SHAMSUL GHANI (shams_ghani@hotmail.com)
Jan 4 - 10, 20

We have witnessed varying inflows of foreign investment during the last five years- from a high of $8.428 billion in FY-07 to a low of $2.665 billion in FY-09. In the absence of any sound industrial policy, this inflow has been of a fleeting nature.

It mostly remained concentrated in a few sectors of economy. Our failure to set any rules of the game encouraged foreign investors to place their funds in such a way that promised high returns and quick repatriation. The portfolio section of foreign investment is far more fickle than the FDI section. It can register incredible highs and lows on year-on-year basis.

During FY-07, we received a record foreign portfolio investment (private plus public) of $3.289 billion whereas during FY-09 this investment recorded a negative growth of $1.555 billion. On FDI side, the most significant beneficiaries have been telecommunication, financial services and oil & gas exploration sectors.




SECTOR FY-09 FY-08 FY-07 FY-06 FY-05
Telecommunication (43.4) (21.1) (4.2) 285.3 -
Financial Businesses (56.0) 72.9 182.5 22.2 -
Oil & Gas Exploration 22.0 16.5 74.3 61.4 -
Total FDI (27.8) 0.3 46.0 131.0 -

FY-06, FY-07 and FY-08 were the boom years for the services sector as telecommunication and financial sectors received attention of the foreign investors in three years. While the country witnessed a communication revolution during the period, industrial policy deficit inhibited capital formation.

Most of the investment was made on marketing side and that too was to offset by the import cost of cell phones and allied equipments. Having a sound base and huge potential to grow, the banking sector flourished during these boom years gaining sufficient strength to cope with the effects of global financial meltdown that was to come.

On financial side, insurance sector, despite having huge untapped potential, did not perform in line with the banking sector. With the economy on a downslide and privatization process at standstill, the communication and banking sectors have recorded a sizeable negative growth during FY-09.

Oil and gas exploration is the only sector that constantly grew during the last five years. However, its five month growth in FY-10, when annualized, raises doubts if this sector can maintain historical growth pattern. The escalation of the ongoing domestic war on terrorism has greatly affected the pace of exploratory projects.

On portfolio side too, these three sectors held attention of foreign investors during boom years. The cumulative market capitalization weight of these sectors accounted 75 percent of the total market capitalization. These were the sectoral imbalances that caused great damage to the economy and the capital market. There is a need to introduce some sort of sectoral balance in the economy by focusing on other sectors, especially agriculture, power and mining.

Pakistan's natural resource base cries for balance. Besides, there are huge segmental imbalances within the financial sector. From market capitalization angle, insurance sector accounts for only 8.6 percent while the banking sector (commercial and investment) carries 88.3 percent weight.


Food, Beverages, Tobacco 22.9 180.7 57.1 515.8 61.9 22.8
Textiles 9.3 36.9 30.1 59.4 47.0 39.3
Sugar, Paper & Pulp 85.1 14.7 10.5 17.4 5.1 4.3
Leather / Rubber Products 2.5 5.7 5.5 7.3 8.2 6.5
Chemicals / Petro Chemicals. 55.6 99.3 106.2 52.5 72.4 52.1
Petroleum Refining 20.6 133.1 74.5 155.2 31.2 23.7
Mining & Quarrying 4.9 13.6 42.3 23.7 7.1 0.5
Oil & Gas Explorations 207.3 775.0 635.0 545.1 312.7 193.8
Pharma & OTC Products (0.1) 30.4 45.6 38.4 34.5 38.0
Cement 3.9 32.6 102.5 33.7 39.0 13.1
Electronics & Other Machinery 13.0 38.2 51.9 22.0 21.0 16.5
Transport Equip. /Autos 5.9 82.5 111.5 50.4 33.1 33.1
Power 77.7 130.6 70.3 204.6 320.6 73.3
Construction 42.6 93.4 89.0 157.1 89.5 42.7
Trade 33.3 166.5 175.9 173.4 118.0 52.1
Telecommunication 59.3 814.9 1,440.1 1,824.3 1,905.1 494.4
Communication (others) (3.1) 64.2 186.7 74.4 32.6 23.2
Financial Business 18.0 707.4 1,607.9 930.1 329.2 269.4
Social & Other Services 19.4 101.5 107.4 88.4 64.7 24.7
Other Groups 95.9 198.6 202.9 166.1 (11.9) 100.5
Total Foreign Direct Investment 774.0 3,719.8 5,152.9 5,139.3 3,521.0 1,524.0

The growing fear of terrorism that has now reached Karachi, and the fallout of Supreme Court judgment on NRO have ignited the uncertainty on foreign investments. Besides raising fears of political fragmentation, the SC judgment has also given reason to believe that future holds great promise as economic mismanagement and corrupt practices that drive away the foreign investment may now be kept under check for public good.

For economic managers the job is quite clear and well-defined. Foreign investment, a double edged sword, needs expert and delicate handling. It should be managed under such far-out rules which neither restrict its inflow nor allow a free outflow at the cost of country's economy.

Besides the trading indices, an index should be introduced at stock exchanges to measure the level of capital formation in relation to the foreign portfolio investment. This index may act as an early warning system to prompt the regulators for on-time corrective action.