RECEDING FDI

FOZIA AROOJ (Fozia.arooj@hotmail.com)
Sep 8 - 14, 2008

Worsening international financial crisis and an unprecedented rise in global food and energy prices tested the strength of economic fundamentals of Pakistan. However country's economy managed to grow at 5.8% in 2007-08, as against 6.8% last year and this year's target of 7.2%. The monetary tightening phase that started from April 2005 in order to curb domestic inflation also played its role in dampening this year's growth. Several important sectors failed to meet their growth targets for the year, exhibiting not only signs of moderation but also fell victim to domestic and external shocks.

The past few years of sustained economic growth had made Pakistan an attractive investment destination by an ever-wider set of investors and leading companies of the world. The foreign direct investment which had attained new heights at $ 6.5 billion last year showed signs of moderation and FDI inflow dropped to of $3.0 billion in July-April 2007-08 as against $3.9 billion in the comparable period of last year augur well for investor confidence on Pakistan's economy. It is pertinent to relate that almost the entire decline in FDI during Jul-Apr 07-08 resulted from decline in cash investment, as reinvested earnings grew by 12.0% during the same period.

The overall foreign investment has two components foreign direct investment (FDI) and portfolio investment i.e., investment in the equity market. Foreign direct investment (private) shown more resilience and stood at $3481.6 million during the first ten months (July-April) of the current fiscal year as against $4180.8 million in the same period last year thereby showing a decline of 16.7%. Private portfolio investment on the other hand witnessed massive decline of 91% by recording inflow of $98.9 million as against $1097.3 million during the comparable period of last year. Public foreign investment depicted modest inflow of only $20.5 million as against outflow of $66.6 million in the comparable period of last year.

FACTORS PROMOTING FDI:

Many factors made Pakistan an attractive place for foreign investments. Firstly, the Pakistan's economy showed responsiveness and potential capacity to meet exogenous shocks and minimize risks in response to various major regional and global events. Secondly, Pakistan has a population of more than 160 million which provided a large market for consumer goods, a growing middle class with adequate purchasing power, and provision of low-cost labor, which reduced the cost of production and its strategic geographical location in Central and South East Asia. Thirdly, Pakistan had an acceptably good physical infrastructure, which is necessary for investment. Finally, there was also a strategic consideration for increasing FDI in Pakistan having implications for global security. Important areas of FDI have been: telecom, energy (oil and gas, power, petroleum refineries), banking and finance, and food and beverages. These four groups accounted for over 80% of FDI inflows (GOP, 2006-07). Other areas, for instance, textile, chemicals and petro-chemicals, automobiles, construction and trade, were also attracting FDI. Almost 57% of FDI has come from three countries, namely, the UAE, US, and UK. US investors with 33.4% investment are on the top, of Switzerland 4.1% or $141.3 million, Hong Kong 3.5% or $121.3 million, Netherlands 2.9% or $101.0 million and Japan 2.9% or $100.3 million were other contributors to FDI inflows. The communication sector including Telecom spearheaded the FDI inflows by accounting for 30.4% stake during July-April 2007-08 followed by financial business 22.6%, energy including oil & gas and power 16.6%, and trade 4.9%. Three groups namely; communication, financial business and oil & gas exploration accounted for almost 67% of FDI inflows in the country. The pace of both FDI and portfolio investment clearly indicates that foreign investors are not upbeat on Pakistan's current and future economic prospects.

With rising macroeconomic imbalances and rising investment needs to grow at a faster pace in the developing countries, foreign investment has played crucial role in providing much needed macroeconomic stability. Foreign direct investment (FDI) has emerged as a major source of private external flows for Pakistan as well amidst widening savings-investment gap. Since current account deficits has generated need for financing, the FDI inflows has provided important source of non-debt creating inflows. During the last two decades countries have liberalized their FDI regimes and pursued investment- friendly economic policies to attract investment to maximize the benefits of foreign presence in the host economy. In many developing countries, FDI has triggered technology spillovers, assisted human capital formation, contributed to international trade integration, helped in creating a more competitive business environment and promoted enterprise development. These developments contributed positively to higher economic growth in many developing countries, which is the most potent tool for alleviating poverty. Another contribution of FDI in recent years to developing countries has been its crucial role of preventing economies from ill-effects of exploding debt accumulation to finance their development needs and thus enabled exchange rate stability. Inflow of foreign investment has remained subdued in emerging markets in FY 08.

FACTORS ERODING FDI:

A probe into the matter reveals that there are several social, economic and political factors that have bottlenecked the growth of FDI in Pakistan. Political uncertainty is the first and foremost reason. Political instability has been endemic in Pakistan. The whole chaos increased the risk of doing business in Pakistan and has decreased its attractiveness as a market for investment. Policy adhocism also begets uncertainty and increases the investment risk. Another important factor is law and order. During last one decade, Pakistan has been subject to twin menaces of religious extremism and ethnicism, which have taken a heavy toll on our economy. There were several incidents of murder and a series of suicide attacks in different parts of the country. The fourth factor is lack of human capital. Workers are widely regarded as the principal asset of a firm and the capital source of its competitive advantage. That is why there is so much emphasis in developed countries on human resource development. In Pakistan however development of human capital has been given a short shrift, which is responsible for low worker productivity. While making investment decisions, MNCs take into account both worker productivity and wages. In Pakistan wages are low but productivity is also low.

Infrastructure, including rail, road and telecommunication network, and price and availability of utilities is another area that needs a lot of improvement. Cost of water and power for business consumers in Pakistan is higher than those in other neighbouring countries like India and China. Infrastructure is also not up to the mark. Poor infrastructure and high cost of utilities increase the cost of doing business and make a country a less attractive market for FDI. Last but not least is the cultural factor. An overwhelming majority of existing or potential MNCs in Pakistan are western. The people of the West have a lifestyle different from us and want to continue that while staying here. However certain self-righteous people want to impose their own values on foreigners and thus meddle into their personal private lives. Nothing irks these foreign investors and managers more than meddling into their personal lives.

CONCLUSION AND RECOMMENDATIONS

Foreign Direct Investment (FDI) has become an important growth factor in the globalization of the world economy. The current wave of slowdown in economic activity could be short-lived if consistency and continuity in economic policies is ensured. A better macroeconomic management could yield dividends which can enhance prospects of the economy. There is need to maintain macroeconomic stability by introducing corrective measures and continue to pursue structural reforms in different sectors of the economy. Keeping in view all these factors it is recommended that

==> Policy makers should provide conducive and friendly environment to foreign investors to attract more FDI.

==> Foreign investor should be given more incentives for the transfer of technology to host country. This would lubricate the local enterprises.

==> For Pakistan import-substitution policy related FDI may prove good.