MAKING PAKISTAN PREFERRED DESTINATION FOR INVESTMENT

SHABBIR H. KAZMI
Feb 23 - Mar 01, 2009

According to the latest data released by the State Bank of Pakistan, net foreign investment inflows into the country have declined by 12.7% to US$ 2.23 billion during July-January period of the current fiscal year. The net inflow was US$ 2.55 billion during the same period last financial year.

Foreign private investment inflow was US$2.26 billion during 7MFY09, down 10.6% from US$2.53 billion in 7MFY08. On the other hand, foreign public investment showed outflow of US$ 34.6 million as against an inflow of US$ 21.5 million, registering a decline of 261 per cent.

The total foreign direct investment registered a marginal increase of 1.3% to US$2.58 billion in 7MFY09 as compared to US$2.55 billion in 7MFY08.

On the other hand, portfolio investment took a nosedive with outflow amounted to US$ 356 million during 7MFY09 as compared to an inflow of US$0.4 million during the same period of last fiscal year.

An investment of US$310.2 million came from the United States of America, US$282 million from Mauritius, US$208.6 million from Malaysia, US$202.9 million from Singapore, US$161.6 million from Switzerland, US$131.7 million from UK, while US$126.1 million from the UAE.

The above stated numbers may look satisfactory to some people but the point to be remembered is that during the current fiscal year Pakistan's GDP is likely to post disappointing growth rate, particularly the large-scale manufacturing sector. However, financial sector is likely to absorb the jolt because of a robust regulatory regime. While around the world banks and other financial institutions are posting horrendous results, Pakistani banks have announced above average results.

Having said this it is necessary to keep in mind that the country needs massive investment for producing exportable surplus. The dwindling textile exports demand extensive refurbishing of the entire sector, particularly the value adding chain. Although, one-year moratorium has been provided to the textile units (key beneficiary being the spinning sector) the probability of revival of units in distress remains low because of the outrageous business model being followed by these companies.

The present government has not been able to overcome issues facing energy sector, worst being circular debt. The government intends to issue bonds for resolving the issue. However, issue of bonds just cannot resolve the issue unless the debtors discharge their liabilities. It seems the economic managers are keen in borrowing more to discharge an outstanding liability rather than streamlining the cash flow.

Pakistan needs massive investment in the energy sector for enhancing indigenous production of crude oil, gas, and electricity. Unless the issue of energy shortage is resolved, it will not be possible to maintain the current production levels, what to talk of enhancing exportable surplus. Twin factors eroding competitiveness of the local manufacturers high energy cost and prolonged load shedding of electricity and gas.

Pakistan needs to add 5,000MW power generation capacity, which alone requires around US$5 billion investment. On top of this almost doubled amount is required for revamping transmission and distribution network, mainly for containing rampant power theft. It must be kept in mind that power plants in Pakistan are a less inefficient when compared to global standards but the real culprit is T&D losses, exceeding 35% of the total units dispatched by the distribution companies.

It has been highlighted repeatedly that GDP growth rate cannot be accelerated without removing the impediments affecting the agriculture sector. Low yield of Pakistan's major crops can be attributed to inadequate availability of water and fertilizer. For ensuring round the year supply of irrigation water, Pakistan must construct storage facilities i.e. dams. The added advantage is production of hydel electricity at a very nominal cost.

The cultivable land in Pakistan is deficient in nutrient content, requiring balanced use of fertilizer. The country requires application of appropriate dosage of urea and DAP. Despite government paying billions of rupees subsidy farmers have been suffering due to shortage and black marketing. The issue can be resolved conveniently by adding new urea manufacturing facilities. According to industry experts, Pakistan must add 1.5 million tons/annum urea-manufacturing facilities. Availability of gas for these units can be ensured by cutting down gas supply to power plants.

Agriculture output can also be increased by introducing corporate farming. Over the years, landholding in the country has reduced to uneconomic units, the main cause of low yield. Now the country needs land reform for clustering of small and uneconomic units. For scientific corporate farming, massive investment in agriculture implements and irrigation system is required. Inviting the overseas investors can help in overcoming both the issues. Investors from a number of oil rich countries have already started acquiring land either through outright purchase or on rent. If foreign investors can invest in manufacturing and services sectors why declare agriculture a 'holy cow' untouchable for the overseas investors?

There has also been a lot of criticism on diverting ships to Gwadar port because of lack of handling and storage facilities. This issue came to limelight when fertilizer was discharged at this port. Along with constructing handling and storage facilities road and rail network has to be created. If NHA can construct expressways BOT basis in other parts of the country, what is stopping it to construct expressway link to Gwadar port?

In the discussions with local and foreign investors, a number of serious impediments have been pinpointed and the government must address these at the earliest. The issues raised are: 1) precarious law and order situation, 2) inaccessibility of ministers and senior bureaucrats, 3) concentration of decision making authority, 4) poor interaction with the business community, 5) habit of sweeping the issues under the carpet mainly because of lack of comprehension of the issues and, 6) who cares attitude.