RECEDING FOREIGN INVESTMENTS

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
July 12 - 18, 20
10

Today Pakistan is facing economic, political and security challenges, which are likely to hinder foreign direct investment (FDI) in the country. On security front, the challenge is however more serious. Law and order is the major factor in reducing the attractiveness of Pakistan as a host for foreign capital.

The worsening security situation during last five years raised security concerns and many foreign firms decided to stay away from more business in Pakistan. The improvement in rule of law is direly needed. In the present challenging environment, the foreign companies have moved to repatriate their profits from the country.

Pakistan's economy has paid heavy costs in terms of flight of capital, closure of industries, loss of employment, economic slowdown, and loss of inflow of FDI due to the country's frontline role in war on terror.

The FDI has posted a decrease of 39 percent to $2.031 billion during the first eleven months of the fiscal year 2010-11, which ended on June 30, as compared to $3.33 billion in corresponding period of last fiscal year, depicting a decrease of $1.3 billion.

Analysts believe the security issue has hit the economy at every level, as the foreign businesspersons and investors remain afraid to visit the country where they cannot move freely and where heavily guarded hotels also remain the prime target of terrorists. Trade and industry people fear that the heinous act would further damage the already shattered image of the country internationally and would result in massive suspension of trips to Pakistan by foreign investors and trade partners.

At least 45 people were killed and 175 were injured when two suicide bombers blew themselves up at the shrine of Syed Ali Hajwairi popularly known as Data Gunj Bakhsh on July 01 in Lahore. The business community believes that the harmful impact of the Lahore incident on the export trade would be visible in the coming months if foreigners divert their orders to other countries.

Businesses across the country were adversely affected as all major markets and commercial shopping centers were shut on July 3 due to strike call given by religious and political parties to condemn the killing at the shrine of a Sufi saint in Lahore. The country's commercial capital Karachi suffered a loss of Rs3 billion on Saturday due to strike, as industrial areas production activities had been affected owing to thin public transport. The supply chain of goods remained suspended due to closure of main markets in Karachi. The arrival of trucks, carrying fruits and vegetables, from upcountry remained normal but the wholesale market lacked buyers from the city areas in Karachi. Many traders dealing in perishable items might have suffered loss due to paucity of buyers as the life of these items usually expires in 24 hours. Only 20-25 per cent production activities were hit mainly in the morning shift owing to thin availability of transport due to strike in Karachi, the country's industrial hub.

The unabated incidents of terrorism in major cities and towns of the country have been compounding the country's economic woes, resulting into reduced foreign investment and lesser trade and business activities. Since the country's army launched a major military offensive against Taliban militants in the country's northwestern tribal belt in October last year, the militants retaliated with a string of terrorist attacks in major cities and towns in which hundreds of people have lost their lives.

Foreign investors harbor a whole range of concerns about worsening security situation in the country. Karachi, the country's commercial capital is presently in grip of sectarian violence, which has claimed at least 40 people in June.

At least 550 people have been killed in retaliatory attacks by militants in cities nationwide after Pakistan's military started operations in the northwest last year.

Pakistani business community has urged the government to take stringent security measures to check terrorist activities in the country. The country suffers billions of rupees of loss from one-day strike call and most of the export orders could not be shipped to their desired destination besides rendering millions of daily wagers jobless. The business community believes that peaceful growth-oriented atmosphere coupled with better law and order is a prerequisite for smooth flow of foreign investment in all economic sectors.

The July 1 shrine attack in Lahore, the country's cultural capital, came a month after over 100 people were killed in twin attacks on mosques of the minority Ahmadi community in the city on May 28.

The military offensive against Islamist extremists forced the country to increase its defense allocations in the current fiscal year 2010-11, which has started from July 1, by 17 percent to Rs442.1 billion as compared to the Rs342.9 billion defense allocations of last fiscal year.

The country's exports were also hurt, as the trade delegations have been reluctant to visit the troubled country. The export orders are either diverted to other countries or foreign buyers hold meeting at other destinations, which increases the cost of production and leaves the country uncompetitive in the international market

The government excessively depends on foreign aid and loans to run the country without having any plan to lead the nation to the goal of self-reliance. The county's strife-battered economy, combined with higher than usual prices for staples such as sugar due to alleged hoarding by producers, has drastically weakened the purchasing power of the country's largely impoverished population of 170 million.

The country has not proved a safe place for foreign investors. Today, security of foreign investors especially Chinese, who have also signed a Free Trade Agreement with the country, has become the biggest challenge for Islamabad. Chinese have been the specific targets of the terrorists in Pakistan since 2004 when three Chinese engineers were killed in Gwadar in Balochistan province. Since then many Chinese nationals have been attacked and killed in the country. The Chinese have reportedly shown reluctance to sign new contracts creating a big problem for Pakistan, whose oil and gas sector is largely dependent on the Chinese companies for big crews for survey and variety of rigs. Security of Chinese is linked with Pakistan's long-term objectives of seeking foreign investment in the country.

Pakistan has incurred heavy economic and financial costs due to the security situation in the country, says the recent World Bank's Global Monitoring Report 2010. The report places the south Asian country among the conflict-affected countries where political uncertainty and fighting continue to disrupt economic activity. The bank's report also places Pakistan among those countries whose economic growth has been the weakest because they entered the global crisis with large internal and external imbalances. The direct costs of economic disruptions include rapid rise in security spending, while indirect costs include a slowdown in economic growth, surge in poverty, and unemployment and decline in foreign investment.