SHRINKING FOREIGN INVESTMENT
SHABBIR H. KAZMI
Jan 05 - 18, 2009
There is an old saying that foreign investment is like the migratory birds and it flows to areas offering safe heaven. Foreign investors draw comfort from the government policies offering protection of investment and opportunities for earning higher return. The willing local investors ready to form joint ventures encourage foreign investors to assume greater risks offering corresponding return. However, over the last 18 months Pakistan has remained exposed to a number of internal and external threats which have jolted investors' confidence. On top of this, the elected government has not been able to come up with policies offering incentives to the investors and many of the foreign investments have been withheld.
Worst of all the precarious law and order situation forces the local investors to look for other safer heavens. Hike in energy cost, load shedding of electricity and gas, higher interest rates not only discourage new investment but even the survival of existing businesses is at stake. Local businesses face erosion of competitiveness and unchecked smuggling bleak business prospects. Ironically, policy makers and elected representatives are fully aware of the impediments but either do not have the time to find the solution or lack understanding of the prevailing problems.
Business friendly policies are must for seeking fresh long term investment. Holding investment road shows may create investors' interest but ground realities play the decisive role. The government does not have to tell the investors where to invest but to facilitate the investors in identifying the potential areas of investment and above all giving the confidence that their investments and their lives are secure in the country.
Two of the industries need specific mention: telecommunication and power generation. When the government opened up telecommunication sector for the foreign investors, it also came up with supporting policies and the result was millions of dollars investment by the players. There was a latent demand and quality of service and competitive rates gave a tremendous boost to tele-density.
As against this the government has not been able to come up with policies capable of attracting investment in power generation sector. The result is ongoing load shedding and hours of outage getting longer with the passage of time. During last winter the country witnessed extensive load shedding of electricity and gas. The situation is worse this year because demand has increased and there has been no corresponding increase in supply. In fact power generation at present is lower than the level achieved during last winter.
The long hours of outages are not only causing billions of rupees loses to the business community but creating sever resentment among the masses. The pain is doubled because there has been persistent hike in electricity and gas tariffs but hours of load shedding are becoming longer. Crude oil prices have plummeted from their peak of US$147/barrel to around US$40/barrel but there has not been corresponding decrease in electricity and gas tariff. In fact the government has given New Year gift to the public in the form of hike in gas tariff.
One of the key impediments has been lack of supporting policies and worst of all eroding confidence of investors. There has been loud talk but actions are missing. Lately, foreign portfolio investment has been playing a vital role, both as provider of liquidity and supporter of foreign exchange reserves. As the stock market plunged deeper into problems there was talk only and no effort to find the solution.
The floor was introduced to stop the market from freefall but its continuation for more than three months made exit virtually impossible. The result was off market transactions taking place at huge discount. One of the stated reasons for imposing floor was to stop flight of capital because country was facing near-default situation in its debt servicing. However, no one bothered to find out the reasons leading to the precarious situation and made any attempt to take measures to improve foreign exchange reserves. Instead an easy path was chosen, soliciting assistance from the International Monetary Fund.
Similarly, all and sundry are issuing statement regarding creation of a bailout fund but nothing has happened. The name of such a fund keeps on changing from bailout fund to opportunity fund to NIT-State Enterprise Fund but opportunists keep on deferring its installation. However, it seems that some of the sponsors of this fund have already started buying in their own account and the fund may not become operational till the KSE-100 index plunges to 5,000 levels.
Ironically, the policy planners are fully aware of the contentious issues facing the country. Either they do not have the courage to make some difficult decisions or simply do not want to pull the country out of the precarious prevailing situation.
On top of this their talks are often devoid of rational thinking. For example PEPCO is spending millions of rupee on a campaign that there would be no electricity load shedding in year 2009 but the fact is year 2009 has already begun and country faces the worst load shedding, extending to more than 16 hours per day in certain areas.
The present load shedding is being attributed to massive fall in hydel power generation; from an installed capacity of 6,500MW only 350MW electricity is being produced. Thermal power generation is a victim of 'circular debt' and the best efforts are there to attain political mileage from the prevailing situation.
Let it be very clear that shortage of energy has become the single biggest impediment in achieving higher GDP growth rate. Blaming the previous governments for not taking effective measures is very easy but coming up with any concrete measure to resolve energy shortage crisis is still far from reality. None of the factors capable of attracting fresh investment seem to be there but all the odds.