>
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TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Fauji Fertilizer Co., Ltd. 14.7%
2. Hub Power Co. 13.9
3. Pakistan Telecommunications Corp. 13.5
4. Lever Brothers Pakistan Ltd. 11.3
5. Pakistan State Oil Co., Ltd. 5.3
6. Nishat Mills Ltd. 4.9
7. Engro Chemicals Ltd. 4.4
8. Shell Pakistan Ltd. 4.4
9. Adamjee Insurance Co., Ltd. 4.1
10. Muslim Commercial Bank Ltd. 3.1
----
79.6%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
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STATEMENT OF NET ASSETS (UNAUDITED)
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MARCH 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
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<S> <C> <C>
PAKISTANI COMMON STOCKS (96.3%)
(Unless otherwise noted)
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AUTOMOBILES (2.8%)
Pak Suzuki Motor Co., Ltd. 1,579,000 U.S.$ 905
------------
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BANKING (5.6%)
Askari Bank 1,688,591 442
Faysal Bank Ltd. 1,861,150 394
Muslim Commercial Bank Ltd. 2,222,770 985
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1,821
------------
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CHEMICALS (21.2%)
Engro Chemicals Ltd. 709,259 1,421
Fauji Fertilizer Co., Ltd. 4,432,600 4,742
ICI Pakistan Ltd. 3,695,100 683
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6,846
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ENERGY SOURCES (11.3%)
Pakistan Oilfields Ltd. 471,462 504
Pakistan State Oil Co., Ltd. 1,058,880 1,725
Shell Pakistan Ltd. 460,800 1,420
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3,649
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FINANCIAL SERVICES (0.0%)
Trust Modaraba Ltd. 100 -- @
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FOREST PRODUCTS & PAPER (1.5%)
Packages Ltd. 648,671 481
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HEALTH & PERSONAL CARE (11.3%)
Lever Brothers Pakistan Ltd. 225,160 3,642
------------
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INSURANCE (4.1%)
Adamjee Insurance Co., Ltd. 1,512,456 1,321
------------
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TELECOMMUNICATIONS (13.5%)
Pakistan Telecommunications Corp. 'A' 9,127,600 3,270
Pakistan Telecommunications Corp. GDR 30,383 1,088
------------
4,358
------------
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TEXTILES & APPAREL (7.2%)
Artistic Denim Mills Ltd. 1,250,000 264
Crescent Textile Mills Ltd. 9 -- @
Ibrahim Fibre Ltd. 3,390,000 473
Nishat Mills Ltd. 7,803,411 1,570
Saif Textiles Mills Ltd. 110 -- @
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2,307
------------
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UTILITIES -- ELECTRICAL & GAS (17.8%)
Hub Power Co. 14,281,100 U.S.$ 4,483
Sui Northern Gas Co. 2,397,270 450
Sui Southern Gas Co. 4,527,811 816
------------
5,749
------------
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TOTAL COMMON STOCKS
(Cost U.S.$53,517) 31,079
------------
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<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.5%)
Pakistani Rupee
(Cost U.S.$492) PKR 25,524 491
------------
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TOTAL INVESTMENTS (97.8%)
(Cost U.S.$54,009) 31,570
------------
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OTHER ASSETS AND LIABILITIES (2.2%)
Other Assets U.S.$ 1,186
Liabilities (472) 714
------------ ------------
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NET ASSETS (100%)
Applicable to 11,604,792 issued and outstanding
U.S. $0.01 par value shares (100,000,000
shares authorized) U.S.$ 32,284
------------
------------
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NET ASSET VALUE PER SHARE U.S.$ 2.78
------------
------------
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</TABLE>
@ -- Value is less than U.S. $500.
GDR -- Global Depositary Receipt
6
