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Business Recorder [Pakistan's First Financial Daily]
EDITORIAL (April 21 2010): It was painful to see that foreign direct investment (FDI) in the country has declined almost by half during the current fiscal. According to the latest data released by the State Bank on 16th April, FDI fell by 49 percent to only $1.553 billion, during July-March, 2010, as compared to $3.041 billion in the same period last year. Portfolio investment also continued to fall and its net outflow amounted to $182.6 million as against $957.7 million in the corresponding period of 2008-09.
Overall foreign investment, comprising FDI and portfolio investment, thus registered a massive decline of 34.2 percent, or $712.7 million to $1.371 billion from $2.084 billion, in the corresponding period of last year. The fall in foreign investment was shared almost by all the sectors.
The communications sector just received $171 million in the first nine months of the current fiscal year, as against $805 million in the same period last year. Information technology witnessed an outflow of $91 million in contrast to an inflow of $57 million in the previous year.
Financial businesses also registered a steep fall. The inflow under this head was only $118 million as against $672 million during July-March, 2009. FDI in the oil and gas exploration sector, which was traditionally an attractive sector, also came down from $555 million to $520 million during the current year.
The reasons for such a steep decline in foreign investment are not hard to understand. The country has lost attraction for foreign investors due mainly to poor performance of the economy, the deteriorating law and order situation, continued terrorism, poor infrastructure and political instability.
No investor, for instance, would like to stake his fortunes on a country where the energy supply is so uncertain, multinational companies are perceived to have suspicious motives and even the most secure places cannot guarantee safety of one's life. If this unfavourable situation continues, domestic investors would also lose interest and look for greener pastures abroad.
It is unfortunate that these developments are taking place at a time when the growth rate of the economy is already very low and poverty and unemployment are on the rise. The financial meltdown in the developed countries, which started from US and Europe in 2007 and engulfed the entire global financial system, has also taken its toll in the form of reduced FDI and multiplied the country's problems.
A rising domestic saving rate could have partly compensated for the shortfall in FDI, but this too, is not happening due to contraction in disposable incomes, inflationary pressures in the economy and uncertainty about the future. The richer sections of society are even reported to be shifting their savings abroad.
All of this is bad news for the country. To tell the truth, there are no easy solutions either, to reverse this unfavourable situation. A very conducive environment has to be created within the country to attract high doses of foreign investment in order to enhance the productivity of the economy and create more jobs to avoid social upheaval, which is almost imminent. This, of course, is an uphill task when so many adverse factors are simultaneously working against such a proposition.
Sometimes, the government tries to paint a rosy picture about the ground realities through propaganda and publicity, which often proves counterproductive because the judgement of foreign investors cannot be influenced by such tricks.
The fact of the matter is that it would take a lot of effort, tinged with a stroke of luck, to attract the attention of foreign investors to consider the country as a favourable destination for investment. Such an effort would become all the more difficult after the expiry of the Stand-By Arrangement with the IMF, which, at present, is serving as a kind of guarantee for sound management of the economy and gives a certain degree of comfort to foreign investors.
EDITORIAL (April 21 2010): It was painful to see that foreign direct investment (FDI) in the country has declined almost by half during the current fiscal. According to the latest data released by the State Bank on 16th April, FDI fell by 49 percent to only $1.553 billion, during July-March, 2010, as compared to $3.041 billion in the same period last year. Portfolio investment also continued to fall and its net outflow amounted to $182.6 million as against $957.7 million in the corresponding period of 2008-09.
Overall foreign investment, comprising FDI and portfolio investment, thus registered a massive decline of 34.2 percent, or $712.7 million to $1.371 billion from $2.084 billion, in the corresponding period of last year. The fall in foreign investment was shared almost by all the sectors.
The communications sector just received $171 million in the first nine months of the current fiscal year, as against $805 million in the same period last year. Information technology witnessed an outflow of $91 million in contrast to an inflow of $57 million in the previous year.
Financial businesses also registered a steep fall. The inflow under this head was only $118 million as against $672 million during July-March, 2009. FDI in the oil and gas exploration sector, which was traditionally an attractive sector, also came down from $555 million to $520 million during the current year.
The reasons for such a steep decline in foreign investment are not hard to understand. The country has lost attraction for foreign investors due mainly to poor performance of the economy, the deteriorating law and order situation, continued terrorism, poor infrastructure and political instability.
No investor, for instance, would like to stake his fortunes on a country where the energy supply is so uncertain, multinational companies are perceived to have suspicious motives and even the most secure places cannot guarantee safety of one's life. If this unfavourable situation continues, domestic investors would also lose interest and look for greener pastures abroad.
It is unfortunate that these developments are taking place at a time when the growth rate of the economy is already very low and poverty and unemployment are on the rise. The financial meltdown in the developed countries, which started from US and Europe in 2007 and engulfed the entire global financial system, has also taken its toll in the form of reduced FDI and multiplied the country's problems.
A rising domestic saving rate could have partly compensated for the shortfall in FDI, but this too, is not happening due to contraction in disposable incomes, inflationary pressures in the economy and uncertainty about the future. The richer sections of society are even reported to be shifting their savings abroad.
All of this is bad news for the country. To tell the truth, there are no easy solutions either, to reverse this unfavourable situation. A very conducive environment has to be created within the country to attract high doses of foreign investment in order to enhance the productivity of the economy and create more jobs to avoid social upheaval, which is almost imminent. This, of course, is an uphill task when so many adverse factors are simultaneously working against such a proposition.
Sometimes, the government tries to paint a rosy picture about the ground realities through propaganda and publicity, which often proves counterproductive because the judgement of foreign investors cannot be influenced by such tricks.
The fact of the matter is that it would take a lot of effort, tinged with a stroke of luck, to attract the attention of foreign investors to consider the country as a favourable destination for investment. Such an effort would become all the more difficult after the expiry of the Stand-By Arrangement with the IMF, which, at present, is serving as a kind of guarantee for sound management of the economy and gives a certain degree of comfort to foreign investors.
