FOREIGN INVESTMENT IMPERATIVES
The nation can live without pizzas, ice-creams and chickens instead of getting itself perpetually buried under foreign exchange liability of the sector on account of the import of ingredients and remittance of profit.
A. M TALHA
Mar 26 - Apr 01, 2007
The improvement in the quality of lives of the citizens of any country, including but not limited to lifting them up from the claws of poverty, implies that not only the national income/wealth increases at a faster rate but adequate system for equitable distribution of national income/wealth among different strata of society does also exist. It is generally believed that 8-10 per cent annual growth in the real GDP coupled with fair distribution system is vital in our circumstances.
While we have achieved reasonable growth rate in the last three years or so and may sustain/enhance it in the coming years through the sustained efforts, introduction of a fair distributive system seems a remote possibility as all the sectors of our economy are in the clutches of influential vested interest which does not allow passage of the resources to the people belonging to the lower strata of society.
Having said that the growth in the GDP requires corresponding investment, the rule of the thumb introduced by the experts is that GDP growth will remain around 1/3rd of the investment made. The record of the last half a decade is as under:
* as percentage of GDP.
It will be seen that the GDP growth in 2001-02/2002-03 was lower than that warranted by the investment while that in 2003-04 it was much higher.
The miraculous GDP growth of 8.6 per cent was witnessed in 2004-05 against the investment of 18.1 per cent only although growth of such a magnitude required investment of the order of over 25 per cent of the GDP.
The national savings during the fiscal 2005-06 (FY-06) were 16.4 per cent of the GDP which leaves investment/savings gap of 3.6 per cent. The State Bank of Pakistan (SBP) in its annual report for the fiscal has shown concern over this gap. The question is how was the gap financed? The said SBP report points out that the resource gap was financed through Foreign Direct Investment (FDI) and remittances. If "remittances" apply to workers' remittances, they go into the pockets of the concerned beneficiaries and the amount saved thereof would constitute a part of the domestic savings. Thus the gap would be taken to have been financed through FDI alone.
SBP Governor, in her article which appeared in the Business Recorder of 24th February, mentioned that a cumulative sum of US $ 8 billion was attracted during fiscals 2003-04 to 2005-06 [FY04-06] through FDI which includes "internationalization" proceeds of the national assets [sale of national assets to the foreigners]. We append Table "B" containing the details of the "FDI" mobilized during over half a decade:
[Figures in U.S.$ million]
"A" Direct investment [without privatization]
"B" Privatization proceeds.
Total foreign investment ["A" + "B" ]
Total "A" [2001-02-2006-07]
Total "B" [2001-02-2006-07]
Grand total "A"+"B" [2001-02- 2006-07]
"C" Portfolio investment.
Total "C" [2001-02- 2006-07] U.S.$ 1182 million.
* Figures for July, 2006 to January, 2007. Source : State Bank of Pakistan website
It will be seen that $ 6.8 billion (72.9 per cent) were received as FDI while $ 2.5 billion represents the "internationalization" proceeds of the national silver. The reasons for dependence on the FDI may include the twin deficits-fiscal and current account- and the lower quantum of the national savings. [The data given in the SBP website is at variance with the figures made available by its governor in her above said article. As per the website, mobilization during FY 04-06 aggregates $5.994 billion - FDI $ 3.892 billion + "internationalization" proceeds of $ 2.102 billion].
The ideal position would be that the investment is financed solely by the domestic resources while foreign currency component is provided by the surplus in the current account of the external balance of payments. In our case, reverse is happening; we are falling back upon the FDI to cover not only the current account deficit but also the fiscal deficit despite the tall claims of economy having become vibrant and despite inflow of huge foreign resources in the shape of unprecedented surge in the workers' remittances, service charges for rendering war-related services to the West, re-profiling of bilateral debts and debt remission by the USA and other lenders in the aftermath of 9/11. The situation does not seem improving in the coming years as the current account deficit is on the increase day by day.
The questions to be considered are: (a) How long the country can pull on with the "internationalization" proceeds and what would be the repercussions of the policy in the long term, and (b) What is the nature of foreign investment being mobilized by the economic managers?
FDI can broadly be divided in two categories: (1) Quality Investment where the resources are used in establishment / expansion of the manufacturing/ information technology sectors creating export surplus/ generating fresh employment thereby making automatic arrangement for generating foreign currency resources not only to cover the ensuing expenditure on the periodical remittance in foreign exchange of the profit generating in local currency but also adding something to the country's foreign exchange reserves / putting a dent in poverty to some extent; and (2 ) the inflow of funds from abroad merely as one time operation to tide over the current account/fiscal deficit problems while creating perpetual foreign exchange liability on account of remittance of profits (e.g.. privatization /investment in sectors not generating export surplus).
