ROLE OF FOREIGN DIRECT INVESTMENT IN OUR ECONOMY

SHAMSUL GHANI (shams_ghani@hotmail.com)
Sep 8 - 14, 2008

While the net inflow of foreign investment during FY08 has recorded a decrease of 38.4 per cent in the wake of a political turmoil that has sent shiver down country's economy, the redeeming aspect is that FDI has recorded a nominal increase of 0.3 per cent in comparison to FY07. Yet more heartening is the fact that the first month of FY09 has seen FDI going up by 76 per cent against the corresponding month of FY08. Despite an uploaded tarrif structure, the hardy telecom sector still remains favorite of the foreign investors, as it has attracted $147.7 million out of a total of $340.7 million received as FDI during July, 2008. The corresponding month of FY08 having recorded a receipt of $27.2 million only for the telecom sector, the percentage increase for July-08 calculates to 443. In FY08, $1.626 billion were received in communication sector, out of which $1.440 were attracted by telecom sector alone. With the government's plan to divest its stake in PTCL, the current financial year may witness FDI in telecom sector going further up. The following table summarizez the comparative net inflow position of foreign investment.

NET INFLOW OF FOREIGN INVESTMENT

MILLION US$

FY08

FY07

% INCREASE

JULY-09

JULY-08

% INCREASE

A. FOREIGN PRIVATE INVESTMENT

5,172.1

6,960.0

(25.7)

221.5

207.2

6.9

Foreign Direct Investment

5,152.8

5,139.6

0.3

340.7

193.5

76.1

of which privatization proceeds

133.2

255.4

(47.8)

     

Portfolio Investment

19.3

1,820.4

(98.9)

(119.2)

13.7

(970.1)

Equity Securities

19.3

1,570.4

(98.8)

(119.2)

13.7

(970.1)

Of which GDRs of

MCB Bank

 

150.0

       

UBL Bank

90.0

559.7

       

Lucky Cement

106.5

         

Debt Securities

 

250.0

       

of which international bonds of

PMCL

 

250.0

       

B. FOREIGN PUBLIC INVESTMENT

20.8

1,468.3

(98.6)

(1.0)

(49.7)

98.0

Portfolio Investment

20.8

1,468.3

(98.6)

(1.0)

(49.7)

98.0

Equity Securities

 

738.0

       

of which GDRs of

OGDC

 

738.0

       

Debt Securities

20.8

730.3

 

(1.0)

(49.7)

98.0

(Net sale/purchase US$bonds,

FEBS, Tbills PIBs etc)

TOTAL(A+B)

5,192.9

8,428.3

(38.4)

220.5

157.5

40.0

The other beneficiary of the Shaukat Aziz era, banking sector will also remain in the lime light during the current financial year. This sector received $43.4 million in July-08 as against a cumulative receipt of $1.608 million in FY08. The acquisitions and mergers in the financial sector and the prospects of foreign buyers further acquiring local banks in the current financial year promise further growth in the FDI size. In the backdrop of a foreign liquidity crunch, the government is expected to launch GDRs of HBL and UBL in the international market this year.

So, the telecom and banking sectors are set to occupy the two top slots in the list of FDI procurers. The oil and gas exploration sector fetched $37 million only in July-08 as against a total receipt of $635 million in FY08. With the increase in the wellhead prices, the sector is likely to pick up in the coming months. Portfolio investment recorded an abnormal decline of 99 percent in FY08. Incidently, both of the segments - private portfolio investment and public portfolio investment - came down with the same intensity. Cumulatively, $40.3 million only were received in FY08 as against a hefty sum of $3.289 billion in the previous year. The set back portfolio investment received needs little explanation in the face of a gigantic drop of 6,000 points in KSE-100 index.

This means that as long as we keep selling existing strategic assets, and keep our focus on service sectors, we will remain attractive to FDI albeit at the expense of industry as well as new capital formation. Portfolio investment will remain linked to the performance of stock exchange which presently is in an utterly bad shape. India has also gone through a communication sector boom but it has been successful in pursuing the global telecom giants like Samsung, Siemens and LG to set up their industrial facilities there. Capital formation is also a function of country's infrastructure. Pakistan has a very poor industrial-level infrastructure. While a lot of planning is underway to develop new infrastructure, it will take quite some time before it is ready to deliver

The cost of doing business in Pakistan is also very high. Energy shortages mean high cost of electricity and gas inputs resulting in a high cost of end product. High interest rate policy aimed at controlling inflation has also eroded country's industrial base. Moreover, a low literacy rate creates shortage of appropriately trained manpower making the unavailability of skilled labor a serious hurdle in the way of industrialization. With the political strife being high on agenda, our economic future remains bleak. The sooner we came out of this syndrome, the better.

During the last 5-6 years, we saw a huge inflow of foreign investment and foreign remittances but in the absence of any sound industrial policy, this inflow was channeled to non-productive sectors namely stock trading and real estate business. The outcome was a low industrial and agricultural growth coupled with a high service sector growth leading to structural imbalance. Owing to the lack of balanced growth, we have experienced one of the worst food inflations. SBP's high-rate monetary policy aimed at controlling inflation and rupee slide, is being viewed with skepticism.

To maintain a smooth inflow of productive FDI, our new economic mangers will have to put their act together. The job should start from revamping of the policy design. An elite panel of economists should be formed. The panel members must not have any political affiliations. While deciding on policy design, the emphasis should be on long term steady growth rather than any ad-hoc measures based on short term vision. The panel should do economic planning for at least coming 30 years divided into a number of smaller plans, like 5-year plans of yester years. Special emphasis should be placed on the development of a strong infrastructure. Agriculture, industry and energy on the economic side, while education and health on the social side should be given top priority. The foreign investment, being a double edged sword, should be made subject to such highly thought out rules which neither restrict its inflow nor allow a free outflow at the expense of country's economy. The major part of FDI should be used for broadening of country's industrial base and transfer of technology. Such plans once prepared and agreed upon by all stake holders, should be given constitutional protection. Any major deviation by any successive government should be allowed only through a constitutional amendment.