FOREIGN DIRECT INVESTMENT
Pakistan currently doing its best to enhance the foreign direct investment and formulated commission will encourage and assist foreign investors
By ALI FARHAN CHAUDHRY
Sep 02 - 08, 2002
Foreign investment is critical in both developed and developing countries as on one hand it is taken as great blessing but on the other a way to loot the real wealth. Foreign direct investment (FDI) has opened world for the investors and also helping nations to explore idle resources achieve economies of scales. In the developing countries, where people are living below poverty line, FDI is increasing, as restrictions are becoming softer under ceiling of many bodies such as WTO. A report by the World Bank revealed the fact that global FDI flows increased by 24 per cent per year during 1991-2000 as trade barriers are reducing and technological innovations encouraged the growth of globally integrated supply networks. Developing countries as a group saw FDI flows rise 20 per cent at constant prices. The rise in FDI as a share of GDP during the 1990s was virtually identical in the poor and other developing countries, although the share of the poor countries in total FDI to developing countries declined during the 1990s.
Here one interesting phenomenon is supposed to be discussed that although the FDI for the poor countries increased but capital flows to the capital market were almost nil or in some countries was negative that shows that financial sector in developing nations really need revolutionary macro changes. Overnight low or zero capital flows towards developing countries is also due to bad credit rating by agencies such as Moody's and S&P etc. Here one thing is very worrisome for Pakistan that the portfolio sector remained in dark in last FY as investors' confidence was shaken after September 11 and especially when Pakistan joined international coalition in a war against terrorism that created law and order disturbance. On the other hand persistent prevailing tension between two nuclear rivals Pakistan and India also shook investors' confidence that ultimately initiated portfolio investment withdrawal and was noted around $10.1 million in last one year.
Meanwhile, in the developing countries institutions are not so strong that they can protect local as well as foreign banks from loan recovery, although they charge higher rates to manage the risk. These problems deepen when there is lack of information about the local business entities. At the same time less developed local markets and higher distribution costs are also hurdles in the way of FDI.
Risks related to the law and order, political stability, inconsistency in monetary policies, and weak infrastructure in developing countries are also slowing down the prospects for the FDI.
Now coming towards Pakistan, where The Foreign Direct Investment (FDI) rose 33.4 in fiscal year 2001-2002, when compared with last FY 2000-01. Rise in FDI is a very good sign that here some concrete steps are taken that in return attracting investors. Pakistan attracted foreign investment worth of US$484.7 million in the fiscal year 2001-02 against US$322.4 million in 2000-01. If we go in further details then facts and figures will reveal that the United States is still the biggest foreign investor in Pakistan and invested US$326 million in last one year. Pakistan has vast oil and gas resources but is unable to explore them in absence of financial resources and advance technology. That is why the US spent US$ $268.2 million in Pakistan on oil and gas exploration. After the US, the Great Britain spent the biggest amount worth of US$30.3 million in the last year in Pakistan.
The country wise breakdown of foreign direct investment in last FY 2001-02 is: the USA's FDI is of US$326.4 million; UK US$30.3 million, UAE US$21.5 million, Germany US$11.2 million, France US$6.9 million, Hong Kong US$2.8 million, Italy US$0.1 million, Japan US$6.4 million, Saudi Arabia US$1.3 million, Canada US$3.5 million, Netherlands US$5.1 million, Korea US$0.4 million, Singapore US$3.9 million, China US$0.3 million, Australia US$0.4 million, Switzerland US$7.4 million, others US$80.8 million.
Only the power sector got a hold of more than $36 million as thermal plants of power sector received 36.4 million dollars. The Food sector received $7.6 million, Beverage $13.6 million, Tobacco & Cigarettes $0.9 million, Sugar $0.1 million, Textiles sector receives $18.4 million, Rubber & Rubber Products $0.2 million, Paper & Pulp $0.7 million, Leather & Leather Products $0.5 million, Chemicals $10.6 million, Petro Chemicals $2.2 million, Petroleum Refining $2.8 million, Mining & Quarrying $6.6 million, Oil and Gas Explorations $268.2 million, Pharmaceuticals & OTC Products $7.2 million, Cement $0.4 million, Metal Products $0.3 million, Machinery other than Electrical $0.1 million, Electrical Machinery $10.5 million, Electronics $15.9 million, I)Consumer/Household) $12.6 million, ii) Industrial $3.3 million, Transport Equipment (Automobiles) $1.1 million, I) Motorcycles $0.8 million, II) Buses, Trucks, Vans & Trail $0.3 million, Power $36.4 million, I) Thermal $29.8 million, II) Hydel $6.6 million, Construction gets $12.8 million, Trade $34.2 million, Transport $21.4 million, Tourism $0.1 million, Communications $12.7 million, 1) Telecommunications $6.1 million, 2) Information Technology $6.3 million, I) Software Development $3.5 million, II) Hardware Development $0.4 million, III) I.T. Service $2.4 million, 3) Postal and courier services $0.3 million, Financial Business $3.5 million, Social Services 2.0 million dollar; Personal Services 8.3 million dollar and others $12.6 million.
Meanwhile the government of Pakistan is doing its level best to rebuild the investor' confidence and show some signs of improvement in foreign exchange reserves that noted 7.27 billion on August 17, 2002.
Pakistan hopes that FDI will increase and might touch the US$1 billion figure in FY 2002-03 that is more than double from the last year's figure. Pakistan is also encouraging foreign investors and multinational companies and announced incentives such as they can remit salaries and even earnings to their homelands. On one hand it is facilitating investors to maximize their profits and on the other hand probability is high that Pakistan will benefit from the personnel' expertise and new technology. At the same time efforts are being made to strictly implement royalty laws.
Multinational firms have global exposure, with equipped financial and managerial tools and when they start businesses in developing countries always do deals with local firms. In this way local firms get access to the international standards and markets as well.
Pakistan currently doing its best to enhance the foreign direct investment and formulated commission will encourage and assist foreign investors. Some efforts should be made to breakthrough bureaucratic style of bureaucracy and politicians. Revolutionary reforms and even new tax structure should be introduced in order to save investors from the complexity of tax structure as well as to save time.
Pakistan is also encouraging foreign investors and has selected few Export Processing Zones where all facilities are provided and even some case tax relaxations are facilitated.
Foreign investors love to capture the sector of the economy that is virgin and has maximum potential to grow and earn profit. And in this regard multinationals from the developed nations hit the markets where they perceive that monopoly or monopolistic competition can be achieved and mostly touch either power, energy or communication sectors, same is the case with Pakistan where most of the FDI went to oil and gas sector.
Foreign direct investment should be encouraged to increase economic growth, reduce unemployment, to raise living standards and to get benefit of innovative technology and services ideas but at the same time all measured should also be taken to save sovereignty of the country.