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Cover Story

By Prof. Dr. Khawaja Amjad Saeed
Dec 06 - 12, 1999

FDI has played a glorious and profit-oriented role in several countries of the world. In the recent past ASEAN countries have been big beneficiaries. Now some of these countries are contributing abroad through the investment of FDI. It is high time that we learn from the success stories of use of FDI, and also gear up our positive efforts to create a conducive atmosphere to attract FDI in Pakistan. This piece looks at the following aspects FDI:

  • Investment Policy 1997 with FDI emphasis

  • Time Series Analysis (1990-1991 to 1999-2000) of FDI.

  • Group wise distribution wiffi focus on Products and Countries.

The above aspects are now explained below:

Investment Policy 1997

The previous Government of Mian Mohammad Nawaz Sharif announced a new Industrial Policy with the objective to enhance the level of foreign investment to at least US $ 2 billion per year in various fields. The salient features of this policy are given below:

1. Foreign investment on repatriable basis was also allowed in agriculture, services, infrastructure and social sectors.

2. Manufacturing sector was prioritized in the following four categories:

a) Value added or export industries

b) Hi-tech industries

c) Priority industries,

d) Agrobased industries

The tariff on imported plant, machinery and equipment which was not manufactured locally for category (a), (b) and agriculture was made zero related while for category (c), (d) and social service would be charged @ 10%.

Industries included in (a) and (b) will enjoy first year allowance for balancing, modernizing, replacement and expansion at the rate of 50% per annum while for those which were included in category (c) and (d) the first year allowance would be 75% and reinvestment for balancing, modernization and expansion will enjoy 50% allowance.

3. Foreign private loans for financing cost of imported plant and machinery for agriculture, services, infrastructure and social services would be contracted.

4. To promote export oriented units, a scheme of National Industrial Zones engulfing Industrial Estates, Free Industrial Zones, Free Trade Zones and Export Oriented Units within the area of its boundary would be launched at few selected prime sites.

5. To encourage the establishment of Small and Medium Industries (SMIs) industrial sheds, structures/constructed and sold/leased to SMIs would be granted an enhanced depreciation allowance @ 30% (in first year) of the cost incurred on the development of these sheds/structures.

The previous government attempted to facilitate foreign investment by announcing "New Investment Policy" which included major policy initiatives and opened new horizons (by james nelson). In the past, foreign investment was restricted to manufacturing sector which covered only 18% of the GDP. Now foreign investment is allowed in the sectors like agriculture and services which constitutes above three fourth of GDP. The main objective of the New Investment Policy was to enhance the present level of foreign investment to at least US $ 2 billion per year in the fields of expanding the industrial base, infrastructure and software development, electronics, engineering, agro-food, value-added textile, tourism and construction industries. Salient features of Investment Policy 1997 are given below:

1. Foreign Investment on repatriable basis was also allowed in agriculture, service, infrastructure and social sectors subject to:

a) Joint venture basis (60:40).

b) Amount of foreign equity shall be at least US $ 1 million.

c) Foreign companies registered in Pakistan will be allowed.

d) In case of social sector and infrastructure projects the condition of joint venture will not be applicable (100% foreign equity may be allowed).

2. Manufacturing sector was prioritized in the following four categories:

a) Value-added or export industries

b) Hi-tech industries

c) Priority industries

d) Agro-based industries

3. The tariff on imported plant, machinery and equipment (PME) which was not manufactured locally for category (a), (b) and agriculture was made zero rated while for categories (c), (d) and social services would be charged @ 10%.

4. First Year Allowance (FYA) of cost of PME would be available @ 90% for (a) and (b), @ 75% for categories (c) and (d), and @ 50% for other industries. Reinvesment Allowance (RA) for expansion and BMR would be allowed @ 50% of cost of PME.

5. Foreign private loans for financing cost of imported plant and machinery for agriculture, services, infrastructure and social sectors could be contracted. Foreign controlled companies were allowed for domestic borrowing to meet their working capital according to their requirement of working capital for manufacturing, to the extent of 75% and 50% of paid-up capital semi-manufacturing and non-manufacturing sectors respectively.

6. Labour laws would be amended to enhance emphasis on productivity, skills and discipline.

7. The sources of investment would not be probed by any official agency.

8. A composite scheme of National Industrial Zones (NIZs) engulfing industral estates, free industrial zones and free trade zones would be launched to promote export oriented units. However, this would not hamper development of EOUs all over the country.

