FOREIGN INVESTMENTS-BACKBONE OF PAKISTAN'S ECONOMY
MULAZIM ALI KHOKHAR
Apr 13 - 19, 2009
Improving political stability has brought momentum in economic and investment activities since last few months. Pakistan's foreign reserves has improved to above US$11 billion, inflation has eased to less than 20%, and the interest rates are said to be reduced by 200 bps.
Despite terrorism threats, the foreign direct investments, for the last 8 months have jumped to US$2794.42 million with an increase of 19.17%. This is a tremendous improvement as compared to last year's growth rate of 5.3%.
Despite terrorism and related threats, the investments are still showing resilience and have continued improving trend since the start of the year 2009.
Karachi Stock Market has been remarkable in this regard. KSE 100 index was the best performing market in MSCI indices during 2009. Pakistan market posted handsome gain of 17% versus MSCI EMA Asia. Although the market witnessed net outflows of US$238 during the period, the local institutions like mutual funds and high net worth have provided higher support to the market. The KSE 100 index has seen a huge recovery of 17% in the 1Q-CY09.
The Credit Suisse Group was quoted saying that Pakistan's benchmark stock index may rise to 9,000 by the end of the year amid signs of an improving economy and extending gains that have made the market the world's third best performer this year.
FOREIGN COUNTRIES CONTRIBUTING TO FDI
Usually, the large portion of FDI in Pakistan comes from its War on Terror Ally the "USA". During the current 8M-FY09 USA accounted for only US$382.6 million, declined by about 74%, compared to US$1,468.4 million for the same period last year.
The second major inflow of the FDI is from United Arab Emirates, which accounted for almost 11.5% of the total FDI i.e. US$588.6 million during the FY08. This time for the current 8 months of FY09 the investment has stood at only US$158.5 million, a 50% decline from US$317.3 million for the same period last year.
The third is United Kingdom with US$460.20 million FDI and accounted for almost 9% of total FDI flowing in Pakistan during FY08. This time its direct investment in Pakistan stands at US$ 124.7 million, an 11% decline from US$140.1 million for the same period last year.
The main beneficiary sectors in FDI are communication, financial business and oil and gas amounting to 28.3%, 23.2%, and 16.9%, respectively. During FY08, IT & Telecom sector attracted US$1625.30 million, Financial Business especially privatization proceeds of banking sector earned US$1607.60 million and Oil and Gas Sector received US$634.80 million.
This time the investment in Communication and Business sector has declined by 4.5% and 9.5% respectively while the Oil & Gas Sector has marked increase of remarkable 18% compared to the same 8 months last year.
DO WE NEED FOREIGN INVESTMENTS?
Being a developing economy with less capital at home, it is very essential to attract foreign investments to multiply existing production capacities. The investment phenomenon really works well for the economic development. As we saw earlier the investments in Pakistan were growing for the last 5 years at CAGR of about 52.65% and so was our economy, which grew at an average annual growth rate of 7% for the last 5 years.
But as investments declined for the last 10 months our GDP growth rate also declined to 5.8%, the country's foreign reserves which declined from peak US$16.49 billion during September 2007 to US$9.57 billion on 21st August 2008 have now reached to more than US $ 11 billion during April 2009.
The current account deficit for the FY08 has been US$14 billion i.e. 8.4 percent of GDP in FY08, more than double the FY07 figures. It is now standing at US$7.46 billion. Our trade deficit is mounting like havoc and in the situation of global economic slowdown and high inflation it will be very hard for Pakistan to survive if it is not able to curtail unnecessary expenditure and maintain a decent economic growth pace. The government has worked on these measures as the indicators are even though not good pacing towards improvement.
In the current situation of fragile balance of payment position, heating current account deficits, but a few critical improving economic indicators, Pakistan badly needs to boost industrial productions and achieve more stable economy. For that, it needs to improve and mobilize its foreign resources to augment real infrastructure development in Pakistan to offer long term stability in economic activities.
Analysts are predicting further slowdown if the government is not successful in attracting more investments and controlling terrorism and political chaos. Foreign investments toady are backbone of Pakistan's economy and the government officials seem on their toes to go into few more privatization and acquisition deals with investors abroad so as to survive in the recent future.
It is very hard in this lawless environment to bring fresh real investments in Pakistan. Foreign companies are winding up and bringing them in Pakistan is like asking them for suicide. The only options left with the government are to privatize its national institutions and to bring in more foreign loans, attract more savings from individual, loan at lower rates to investors and boost PSDP.
These will help mobilize the economic development activities and achieve stability in the country.