The "internationalization" of the national assets falls under the second category. While it may provide temporary solace to the economic managers, it is also creating a dangerous situation for the economic managers who will succeed the present ones and for the nation as a whole. This is obviously because such investment is neither generating fresh employment nor the additional foreign currency resources needed for (perpetual) remittance in foreign exchange of profits earned in rupees on the internationalized assets. Apart from that, it has been seen that the foreign buyers are increasing unemployment by retrenching the existing employees. The banking sector has already set a precedent in this context while Pakistan Telecommunication Company Ltd (PTCL) is believed to be on the path. Additionally, the efficiency of the PTCL has also gone down after takeover by the foreigners; it does not just care to attend to the complaints of the users in so far as the fixed line telephones are concerned. About the KESC, public has seen the last summer and are waiting for the coming one. It is unfortunate that such a category of foreign currency inflow is treated as FDI by the economic managers.
Let us now have a brief look on the details of the FDI received during the last half a decade or so. We append Table "C" showing the details of the FDI received in some sectors of the economy"
Sector-wise Foreign Direct Investment
[Figures in million U.S.$]
Oil & gas exploration
[260.0]* [1186.0]* [133.2]*
I.T. Services [Software
I.T Services [Hardware
242.1 269.4 329.2 553.6
[178.0]* [199.0]* [103.8]* [99.3]*
Source: State Bank of Pakistan website. * Amount generated through privatization.
^ Figures for 8 months- July, 2006-January, 2007
One can question how far FDI in sectors like food and banking is warranted? The nation can live without pizzas, ice creams and chickens instead of getting itself buried perpetually under foreign exchange liability of the sector on account of import of the ingredients and remittance of profit. The position of the banking (financial) sector is no different. We could conveniently run the sector without induction of the foreign interest. The position of the FDI in these sectors is no different than that in the second category.
Power sector is an important sector, but we do not see any sizable FDI coming in it during over half a decade. The only big inflow is on account of sale of KESC to the foreign buyer.
The investment in the telecommunication sector is also not a "quality" investment because it has merely created perpetual foreign exchange liability on account of import and remittance of profits. That each is individual in the street is holding a cell phone is not a matter to be proud of. PTCL was precluded from or it deliberately avoided introduction of cell phone in order to provide foreign companies a foot-hold in the country is a matter to be pondered upon. Had the PTCL introduced its U-phone in the initial stages, there would have no need of induction of many foreign companies which could obviate perpetual foreign exchange liability partially- if not fully. The internationalization of profit-earning entity like PTCL also did not have any rationale except that it was an effort to tide over the difficulties in current account/fiscal sectors.
About a decade back, there was a lot of euphoria about Information Technology sector; opening of technology parks in the big cities of the country and establishment of the institutes of the world class to train the youths etc. Nothing of the sort has happened. India is earning billions of dollars through the export of software and rendering of "outsourcing" services in the field. Our foreign currency earnings in the field may have hardly crossed $ 100 million. How much FDI we could mobilize in this field is evident from the data given in Table "C" above. The position of the domestic investment may also not be much different.
As for portfolio investment, we have already built up a liability of over $ 1.2 billion. The opening of our bourses to foreign investors may be seen as one of the sermons included in multilaterals' (IMF/ World) "pink pill" treatment which is invariably prescribed by them to the developing countries in the garb of "making the domestic currency convertible on capital account". This category of investment has any economic efficacy for the country as it neither adds to the GDP nor does it create fresh employment opportunities. It can rather be construed as most dangerous for developing countries like ours which are almost vulnerable in the external account as it constitutes "hot" money entering in and leaving the country at any time along with the huge capital gains earned in the short term through speculation. For the benefit of the big investors, mostly comprising brokers, who make billions of rupees in short spells through speculation and market manipulation, government continues to keep the capital gains tax free. With the growth in the quantum of foreign portfolio investment, the foreign fund managers may join hands with their local counterparts in manipulating the market to make huge tax- free capital gains at the cost of small investors as had happened in 2005 and 2006 and our regulating authority may prove as hapless as in the past. It may be recalled that the portfolio investment was one of the causes of the crises created in late 1990s in the Far Eastern countries. In fact, capital account convertibility prescription is not suitable /desirable for the developing countries. But what can be done when our economic managers hail from the multilaterals and their brains are completely tuned up with what they have been taught by these multilaterals.
(A.M. Talha is a retired senior banker)