FDI GOVERNMENT POLICY

SYED FAZL-E-HAIDER
Sep 8 - 14, 2008

It is mainly the policies of the government that bring foreign investment in a country.

The present government is yet to announce its policies and to do a lot of work vis--vis growth of foreign direct investment (FDI). The beginning of the current fiscal year has however been encouraging with respect to FDI inflows that recorded an increase of 76 per cent in the first month of the current fiscal year. FDI inflows were at $340 million in July 2008, according to the State Bank of Pakistan. The telecommunication sector received the lion share of $147.7 million in the month under review as against the $27.2 million in the same month last year. The financial sector received $43.4 million in July 2008 against $28 million the same month last year. Oil and gas exploration sector attracted $37 million in FDI in July 2008.

The policies of liberalization, deregulation and privatization of the former government resulted in rapid growth of all segments of the economy particularly telecom and banking sectors. These policies paid rich dividends. The reforms implemented under former government however lacked strategic policy coherence. The heavy outflow of the portfolio investment during July-January 2007-08 lowered the growth of FDI, which had increased by 7.9 per cent during the same period a year ago. The country had received $669 million portfolio investment during July-January 2006-07, but it received only $21 million during the same period a year ago.

In order to attract foreign investment in the country, the former government of Prime Minister Shaukat Aziz had allowed the foreign companies to repatriate 100 percent profits to their owners abroad. 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 last fiscal year compared to $23.1 million during the same period a year ago, the petroleum refining companies sent $48.2 million last fiscal compared to $45.8 million repatriated abroad a year ago. 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 last fiscal year

Though Pakistan still faces an image problem, yet the overall situation with reference to foreign investment in the country had improved during past five years. Under former President 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 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. The country's total foreign investment witnessed a growth of 50 percent at 6.282 $ billion during 11 months of last fiscal year 2006-07 against $4.177 billion of the fiscal year 2005-06. In 2006-07, USA was on top with $1.544 billion investment, while UK with $1.139 billion was the second. UK and USA share in total foreign investment (FDI and portfolio investment) in 2006-07 had increased by $1.795 billion to $2.683 billion as compared to $888 million in fiscal year 2005-06.

The investments by USA and UK in Pakistan went up by 107 percent and 690 percent, respectively, together touching the high level of $2.683 billion during July-May period of fiscal year 2006-07, making 42 percent of overall investment in the country against 21 percent of the same period of fiscal year 2005-06. According to central bank, USA investment during the period under review stood at $1.544 billion against $744.6 million of the fiscal year 2005-06, depicting a raise of $800 million or 107 percent. 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.

Pakistan continues to face economic, political and security challenges, which are likely to hinder FDI in the country. Last 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 a year ago. 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 present government may revoke the policies of their predecessors- former Prime Minister Shaukat Aziz and the President Musharraf.

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 present government 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.

The main challenge for Pakistan is to keep up with reforms in many developing countries. The culture of SROs, notifications and NOCs 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.