Investment occupies pivotal position in the economic growth (GDP) of a country as increase in the level of investment boosts economic growth and vice versa. Investment increases the real value of the economy. With increasing level of investment, output of goods and services increases. With additional economic growth, many job opportunities are created and gap between employed and unemployed labour force squeezes. More jobs tend to increase purchasing power of the people, as a result consumption expenditure increases and overall welfare of the society gets enhanced.
Investment comes from domestic sources and foreign capital inflows. For the developing countries, the domestic sources — skilled labour, capital, technology and managerial skills — are limited. Therefore, Foreign Direct Investment (FDI) becomes all the more crucial for boosting production capacity and spurring economic growth.
Pakistan is a developing country with low Human Development Index (HDI). Productive expenditures are extremely low as compared to non-productive ones. It is because domestic revenues are too meagre to meet the requirements for desired investment level. Therefore, attracting right kind of FDI is essential to raise the overall investment in the country.
FDI has many advantages. It’s a source of capital for capital-starved countries. It brings new technology. Foreign investors also provide requisite trainings to the local workforce. Moreover, FDI does also innovate the production methods, marketing, distribution, etc. and helps achieve efficiency in resource utilization.
Pakistan was successful in attracting sufficient FDI inflows between 2002-03 and 2006-07. However, it started to decline from 2007-08. On average, FDI contracted by 28% between 2007-08 and 2011-12 as against the average growth of 29% between 2002-03 and 2006-07. Percent increase/decrease in FDI during 1991-92 to 2010-11 is given in Table 1. It shows sharp increase in FDI inflows between 2001-02 and 2006-07. Afterwards, the FDI inflows reduced significantly partly due to global financial crisis and partly due to perilous law and order situation in the country.
Why foreign investment is drying up in the country?
According to the SBP, excessive red-tapism, complicated and less transparent tax procedures, excessive regulatory bodies, labour laws, high costs and slow dispute settlements and time-consuming entry and exit of business firms are important factors responsible for significant reduction in FDI over the years. These are discussed as under:
Poor Internal Security Situation
Poor internal security situation is a major impediment to wooing foreign investors. How on earth foreign investors will bring in their money if they find their own lives or that of their staff and labour force at risk? Numerous such incidents in recent years strengthen this argument. Poor law and order situation is still a serious issue in Pakistan. The government has to come up with stringent measures to improve internal security situation in order to restore the confidence of the investors.
Though the country offers market size — one of the determinants of foreign investment — policy and political instability risks are higher. Frequent policy changes hardly boost investors’ confidence while making financial decisions. In the recent political turmoil in and around Islamabad, the roads were almost blocked with containers. Such a months-long political instability compels big firms to halt their operations. Secondly, it thwarts new investors’ entry. Failure to manage the visit of the Chinese president in the mid of sit-ins provides better illustration that political crisis dissuades the investment opportunities.
Excessive Tax Burden
According to investor surveys, tax administration is the top constraint to businesses in Pakistan. Furthermore, Pakistan ranks 21st in the world in terms of number of payments required to be made by large firms, according to World Bank data. The Federal Board of Revenue (FBR) has taken a number of steps such as self-assessment, online registration, e-filing, e-payment, etc. to facilitate taxpayers in order to broaden the tax base. However, the number of effective taxpayers remains a fraction of the total population. Taxpayers’ low compliance indicates poor tax culture. Hence, promoting tax culture is imperative to broaden the tax base. Equal treatment of taxpayers by reducing exemptions is also important to make tax system transparent, equitable and efficient.
Inadequate Energy Supply
Adequate supply of energy is essential for operating machinery to the fullest capacity and also to utilize labour efficiently. But, the energy supply in the country is far from satisfactory. Frequent power outbreaks have resulted shutting down of hundreds of industrial units ergo reduction in production and employment opportunities. Some investors have even shifted their capital to other countries. Thus this crippling crisis has caused irreparable loss to the economy over the last many years. The policymakers need to focus on this particular area.
By constructing dams, energy supply can be enhanced on one hand and damages due to floods, caused by excessive rains, can be minimized on the other. Likewise, controlling electricity losses is required to recover cost of supplying electricity, which can be further invested in new energy-related projects.
Availability of cheap labour is an important factor that influences the decision of foreign investors. This resource is abundant in Pakistan. Jobs are not sufficient to meet the requirements of labour force, so workers are available at low wages. Moreover, most labourers are not adequately skilled. At first place, they are not requisitely educated. Second, they are not adequately trained. So to attract the foreign investment, the policymakers must have to ensure quality education to the youth. As majority of poor masses can send their children to public schools rather than costly private schools, the government should come up with robust policy to implement curriculum in public schools at par with that in private ones.