FDI FLOWS MOVING FROM RESOURCES TO SERVICES SECTOR
Looking at the financial sector of Pakistan, one comes to know that there is a kind of confidence reposed by the foreign investors.
KHALIL AHMED, Senior Correspondent
Oct 23 - Nov 05, 2006
The major chunk of Foreign Direct Investment (FDI) in both Pakistan and India goes into communications and financial sectors. Since FDI flows by and large have moved from resources to services such as in banking and in telecommunication, these sectors have witnessed a phenomenal growth. Looking at the financial sector of Pakistan, one comes to know that there is a kind of confidence reposed by the foreign investors. Pakistan has made tremendous progress in terms of attracting FDI. The country received a record $3.6 billion FDI including privatization proceeds in 2005-06 which indicates the interest of the international investors.
Not only the developing countries but also the developed countries have been striving to attract foreign investment for the better performance of their economies. One of such instances is that of the UK which attracted $63 billion in foreign investment in 1998. The UK attracted a big portion of the total FDI which stood at $644 billion during the year across the world. As far as the developing countries are concerned, until 1999 just five developing countries namely China, Brazil, Mexico, Singapore and Thailand received half of all multinational investment. However, at present Pakistan is one of such countries which has been able to draw attention of the world investors. Brazil should be one of the examples for Pakistan as the country is geared to go for privatization of the state-run organisations. It is to be noted that Brazil was successful in attracting $28 billion in 1998 through its privatization programme.
Having a glance at the world level, one comes to know that Pakistan is moving in the right direction and is winning the confidence of the investors across the world. So far Pakistan has been the focus of the investors mainly from the United States, the UAE, Netherlands, the UK, Switzerland, Japan, etc, however, now there is a need to attract the foreign investment from Hong Kong, Russian federation, Singapore, Taiwan, Brazil, China, Malaysia, South Africa and Korea. All these countries have made significant investment in foreign countries during the last year. Let's look at the Pakistani share in the global FDI. FDI into South Asia during 2002 was around $5 billion and Pakistan was able to attract $798 million in 2002-03 which was an improved amount as during 2001-02 total foreign direct investment made in Pakistan stood at $484.7 million. FDI global inflows in 2004 were estimated at $648,146 billion. During 2004-05, Pakistan witnessed the inflow of $1.52 billion foreign direct investment compared to $949.4 million in 2003-04. And out of over $400 billion FDI made in the emerging markets during 2005-06, Pakistan's share stood at $3.6 billion which is a phenomenal success compared to just $323 million attracted by the country in FDI during 2000-2001. It must be noticed that even Venezuela, the Latin America's fourth-largest economy, was able to attract just $1.2 billion in foreign direct investment last year.
Looking at the past performance and recent developments with regard to drawing investment from foreign countries, one can say with confidence that the country could attain the targeted $7 billion mark in foreign direct investment during the current financial year.
The performance of the financial sector is praise-worthy. The banking sector of Pakistan since its banking reforms initiated in 1997 has never looked back and seems to be moving in the right direction supporting the economy of the country. At this juncture, 80% banking sector is in private hands. Private sector gives a boost to the economy, however, according to sources the banking sector in the country is concentrating on major cities and the number of branches in far off places of Pakistan seem to have declined slightly. It has been claimed that by 2007 all branches will start on-line operations, which of course would provide ease in transactions and accessibility. Private sector is always a driving force behind innovation in products. There were times that the public sector banks dominated the scene in Pakistan, however, now the local and foreign private banks have taken the lead.
It is a fact that all the banks in India were private banks which were founded prior to the independence to cater to the banking needs of the people. Sources quote that after nationalisation of banks in 1969, public sector banks came to occupy dominant role in the banking structure. However, the Reserve Bank of India encouraged setting up of private banks in 1994 as part of its policy of liberalisation of the Indian banking industry. Today, the Indian financial sector is one of the robust sectors. The privatization of banks in Pakistan has brought about increasing economic activity. The financial sector of Pakistan was the largest sector in terms of FDI during two consecutive financial years.
During 2002-2003 the banking and finance sector emerged as the largest FDI sector by attracting a hefty investment worth $207 million. And the following year, 2003-04, was even more successful for the financial sector as once again it emerged as the largest FDI sector by attracting the largest amount of FDI which stood at $242 million. However, for the last couple of years the financial sector has been overtaken by communications and energy sectors. In 2004-05, communications attracted FDI worth $517 million (34 per cent) followed by financial business of $269.4 million (17.7 per cent). And during 2005-06 telecom was the largest recipient with over $1.0 billion followed by the energy sector leaving the financial services as the third largest FDI sector with over $265.5 million.
However, at present it seems as if the financial sector will lead all the sectors in FDI during the current financial year. According to a leading daily, as the profits of the banks are too large, foreign banks are seeking mergers with domestic banks. The Standard Chartered Bank has taken over the Union Bank and the Barclays Bank of London is looking to buy for another bank. ABN Amro is reported to be interested in the Prime Bank. Looking at the recent developments, one could assume that the banking sector would boom with activities in the days to come as the renowned foreign banks i.e. the Barclays Bank is keen to invest in Pakistan. Barclays is a UK-based financial services group, with a large international presence in Europe, the USA, Latin America, Africa, the Caribbean, Asia, the Middle East and Australasia. In terms of market capitalisation, Barclays is one of the largest financial services companies in the world and it has been operating for more than 300 years with 25 million customers and 118,000 employees in over 60 countries.
It has been said that China could attract more FDI if it sets up transparent merger and acquisition procedures. In Pakistan, merger and acquisition procedures in the banking sector would help the economy of the country and would lead to more FDI in future. The banking sector seems to be moving on the fast track as lots of good news have come in this regard recently. One of the most excellent developments is that of MCB. MCB Bank Limited, one of the leading commercial banks, has raised US$150 million through Global Depositary Receipts (GDRs). This is a feather in the cap of the banking sector and an excellent progress in building Pakistan's image in the global village.
FDI is vital for the reduction of widening of trade and account deficits. Pakistan has attracted around $14 billion foreign direct investment over the period of last 16 years, whereas China has attracted FDI worth $14 billion in the first quarter of 2006. China drew $60.6 billion in 2004 and $ 60.3 billion in FDI last year. It must be noted that China invested $46 billion in foreign countries during 2005. The concerned authorities in Pakistan need to look at this option very carefully which could benefit our financial sector to a great deal. In case our experts in the financial sector provide their expertise to the Chinese investors by convincing them of excellent returns with security, our economy could get a big boost which would eventually help eradicate poverty and unemployment.
Increasing employment opportunities, reducing poverty and reviving growth are important elements of the government's strategy and this could be attained with a strong financial sector.