INVESTMENT CLIMATE AT FY10 INCEPTION

MULAZIM ALI KHOKHAR
June 8 - 14, 2009

The investment climate of Pakistan's financial market is though improving but still blurred. One cannot expect with calculated probabilities that how much could be earned or what exactly the risks are pertaining to investment. Investors are confused and mostly out of the market and that has turned the investment managers to sweat for their future livings. Out of the tension, they have started applying wrong means to attract the investors. These cases may range from misrepresentation to fraud. One of such recently highlighted cases was of a widow whose Rs500,000 was misappropriated by an insurance company in Pakistan.

A few days earlier, division bench of High Court of Sindh issued a notice to Securities & Exchange Commission of Pakistan (SECP), State Bank of Pakistan, a bank and an insurance company for misrepresentation of investment profits by the companies and fraudulent transactions on the back of the misrepresentation. On the back of the transaction, the companies not only refused profits but also forfeited the invested amounts.

The other nightmares for investment managers are worsening law and order situation and the expectations of budget for the Financial Year 2009-10. They may not hit hard directly the financial sector, including commercial banks, investment banks, money market and income funds, in terms of taxes and duties but the cut in policy rates would mean lower profits for them.

On the other hand, this cut will be welcomed by the stock market investors as the financial profits of many high leveraged companies will improve. The Credit Suisse Group were 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. The capital market is gaining pace but is currently slow and waiting for the budget to weigh its next step forward.

The foreign investments statistics released by the SBP are raising concerns about the investment required economic sectors. Foreign investment inflows have declined almost 43% for the 10 month of FY08-09 to US$2.21 billion from US$3.86 billion in the comparable period. This is a big slump in the investments and especially the portfolio investments declined swiftly by 792% during the period under review.

The FDI inflows have also declined by 13.8% to US$3.21 billion compared to last year's figures of US $3.72 billion.

NET INFLOWS OF FOREIGN INVESTMENT IN PAKISTAN, BY GEOGRAPHICAL ORIGIN

Million US$

Country/ Economy July-April FY08 July-April FY09 % Change
  FDI Portfolio Total FDI Portfolio Total FDI Portfolio Total
Total (I+II) 3,719.1 143.4 3,862.5 3,205.4 -992.5 2,212.9 -13.8 -792.1 -42.7
I. Foreign Private Investment
Total Private with Privatization 3,719.1 98.9 3,818.0 3,205.4 -451.5 2,753.9 -13.8 -556.5 -27.9
Privatization 133.2 - 133.2 - - - -133.2 - -133.2
II. Foreign Public Investment   44.5 44.5   -541.0 -541.0   -1,315.7 -1,315.7
Source: State Bank of Pakistan

The real beneficiaries of the dwindling FDI in Pakistan are still Communication, Financial Business, and Oil & Gas Exploration, receiving 28.3%, 23.2%, and 16.9% of total FDI respectively.

During the 10 months of FY-09 IT & Telecom sector attracted US$828.5 million, Financial Business earned US$60.9 million and Oil and Gas exploration received US$612.1 million. This time, the investments in Communication, Financial & Oil Explorations have declined by 28.9%, 25.7%, and 31.7% respectively compared to the same period last year.

Being a developing nation with less capital at home, it is very essential to attract foreign investments to multiply our existing production capacities and explore for the more. The investment phenomenon really works aggressively 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.

However, as the investments have declined for the last 10 months our GDP growth rate has also declined to lower than 3%. 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 FY-08 which was US $14 billion i.e. 8.4 percent of GDP in FY08 more than double the FY-07 figures 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 as a developing nation if government fails to curtail unnecessary expenditure and maintain a decent economic growth pace. The government has worked on these measures and we are seeing that indicators are yet not good but 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 resource 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 like backbone of Pakistan's economy and the Government officials seem on their toes to attract a few more privatization and acquisition deals in Pakistan from investors abroad 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 institution and bring in more foreign loans, attract more savings from individual, to loan at lower rates to investors and increase public spending.

These will help revivify the economic development activities and achieve stability and further attract new investments in the country.