POLITICAL STABILITY & SENSE OF SECURITY VITAL FOR FOREIGN INVESTMENT
Sep 8 - 14, 2008
Over the past few years, Pakistan has been an attractive investment destination by an ever-wide set of investors and leading companies of the world, thanks to ever escalating economic growth. The financial year 2007 has been the most tremendous year in terms of economic boost; foreign direct investments touched the new highs of USD 6.5bln in that year. Pakistan's strong economic growth of last six years has also benefited from the buoyant global economic environment. Nevertheless, FY08 and the subsequent period couldn't maintain this boom any more owing mainly to the continuous political turmoil in the country. Also, the global environment remained inhospitable and had adverse impact on domestic economic environment.
Foreign direct investment has played an important role in providing stability to the economy, given the rising investment needs in the developing economies to grow at a fast pace. FDI has emerged as a major source of private external inflows for the country. Over the last many years, developing countries have liberalized their investment policies to welcome inflow of foreign investment, and this policy has benefited the economies in manifolds. In many developing countries, FDI has triggered technology spillovers, assisted human capital information, contributed to international trade integration, helped in creating a more competitive business environment and promoted enterprise development. These developments have contributed positively towards higher economic growth in many emerging economies. Inflow of foreign investments not only remained constraint in Pakistan but also in other many emerging countries. However, in Pakistan the impact of global slowdown was more pronounced owing to continuous political instability, in turn, impacting the national economy.
Foreign investment scenario in Pakistan looks in jeopardy, as both direct as well as portfolio investments reported declines during FY08. According to the data released by SBP, foreign direct investment in Pakistan declined to USD 2.52bln during first 8MFY08. However, when we come up with the full year results, it remains virtually unchanged, as the month end June only attracts the bulk portion of the total FDI, which helped maintain the total figure largely at the previous year level. However, the portfolio investment witnessed a sharp decline to USD 20.8mln as against USD 1.47bln in the corresponding period last year.
Historically, communication, financial services, energy and trade sectors have been the major contributors to the foreign direct investment inflow to the country. According to a research conducted last year, it was observed that the investments by foreign investors had historically been done in those sectors, which couldn't contribute much towards employment generation in the country. As against these sectors, agriculture sector was the only sectors that had been deprived of the foreign investment, yet contributed the bulk to the employment opportunities to the nation. This analysis proves that the general perception that more FDI means more employment is wrong.
Foreign direct investment inflow in financial business sector during FY08 increased by 72.8% to USD 1.61bln while in the communication sector it dropped by 14.4% to USD 1.62bln. In the power sector, it went down by 65.6% to USD 70.3mln. It is pertinent to note here that in power sector, thermal sector inflows were down by 69.5% to USD 61.5mln from USD 201.6mln in the last financial year, while FDI in hydel power sector was up by 189% to USD 8.8mln from USD 3mln recorded in the corresponding period last year. The sad part of the story is that all other main sectors largely witnessed a drop comparing to previous year, including beverage, tobacco & cigarettes, sugar, textile, paper & board, leather products sectors. Only notable encouraging factor remains that IT sector, software and hardware development fetched USD 13.7mln and USD 6.6mln respectively, which was more than what achieved in the corresponding period last year.
Despite various negativities, foreign investors still seems upbeat on Pakistan economic prospects, particularly investors from UAE market. The down fall in foreign investments remains in line with the ongoing political turmoil and security issues. Ironically, according to the World Bank's "Doing Business 2008" report, Pakistan is ranked 19th out of 178 economies when it comes to protecting investors; the rank was better than some of the most prominent emerging economies including India, Indonesia, Thailand and Korea.
The downfall in total foreign private investment comes up at a time when Pakistan is trying to attract foreign investors to enter the domestic debt market. On March 10th of the current year, Federal Board of Revenue (FBR) has slashed the withholding tax rate on PIB from 30% to 10% for foreign investors in the quest for less inflationary alternatives to finance the fiscal deficit.
Rising oil prices, domestic power crisis along with political uncertainties are the major concerns barring foreign investors to enter Pakistan with long-term investment prospective. Unless these concerns are resolved, attracting FDI in the real economy seems a far cry. Most importantly, there is a strong need to address the political issues, and show stability and unity to global world as only we can correct the adverse trend prevailing in the country and can improve our image in the world market.