Mar 17 - 23, 2008

While the winds of change are blowing in Islamabad following February 18 polls, the foreign investors harbor a whole range of concerns about political uncertainty, worsening security situation and continuity of economic policies. In the present challenging environment, the foreign companies have moved to repatriate their profits from the country. During first seven months (July-January) of the current fiscal year, the foreign firms repatriated $519.3 million profits from Pakistan, as compared to$467.9 million repatriated in the corresponding period last year. This indicates a rise of 11 percent in repatriation of profits from the country this year.

In order to attract foreign investment in the country, the former government of Prime Minister Shaukat Aziz had allowed the foreign companies to repatriate100 percent profits to their home countries. But this policy proved short-sighted, as it attracted the foreign capital for a short time period to meet the country's trade and current account deficits, but failed to lower the cost of doing business and prepare a skilled workforce in the country.

While foreign oil and gas explorations firms repatriated $50.8 million the first half of current fiscal year as compared to $23.1 million during the same period last year, the petroleum refining companies sent $48.2 million as compared to $45.8 million repatriated abroad last year. Similarly, the country witnessed a repatriation of $101.8 million profits from thermal sector, $19 million from pharmaceutical sector, $83.6 million from telecommunications sector and $49.9 million from financial sector during the first seven months of the current fiscal year

Today Pakistan is facing economic, political and security challenges, which are likely to hinder foreign direct investment (FDI) in the country. On political front, the ongoing politics of cobbling coalition government following February 18 polls, has led the presidential camp in Islamabad and winning opposition parties to a state of clash on the issue of reinstatement of supreme court judges, who were deposed following proclamation of emergency in the country by the General Pervez Musharraf last November. On security front, the challenge is more serious, as the suicide attacks in the country have become a routine terrorist activity.

The current fiscal year (2007-08) could not attract foreign investors in shares trading, as portfolio investment in the first quarter (July to September 2007) could hardly reach $57.6 million, much lower than $120.6 million in the corresponding period of last year. Proclamation of state of emergency in the country on November 03 and the political turmoil following the assassination of former Prime Minister Benazir Bhutto on December 27 further decreased the portfolio investments in the country's equity markets.

Last month, the cumulative inflows were to the tune of $154 million, which according to the Pakistan central Bank changed the overall collective investment from the negative to the positive during the first eight months (July-February) of the current fiscal year. The local analysts consider the "change "a result of peaceful general elections and hope that the foreign investment might see a sharp upward trend in the coming months if power is transferred smoothly to the elected members. The heavy outflow of the portfolio investment during the last seven months (July-January 2007-08) lowered the growth of foreign direct investment (FDI), which had increased by 7.9 per cent during the same period last year. The country had received $669 million portfolio investment during July-January 2006-07, but it received only $21 million during the same period in the current fiscal.

Presently, one of the top barriers to foreign investment is that of policy uncertainty after February 18 general elections. Foreign investors are worried about continuity of economic policies, as the new government, which is likely to be formed by anti-Musharraf political parties, may revert the policies of their predecessors- former Prime Minister Shaukat Aziz and the President Musharraf. The policies of liberalization, deregulation and privatization under previous regime resulted in rapid growth of all segments of the economy particularly telecom and banking sectors. These policies have paid rich dividends. The reforms implemented under former government however lacked strategic policy coherence. The culture of SROs, notifications and NOCs had created an uncompetitive business environment with a de facto form of "special and differential treatment" for enterprises with government access. Pakistan's administrative barriers to investment stem from weak government service delivery to the business community.

The overall situation with reference to foreign investment in the country had improved in the last five years. The former government gave a petroleum policy entailing lucrative incentives for the prospective foreign investors in the onshore and offshore oil & gas exploration. Presently, over two dozens foreign oil companies are operating in the country. Some reputed foreign energy firms operating in the country include Rally Energy Corporation of USA, British Petroleum, Austria's OMV, Hungary's MOL Group, Canada's Jura Energy Corporation, Eni of Italy and the Couger Energy Company of Australia. The worsening security situation during last one year, however, raised security concerns and some foreign firms including Tullow Oil recently decided to stay away from more business in Pakistan.

