Foreign Direct Investment stood at US$812.6 million in fiscal 2011-2012, down by a mammoth 50 per cent compared to a year ago. The FDI was US$1.635 billion in financial year 2010-2011.
What a pity! FDI is fading away gradually for the last many years. It peaked at US$5.41 billion in financial year 2007-2008 ‘the highest amount of foreign investment Pakistan ever relished. It also included proceeds from privatization of the state-run entities such as the state-run telecom giant PTCL.
Pakistan Central Bank in its latest annual report laments: ‘Disinvestment (foreign loan repayments) by two large cellular companies was the major reason for this decline in FDI. Pakistan in recent years has struggled to attract foreign investment.’ It is evident from the official data that two big investors in the telecommunication sector, Telenor from Norway and Etisalat of the UAE, are repatriating funds. The outflow from Norway was US$275 million during the financial year 2011-2012. Likewise, Norway sucked back some US$102.6 million in the first half of the current fiscal.
The image of Pakistan in the world’s eye is very bad. The so-called war on terror with no result in sight has its plight in each and every segment of the society. The worsening law and order situation across the country, the burning cauldron of Balochistan coupled with the sectarian bloodbath unabated as well as incessant target killing in the port city of Karachi are taking their toll. The chronic energy crisis ‘the acute shortfall in electricity and gas supply’ is all but adding fuel to fire.
The modern-day economy is nothing but political economy. The contentious state of domestic politics and the weak governance standards have blocked progress on the economic reform. Tensions are rising in the run-up to the election, between March and May. These developments are a sign of the worsening in relations between the executive, judiciary and military arms of the government and represent a risk to the smooth transfer of power. Such events also undermine Pakistan’s ability to make policies to meet the pressing economic challenges, bolster investor confidence and attract external financial support from the country’s official creditors and donors, the Standard and Poor’s report elaborates.
A threadbare analysis of last three-and-a-half financial years’ period exposes Pakistan’s vulnerability towards sustaining stability in terms of attracting direct investment from friendly and rich nations. The United States of America (US) and the United Kingdom (UK) remained the biggest investors in Pakistan. Companies from the two big nations prefer to invest in the very much lucrative oil and gas sector only. Around US$303 million of investment is made in the oil and gas sector during the first half of the current fiscal. A decent investment in financial business is also seen off and on.
The exploration and production costs in Pakistan are relatively high, given the country’s natural gas reserves are found at a greater than average depth, and given the problems of terrain and infrastructure. The single most important incentive for exploration and production companies is the well-head price of natural gas. One of the reasons for the current level of underproduction is the low price that exploration and production companies realize for their commercial activities.
The risks that exploration and production companies cite as deterrents include security; policy uncertainty and contract enforcement. Finally, there is no authentic third-party estimate of Pakistan’s natural gas reserves, which keeps Pakistan under the radar for foreign investors. One must not forget that exploration and production companies have to operate on a much longer investment horizon than most other investors.
Furthermore, in the last five years, with the exception of intermediate goods such as fertilizers, cement, steel, and petroleum refining, no sector has attracted much investment. For instance, despite a strong demand, we find little or no local manufacturing of cellular phones and their accessories, rechargeable fans, energy saving bulbs, synthetic fabrics, moulds and dyes for auto-parts, processed/powdered milk, children-wear, low-tech electrical appliances, remote controls and office equipment.
The global financial turmoil of 2008-09 had an adverse impact on FDI in the emerging economies. However, with a subsequent improvement in investor confidence, the FDI flows have recovered to some extent in recent years. In the case of Pakistan, however, FDI has not yet picked up.
The inward FDI performance index suggests that over the years, Pakistan has lost momentum in attracting FDI.
In contrast, some of the other countries in the group have either stabilized or improved. Initially, the fall in FDI flows to Pakistan was considered to be in line with the global trend as most of the countries in the region were facing similar declines. This suggests that the country needs to make more efforts to attract FDI, especially when debt inflows are also low.
Interestingly, Pakistan has a better standing in terms of ‘Ease of Doing Business Ranking’ compiled by the World Bank. The ranking shows that Pakistan is better placed than Bangladesh, India, Indonesia and Philippines. The ‘Cost of Doing Business Report’ assesses regulations affecting domestic firms in 183 economies and ranks the economies in 10 areas of business regulation, such as starting a business, resolving insolvency and trading across borders.
Foreign direct investment (FDI), which supported the external sector during the past few years, shrank to 0.35 per cent of GDP. It means the major non-debt-creating source of financing the current account deficit ethers into thin air. Financing of the current account deficit was very challenging as the capital and financial account surplus contracted by US$600 million in fiscal 2010-2011. This fall was due to a decline in both, non-debt (investment) and debt (loans) inflows. Not only did FDI is not coming in, the disbursements of fresh loans are also lower than last year.
This means that the overall deficit in the external account had to be financed from the country’s foreign exchange reserves, which declined by US$3.8 billion during fiscal 2011-2012. Although reserves are still enough to fulfil the external debt payments due over the next year, weak capital flows and the absence of emergency liquidity infusions would ultimately weigh on the reserve adequacy and increase the possibility of default. This development would be reflected in a sharp increase in the External Vulnerability Indicator from 32.3 per cent in fiscal 2011-2012 to 52 per cent in the current fiscal, if the decline in reserves is not checked.
On the other hand, Pakistan’s standing is not as encouraging when it comes to the macroeconomic environment, quality of institutions, infrastructure facilities, human development indicators and political risk, which are considered important determinants of FDI. According to the Global Competitiveness Report of 2011-12, Pakistan lags behind its peers in most of these indicators. Moreover, while other countries have either made improvement or (remained stagnant), Pakistan has slid further down. Pakistan now ranks above 100 in all the competitiveness indicators.