9. Tariff rationalization at both provincial and federal level to facilitate foreign investment would be undertaken.

Time series analysis of FDI

Table 1 shows the and of FDI for the last nine years. There are two sources of FDI namely, Direct Investment and Portfolio. Direct Investment refers to investment in various industries. This represents fixed investment and is generally expected to be on long run basis. However, portfolio refers to investment in stock market and this investment is temporary. Foreign investors take out their money out of the country where investment in stock market is made. Amount in this respect keeps changing subject to the level of confidence in the prevalent cirumstances in a country. During the last nine years, the Karachi Stock Exchange index, having a base of 1000, fluctuated between 2629 to 777. Wide variations were notified in the above period.

The following conclusions flow from the analysis of Table 1 relating to FDI in Pakistan.

1. Direct Investment (Foreign)

a) Average direct investmentis US $ 485 million in the previous nine years. This is too small a figure. Previous Governments were perceptive of US $ 2 billion on yearly basis. The performance is a dismal one.

b) Year 1995-96 had the highest FDI of US $ 1,102. This year was the oe in which IPPs were executed and their problems are still unresolved.

c) The current trend is a declining one. There is a dire need to ensure law and order in our country and take steps to ensure confidence building in Pakistan. The foreigners have many competing uses of their money in different countries. They are guided by several considerations including political stability and congenial atmosphere. They are also guided by the Institutional Ratings released in te World Development Report which is anually released. Pakistan's rating is 20 out of 100 in the World Development Report 1999-2000 made public in August 1999. Unfortunately our released in the World Development Report which is annually our rating is the lowest in SAARC region. The present set up must follow the above negative trends, bring these to a grinding halt and ensure a rising trend for the future. This will, accordingly, augur well for our country.

2. Portfolio Investment (Foreign)

No restrictions on the inflow or outflow of foreign portfolio investment in Pakistan were imposed. Consequently the results shown in Table 2 exhibit a volatile trend. The range is very high — minimum of minus US $ 9 million to a maximum positive of US $ 1,102 million. The average invetment over the last nine years was US $ 269 million. There is a need to give a fresh look to the situation and help develop confidence of foreign investors in Pakistan's stock market.

Foreign Investment in Pakistan








1998-1999 (July - March)







1997- 1998
























































Source: Excerpted from Economic Survey 1998-99 (Economic and Social Indicators), Islamabad, Finance Division, Ecnomic Advisor's wing, Table 3.10, pp 39-40

Group wise and country distribution

Table 2 shows group wise distribution of FDI during 1998-1999 (July-March). It would be noted that 85% represented only six areas namely, powe, mining and quarrying (Oil & Gas), chemical, pharmaceutical and fertilizer, petro chemical and petroleum refining, financial business and transport storage. In the above period total FDI was US $ 296 billion.

Group Wise Distribution of FDI: 1998-1999 (July — March)

Economic Group $ Million %

1. Power 116 39

2. Mining and Quarrying (Oil & Gas) 46 15

3. Chemcal, Pharmaceutical and Fertilizer 40 14

4. Petro Chemical and Petroleum Regining 28 9

5. Financial Business 11 4

6. Transport and Storage 11 4

252 85

44 15

7. Others 296 100

Source: Excerpted from Economic Survey 1998-1999, Table 3.8(b), pp 39.

and pp 39-40 of the above survey, the total is US $ 301 million.

Sectors offered in 1997 to foreign companies included the following:

1. Energy

2. Communication

3. Agri business

4. Services

5. Manufacturing Industry

6. Other including banking, brokerage, insurance and livestock.

Partners were awaited from USA, Russia, Canada, Kazakistan, UK, Greece, Belgium, Spain, Sweden, China, Germany, Japan, France, South Korea, Malaysia, Italy, Philippines, Turkey, Saudi Arabia, Qatar, UAE, Egypt and Kuwait. During 1998-1999 (July-March) the position of FDI based on country linkages between Pakistan and other foreign countries is tabulated below:

Gourt wise Disown of FDI: 1998-1999 (July-March)

Country US$ Million %

1. USA 115 38

2. Japan 44 15

3. U.K. 44 15

4. UAE 24 8

5. Germany 18 5

245 81

56 19

6. Others 301 100

soursce: Excerpted from Economic Survey 1998-1999, op. cit. Table 3.8(a), pp 39.


In today's world, all countries have interactions with each other. No country, irrespective of ideological differences, stands isolated today. FDI is a strong and vibrant instrument for an accelerated socio-economic development. We must help develop conducive atmosphere in Pakistan and FDI is expected to follow. This challenge has to be met by all stakeholders in Pakistan. Sincere and sustained efforts will produce productive results.

The author is Dean: Executive Programs, Punjab College of Business Administration, Constituent College of Mohammad Ali Jinnah University, Lahore

President, Institute of Cost and Management Accountants of Pakistan (ICMAP)

Member, Governing Council, International Federation of Accountants (IFAC)