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Slump in foreign investment | Business Recorder
It is often said that troubles never come alone and this is what exactly is happening with the economy of Pakistan at this point in time.
While almost all the major macroeconomic indicators like the fiscal and external sector deficits, prices and exchange rate are showing deterioration of varying degrees, foreign investment also continues to plunge to new low levels, undermining the prospects of the economy further in the coming years.
According to the latest data released by the State Bank of Pakistan on 15th May, foreign private investment in the country dropped to only dollar 595 million in July-April, 2012 as compared to dollar 1.622 billion in the corresponding period last year, showing a huge fall of over 63 percent.
Out of this, foreign direct investment (FDI) fell to dollar 667 million as against dollar 1292.8 million in the comparable period of 2011-12, while portfolio investment showed an outflow of dollar 71 million in sharp contrast to an inflow of dollar 329 million in the corresponding period last year.
Sector-wise, the most discouraging news was in the telecommunication sector which used to be the favourite area of investment of foreigners but witnessed a profoundly high net outflow of dollar 327 million of investment during the first ten months of the current fiscal as against an inflow of dollar 73 million in July-April, 2011.
The power sector also recorded a net outflow of dollar 25 million compared to a net inflow of dollar 129 million in the same period of last year.
FDI in financial business declined to only dollar 54 million compared to dollar 223 million in the corresponding period of 2010-11.
Transport and trade sectors also witnessed massive declines of 83 percent and 55 percent, respectively, in FDI during the year.
However, investment in the oil and gas exploration sector at dollar 466 million witnessed an increase of 12 percent during July-April, 2012.
Country-wise, FDI from the US was the highest at dollar 196 million followed by the UK at dollar 171 million, Italy at dollar 162 million and China at dollar 113 million.
A steep fall in FDI during the first 10 months of 2011-12 is definitely disturbing news for the country, especially at a time when the economy is in dire need of liquidity to revive its growth prospects to create job opportunities and reduce poverty.
Also, foreign investment is crucial for technological upgradation, innovative improvements and overall modernisation of the industrial base to allow it to be competitive at the international level and enhance exports to narrow the widening trade gap.
Of course, the compulsion to attract FDI would have been less severe if the country was able to generate the required level of domestic resources to finance the needed investment, but obviously this is not the case as indicated by a huge gap in these two variables.
The most worrying aspect of the situation is that foreign investors have, over the years, changed their perception about the country as a favourable destination of investment and shifted their attention to other countries.
This is indicated by a steady decline in FDI in the country from dollar 5.4 billion in FY08 to dollar 3.7 billion in FY09, dollar 2.2 billion in FY10 and dollar 1.7 billion in FY11.
If the present trend continues which we have no reason to contest, the inflow of FDI during 2011-12 could be less than dollar one billion or highly inadequate to make any meaningful contribution to the country's economic prospects.
The reasons for a rapid decline in FDI in the recent years are not difficult to understand.
Although, there are ample opportunities for investment in various sectors of the economy and Pakistan has one of the most conducive policy framework to attract FDI, the inhibiting factors are so dominant and pervasive that foreign investors seem to avoid the country without giving much thought to the positive gestures of the government.
Some of the deterrents to foreign investment include poor infrastructure, energy crisis, very poor law and order situation, corruption, political instability, lack of good governance and increasing militancy.
There is also a growing perception that Pakistan is a safe haven for terrorists and is a place where life, property and other assets are not safe.
In addition, a profound lack of progress in the privatisation process and the inability of the government in conducting auction for 3G licences has also contributed to a woeful decline in FDI.
We are sure that the concerned authorities are well aware of the importance of enhancing FDI flows at this juncture.
There are, therefore, some legitimate expectations that they would try to do everything in their power to remove the above impediments.
Such an effort is not only necessary to attract foreign investment but is also essential to provide an enabling environment to domestic investors who also appear increasingly keen to take their capital to safer shores.
And now, last but not least.
It is important to note that countries like Pakistan have come increasingly to see FDI as a source of economic development and modernisation, income growth and employment.