In its recently issued report on current account deficit, Merrill Lynch said, "Despite political instability, Pakistan has financed its current account deficit with ease through a mixture of foreign investments, debt accumulation and reserves withdrawal. The new government would be inheriting a strong balance sheet and should be in a solid position to absorb this shock too, while the recent peaceful conclusion of general elections bodes well for Pakistan and should help attract foreign investments, make foreign loans available on better terms and improve the country's credit rating. Merrill Lynch has observed that the new foreign investment would help to fill the gap of current account deficit and bring the deficit under control.

Under President Pervez Musharraf, the country continuously witnessed an improvement in macroeconomic indicators since 2001 and FDI had undoubtedly started picking up in Pakistan. According to the South Asia Economic Report of Asian Development Bank (ADB), the net inflow of FDI into Pakistan increased by 136.5 percent in 2006 as compared to 2005, which placed Pakistan ahead of India where FDI grew by 79.9 percent in the same period. Under the former government, the country had several major transactions, which covered the manufacturing as well as the financial sectors. Pakistan sold several big state-run firms, including the $2.6 billion sale of a controlling 26 percent stake in Pakistan Telecommunication Co Ltd (PTCL), to Emirates Telecommunications Corp in June 2005.

In the fiscal year 2003-04, the FDI in Pakistan stood at $949.4 million, which was 19 per cent higher than the corresponding period of 2002-03. This also included $198 million first tranche of the Habib Bank Limitd (HBL) sale proceeds. Similarly, the FDI stood at $798 million in 2002-03, which was 65 per cent higher than $484.7 million in 2001-02. This also included $176 million privatization proceeds of United Bank Limited. FDI from the U.S. rose from $238 million to $326 million in 2004-05, making American investment second in quantum only to funds from the UAE, which poured $367.5 million.

Pakistan had attracted $1.524 billion FDI during the fiscal year 2004-05, which was 61 per cent higher than the corresponding period of 2003-04. This also included $363 million FDI as privatization proceeds of 10 per cent first tranche of PTCL and $103 million second tranche of Habib Bank's privatization. In 2004-05, the portfolio investment from US amounted to $47 million, up from $21 million the previous year and higher than from any other country.

Last year, USA, UK, Netherlands, China, United Arab Emirate, Australia, Japan, Saudi Arabia, Singapore and Switzerland were among the leading foreign investor countries in Pakistan. The country's total foreign investment witnessed a growth of 50 percent at 6.282 $billion during 11 months of last fiscal year against $4.177 billion of the fiscal year 2005-06. According to the statistics of central bank, USA was on top with $1.544 billion investment, while UK with $1.139 billion was the second and Netherlands was the third with $765.8 million. UK and USA share in total foreign investment (FDI and portfolio investment) had increased by $1.795 billion to $2.683 billion last year as compared to $888 million of the same period of fiscal year 2005-06. Similarly, China invested $711.1 million, United Arab Emirate $429 million, Singapore $139.5 million, Saudi Arabia $105.3 million, and Switzerland $66.6 million. In addition, Canada invested $10.8 million, Australia $59.8 million, Japan $57.4 million and Kuwait $83.9 million.

Is Pakistan still an attractive host for foreign investment? Today, political instability, civil conflicts and law and order are the major factors in reducing the attractiveness of Pakistan as a host for foreign capital. The rise in repatriation of profits from the country in the current fiscal year has also put further pressure on the weakening Pakistani Rupee.

The incoming elected government in Pakistan needs to improve its economic conditions and policy framework and ensure improved governance to attract sizable foreign investment. The improvement in infrastructure and the rule of law is direly needed. There also exists a considerable room for legislative and regulatory reforms particularly at the provincial level. Saudi Arabia, USA, UK and China can still be a major source of investments into the country. The main challenge for Pakistan's new political set up is to keep up with reforms in many developing countries.