Aug 03 - 09, 2009

Improved law & order situation is a prerequisite for not only bringing foreign investment but also sustaining local investment. Pakistan's economy had to suffer a lot because of deteriorating law and order situation mainly emerged out of war against terrorism. Apart from this, persistent energy shortages in the country also left adverse impact on the country's economy. Economic incentives do attract foreign investment, but if we want it to come in a big way, the government needs to first improve law and order. Islamabad needs to put in place an effective security modernisation programme to ensure unhindered development of the country's economy. Law and order is a pre-requisite to sustainable development.

Pakistan's economy has been suffering an estimated net loss of $ 7 billion annually in the aftermath of war against terror besides rendering millions of people displaced in addition to endangering the security in the country. According to available figures, Pakistan has suffered a colossal loss of over $80 billion since turmoil in Afghanistan and war against terror.

Poor governance has also been identified as the key underlying cause of problems in Pakistan. Poor governance has not only enhanced vulnerability, but is the prime cause of low business confidence, which in turn translates into lower investment levels and growth. Governance problems have also resulted in inefficiencies in provision of social services, which has had serious implications for human development in the country. The lack of public confidence in state institutions has directly contributed to worsening conditions of public security and law and order.

Statistics made available to PAGE show that foreign direct investment (FDI) totaled over $3.7 billion during the fiscal year 2008-09 despite serious law and order issues in the country. However, FDI was 31 per cent lower than the preceding year (2007-08) reflecting the country waning charm with foreign investors. The figure of portfolio investment was especially precarious when considered against the investment climate, as the foreign investors continued to withdraw their money. The net outflows from the portfolio investment were $1.053 billion against inflows of $40 million during the preceding year 2007-08.

Inflows from the United States, United Arab Emirates, and Saudi Arabia witnessed massive declines, a reflection of the global recession, which has gripped the developed economies including the major oil exporters. Inflows from US fell by 33 per cent to $875 million from $1.309 billion recorded during the preceding year. The US has been the biggest investor in Pakistan and retained the same position despite massive cuts in FDI. The United Arab Emirates invested around $589 million in various sectors of the economy during 2007-08, but this amount plummeted to just $178 million during fiscal year 2008-09. Saudi Arabia, which was hit hard by falling oil prices, emerged as a net dis-investor, as it withdrew $92.3 million as compared to an investment of $46 million made in the preceding year. Oman, which had invested $140 million a year before, invested just $2.2 million in the year ended on June 30. The figures of FDI show that the poor law and order situation in Pakistan affected Middle Eastern investors more than the American and European investors.

Those worst hit by the declining FDI are the financial business and telecommunications sectors. FDI in the financial sector shrank to $707 million from $1.865 billion - a decline of 62 per cent.

According to business leaders, the outgoing fiscal year 2008-09 proved critical for banks as their profits and deposits fell. Textile sector was in trouble as it was not getting orders, which reduced liquidity demands from the banking sector.

"Law and order situation is also a serious source of concern for the economy. Buyers prefer to go to India, Dubai and Bangladesh, instead of coming to Pakistan, due to operation against militants in the northern part of the country," a textile industrialist Mian Faraz Alam said.

He further said that political instability, civil conflicts, poor law & order situation, high cost of doing business and electricity crisis are hitting hard to national economy. On one hand, these factors are affecting local investment climate while the inflow of foreign investment is also on downward side on the other hand.

Mian Faraz Alam said that the enemies of the country wanted to portray Pakistan as a failed state but everybody would have to play its role to make Pakistan a safer place for potential investors. According to him, good news is that the Prime Minister has directed the cabinet committee on energy crisis to recommend immediate and long-term solutions to the electricity problem. The committee will also review progress of these projects for ensuring their timely implementation. The government had launched a number of hydel power projects, including Diamer-Bhasha dam, and 'we will be able to overcome power deficit by the end of this year'.

According to Pakistan Industrial and Traders Associations Front (PIAF) Chairman Irfan Qaiser Sheikh, the entire business community has serious reservations that the present democratic government has failed to make any change and is continuing with heavy dependence on foreign loans.

Irfan Qaiser Sheikh said that the Pakistan direly needs homegrown policies instead of any directions from International Monetary Fund that has already suggested increase in power tariff, tax reforms and raise in markup. He also severely criticized government plans to generate electricity from thermal means. He said that all thermal power units should be converted to coal-fired systems, which are two times cheaper than thermal.

The third issue of the South Asia Economic Report (SAER), released by the South Asia Department and the Central and West Asia Department of the Asian Development Bank (ADB) says political instability and civil conflicts have been found to be a major factor in reducing the attractiveness of South Asia as a host for foreign capital. Afghanistan, Pakistan, and Sri Lanka continue to face political uncertainties and security challenges that are likely to hinder foreign direct investment (FDI).

Analysts told PAGE that poor law & order situation in Pakistan is causing serious loss to the country's economy, as not only local investment is on downward trend but it is also hampering FDI inflows. They were of the view that FDI is a vital requirement for sustained economic growth, because it can not only generate employment but also supplement domestic savings. Pakistan is confronted with serious challenges of national security and economic wellbeing, particularly in the areas of trade and energy, they opined. The government is facing a number of challenges foremost being economic difficulties and law & order situation, they said and adding socio-political stability leads to economic stability.

Moreover, the ADB has warned that Asia's economic growth and social order is being threatened by a lack of equality that has seen hundreds of millions of people left in poverty.

ADB managing director general Rajat Nag said despite the sharp growth enjoyed by the region in the past 30 years there was a widening gap between rich and poor. 'The rich are getting richer faster than the poor are getting richer,' he said, warning that it could foster disorder and impede growth. The global financial crisis had worsened the situation, he said, warning that 'for Asia, this is a social crisis.' Speaking at a forum of the Platinum Circle business group in Manila, Nag said there were still about 620 million people in the region living on less than a dollar a day and 700 million without access to drinkable water. 107 million children under five were underweight and 100 million children not enrolled in primary school. This could result in a huge population of physically and mentally deficient people in Asia, he warned. Additionally, the large youth population could become 'a demographic curse if Asian countries don't find jobs for them, he said and adding that 'only 60 per cent of young men and 40 per cent of young women are employed.' To raise more people out of poverty, Nag said Asia had to spend about 400 billion dollars a year on infrastructure. He also called for further integration of Asian economies to make them less dependent on Western nations.