Arguably, FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development.
It is often said that troubles never come alone and this is what exactly is happening with the economy of Pakistan at this point in time.
While almost all the major macroeconomic indicators like the fiscal and external sector deficits, prices and exchange rate are showing deterioration of varying degrees, foreign investment also continues to plunge to new low levels, undermining the prospects of the economy further in the coming years.
According to the latest data released by the State Bank of Pakistan on 15th May, foreign private investment in the country dropped to only dollar 595 million in July-April, 2012 as compared to dollar 1.622 billion in the corresponding period last year, showing a huge fall of over 63 percent.
Out of this, foreign direct investment (FDI) fell to dollar 667 million as against dollar 1292.8 million in the comparable period of 2011-12, while portfolio investment showed an outflow of dollar 71 million in sharp contrast to an inflow of dollar 329 million in the corresponding period last year.
Sector-wise, the most discouraging news was in the telecommunication sector which used to be the favourite area of investment of foreigners but witnessed a profoundly high net outflow of dollar 327 million of investment during the first ten months of the current fiscal as against an inflow of dollar 73 million in July-April, 2011.
The power sector also recorded a net outflow of dollar 25 million compared to a net inflow of dollar 129 million in the same period of last year.
FDI in financial business declined to only dollar 54 million compared to dollar 223 million in the corresponding period of 2010-11.
Transport and trade sectors also witnessed massive declines of 83 percent and 55 percent, respectively, in FDI during the year.
However, investment in the oil and gas exploration sector at dollar 466 million witnessed an increase of 12 percent during July-April, 2012.
Country-wise, FDI from the US was the highest at dollar 196 million followed by the UK at dollar 171 million, Italy at dollar 162 million and China at dollar 113 million.
A steep fall in FDI during the first 10 months of 2011-12 is definitely disturbing news for the country, especially at a time when the economy is in dire need of liquidity to revive its growth prospects to create job opportunities and reduce poverty.
Also, foreign investment is crucial for technological upgradation, innovative improvements and overall modernisation of the industrial base to allow it to be competitive at the international level and enhance exports to narrow the widening trade gap.
Of course, the compulsion to attract FDI would have been less severe if the country was able to generate the required level of domestic resources to finance the needed investment, but obviously this is not the case as indicated by a huge gap in these two variables.
The most worrying aspect of the situation is that foreign investors have, over the years, changed their perception about the country as a favourable destination of investment and shifted their attention to other countries.
This is indicated by a steady decline in FDI in the country from dollar 5.4 billion in FY08 to dollar 3.7 billion in FY09, dollar 2.2 billion in FY10 and dollar 1.7 billion in FY11.
If the present trend continues which we have no reason to contest, the inflow of FDI during 2011-12 could be less than dollar one billion or highly inadequate to make any meaningful contribution to the country's economic prospects.
The reasons for a rapid decline in FDI in the recent years are not difficult to understand.
Although, there are ample opportunities for investment in various sectors of the economy and Pakistan has one of the most conducive policy framework to attract FDI, the inhibiting factors are so dominant and pervasive that foreign investors seem to avoid the country without giving much thought to the positive gestures of the government.
Some of the deterrents to foreign investment include poor infrastructure, energy crisis, very poor law and order situation, corruption, political instability, lack of good governance and increasing militancy.
There is also a growing perception that Pakistan is a safe haven for terrorists and is a place where life, property and other assets are not safe.
In addition, a profound lack of progress in the privatisation process and the inability of the government in conducting auction for 3G licences has also contributed to a woeful decline in FDI.
We are sure that the concerned authorities are well aware of the importance of enhancing FDI flows at this juncture.
There are, therefore, some legitimate expectations that they would try to do everything in their power to remove the above impediments.
Such an effort is not only necessary to attract foreign investment but is also essential to provide an enabling environment to domestic investors who also appear increasingly keen to take their capital to safer shores.
And now, last but not least.
It is important to note that countries like Pakistan have come increasingly to see FDI as a source of economic development and modernisation, income growth and employment.
Arguably, FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development.
