POLITICAL UNCERTAINTY, SECURITY RISKS AFFECTING FDI INFLOWS
Jan 4 - 10, 2010
Pakistan continues to face economic, political and security challenges, which are likely to hinder foreign direct investment (FDI) in the country. Almost all sectors of the economy are under severe stress due to weak economic growth. The three main sectors- the telecom, power, and finance have already lost attraction due to terrorism, which shook the confidence of both the local as well as foreign investors.
Analysts believe that mounting terrorism inside the country is expelling foreign investors from the country while causing massive losses to manufacturing and trading sectors.
The FDI dropped by 52 percent during July-November period of current fiscal year due to power shortage, worst law and order situation and uncertainty on political front. FDI reduced to $774 million in July-November of current fiscal year as compared to $1.62 billion in same period of last fiscal year, depicting a decrease of $846.7 million. However, portfolio investment, which was on decline during last fiscal year, posted a surge of 291 percent due to some profit taking in the equity market.
Portfolio investment mounted to $311.3 million in July-November relative to a negative position of $162.9 million in corresponding period of last year.
A political crisis is raising head in the country, as President Asif Ali Zardari is facing calls to step down after the Supreme Court struck down an amnesty that had protected the increasingly unpopular leader and several of his political allies from corruption charges.
November was the third consecutive month in which the country posted decline in foreign direct investment (FDI) due to worst law and order situation. Rising political uncertainty has cost the country's stock markets dearly in the shape of outflow of foreign investment in December that was otherwise showing encouraging signs in the previous months. The experts believe that the inflows would further decline in the coming months as new development on political front has started taking strong grip over the country. Market players are anxious over the uncertain political situation and its fallout on the economy and stock business.
The double-digit inflation has pushed more people below poverty line in the absence of any significant economic activity owing to prevailing law and order situation in the country.
National Reconciliation Ordinance (NRO) was promulgated by former president Pervez Musharraf as a result of a US-brokered deal that allowed former Prime Minister Benazir Bhutto to return home from self-exile and participate in politics without facing charges. Under the deal, corruption investigations involving up to 8,000 ministers, bureaucrats or politicians from across the spectrum were stopped.
After the assassination of Benazir Bhutto in December 2007, her husband Zardari provided leadership to the Pakistan Peoples' Party (PPP) and was elected the country's president last year after the Musharraf's resignation. Zardari is facing several corruption cases including the alleged misappropriation of $1.5 billion and an alleged multi million-dollar money laundering case.
The uncertainty regarding corruption cases against some sitting ministers, advisors, and members of parliament has created uncertainty among the investors. The benchmark Karachi stock exchange (KSE) 100 Index so far witnessed a net outflow of $6.279 million in December. The absence of any leverage product for the last many months has already hampered the entry of local as well as foreign funds in a big way.
The country was also unable to grapple the situation arisen because of global financial crisis and only a few countries found Pakistan attractive for portfolio investment.
Investors are cautious of the future impact of post-NRO scenario, and have decided to keep an eye on day-to-day developments before resuming normal operations.
The country's economy is already paying the heavy costs of fighting terrorism. Islamabad launched its largest offensive against Taliban militants in October by sending 28,000 troops into South Waziristan, the tribal area in the country's northwest. The U.S. wants Islamabad to extend its campaign against Islamist extremists, but the rising political tensions in the country is not only harmful for the country's economy, which is presently in recovery phase, but it may also affect the authorities' administrative capabilities to effectively deliver vis-‡-vis war on terror.
Mainly the policies of the government bring foreign investment in a country.
The policies of liberalization, deregulation and privatization of the former government resulted in rapid growth of all segments of the economy particularly telecom and banking sectors. These policies paid rich dividends.
The reforms implemented under former government however lacked strategic policy coherence. The heavy outflow of the portfolio investment during July-January 2007-08 lowered the growth of FDI, which had increased by 7.9 per cent during the same period a year ago. The country had received $669 million portfolio investment during July-January 2006-07, but it received only $21 million during the same period a year ago.
In order to attract foreign investment in the country, the former government of Prime Minister Shaukat Aziz had allowed the foreign companies to repatriate100 percent profits to their owners abroad. But this policy proved short-sighted, as it attracted the foreign capital for a short time period to meet the country's trade and current account deficits, but failed to lower the cost of doing business and prepare a skilled workforce in the country.
Pakistan had attracted $1.524 billion FDI during the fiscal year 2004-05, which was 61 per cent higher than the corresponding period of 2003-04. This also included $363 million FDI as privatization proceeds of 10 per cent first tranche of PTCL and $103 million second tranche of Habib Bank's privatization. In 2004-05, the portfolio investment from US amounted to $47 million, up from $21 million the previous year and higher than from any other country. The country's total foreign investment witnessed a growth of 50 percent at 6.282 $billion during 11 months of last fiscal year 2006-07 against $4.177 billion of the fiscal year 2005-06.
In 2006-07, USA was on top with $1.544 billion investment, while UK with $1.139 billion was the second. UK and USA share in total foreign investment (FDI and portfolio investment) in 2006-07 had increased by $1.795 billion to $2.683 billion as compared to $888 million in fiscal year 2005-06.
The beginning of the last fiscal year 2008-2009 had however been encouraging with respect to FDI inflows that recorded an increase of 76 per cent in the first month. FDI inflows were at $340 million in July 2008, according to the State Bank of Pakistan. The telecommunication sector received the lion share of $147.7 million in the month under review as against the $27.2 million in the same month last year. The financial sector received $43.4 million in July 2008 against $28 million the same month last year. Oil and gas exploration sector attracted $37 million in FDI in July 2008.
Today, political instability, civil conflicts and law and order are the major factors in reducing the attractiveness of Pakistan as a host for foreign capital. The present government needs to improve its economic conditions and policy framework and ensure improved governance to attract sizable foreign investment. The improvement in infrastructure and the rule of law is direly needed. There also exists a considerable room for legislative and regulatory reforms particularly at the provincial level. Saudi Arabia, USA, UK, and China can still be a major source of investments into the country. The main challenge for Pakistan is to keep up with reforms in many developing countries.