SECURITY ENVIRONMENT AND FOREIGN INVESTMENTS

ATTRACTIVE SECTORS LOST CHARM FOR FOREIGN INVESTORS IN 2009/10

TARIQ AHMED SAEEDI
(feedback@pgeconomist.com)
July 12 - 18, 20
10

According to the State Bank of Pakistan, foreign investments in major sectors of Pakistan's economy saw a downturn in the financial year ended June 30, 2010. These sectors notably have been centre points of attractions for foreign investors since almost a decade. Mainly except oil and gas sector foreign investments in other sectors saw a considerable slide.

Economic analysts attribute both external and internal factors behind this trend. Ranging form deteriorated law and order situation in the country to political instability internal factors remained major factors that spooked the foreign investors. On the other hand, global macroeconomic conditions also compelled the investors to risk investments only in profitable ventures in the emerging and developing economies.

Telecommunication sector has apparently lost its charm for the foreign investors. This sector saw a 48 per cent decline in foreign investments during the period ended on June 2010. This was the largest decrease in any sector during the period. It is notable that telecommunications remained an attractive avenue for investments for last five or six years and leading international telecom companies poured billions of dollars in Pakistan to vie for the underexploited market shares in telecommunication sector. These companies have spent sizeable amounts to build telecom infrastructure and are still getting heavy returns on investments. Cellular sector cheered huge inflows of foreign investments during these years. Since cellular technology was new in the country, the services offered by these companies were received with warm welcomes. But, as the teledensity reached its optimum the aggressiveness in foreign inflows lost its vigour. A decrease to $388 million in the financial year 2010 from $727 million in the corresponding period last year was broadly the offshoot of this retracement.

Many believe power sector of Pakistan is a lucrative field for investors since the returns form the sector are high due to current demand and supply gap in the country. Besides, transmission and distribution is itself a separate avenue calling for a extensive overhauling. Power sector in Pakistan is largely dominated by state-run generation, transmission, and distribution companies. Unmanageable affairs of generation and distribution in the capital city of Karachi by a private company left not an encouraging footprint for others to follow in the power sector. Though state-run companies rely manifestly on independent power producers to lessen supply shortfall of electricity, yet the sector is said to be too complicated to invite private parties to take on full responsibilities. There is certainly need of legislations to make power sector's business supportive for private investors in Pakistan. Not only because 60 to 70 per cent of total population have access to electricity, but also because those who use electricity are not given uninterrupted power supply, which hampers the economic growth. There are loads of potentials in renewable energy sector as well as coal and hydro resources in the country. Foreign power companies have expressed their willingness to invest in the power sector. Nonetheless, the facts are entirely opposite to this, notably in the last financial year, which saw the sector sustaining striking net loss of foreign investments. Instead of inflows there took place outflow of 17 million dollar from the sector. It is worth remembering the fact that power sector got as more as 100 million dollar foreign investments in the comparable financial year. Similarly, information technology sector too underwent a flight of 82 million dollar foreign funds.

Local and international publications are replete with news stories of existing unsafe situations in Pakistan. Optimists still hope foreign investors are not deterred by short-lived horrible memories. They said they eye for long-term benefits of investments, citing oil and gas exploration as an example. It takes quite a number of years before the oil and gas exploration venture hits break-even point. Therefore, it is a long-term investment, they said. Overall energy sector of Pakistan is ripe for investments. And, this is manifested in the unmitigated interest of foreign investors particularly in oil and gas exploration business during the previous fiscal year. This sector received the highest amount of foreign investments during last financial year. A comparison reveals that oil and gas exploration in which foreign investors invested 654 million dollar emerged as prominent recipient of foreign investments in financial 2009/10. During preceding year, this sector however got 658 million dollar foreign inflows.

Many hold the views that law and order in the country enumerates as importantly as any other considerations to investments. Until this improves, no one dares to land in no matter how valuable long-term benefits are. Practically, high security risks are souring the sentiments foreign investors held for different economic sectors of Pakistan. Analysts believe war on terror and its subsequent bombings has shooed away foreign investors from potential laden sectors of the country.

LAW & ORDER

As the bandwagon of war on terrorism is catching speed, the security's state in Pakistan is getting worst gradually. Pakistan that is located on the geographically important place of South Asia with two world's renowned deep-sea ports-one of which Gwadar has capacity to handle mammoth size of cargo ships such as panamax-joined the US-led war on terrorism in Pakistan-Afghanistan border area to counter the threats of militancy posing serious risks to state's survival. But, this unalterable decision unleashed one after another problems for the society and the economy. At present, people are living under sheer dangers emanated from apparently invincible suicide bombings. Civilian death toll has reached at a historically high level because of these catastrophic incidents. Apart from life dangers, worst law and order are playing havocs to economic activities signalling a danger of economic stagnation since unemployment rate is on rise and industries are reeling under extreme pressures.

Equally, global financial recession took a heavy toll on foreign investments in the financial sector though equity funds in Pakistan's stock exchanges went slightly on the sidelines during the last financial year. However, overall financial sector saw a decline of 77 per cent in foreign investments to 154 million dollar in 2009/10 over 689 million dollar in the preceding financial year.

Improvement in law and order conditions is essential to restore confidence of investors on security environment in Pakistan.