July 12 - 18, 20

The globalisation of economy has imparted the financial operators an acute sense of market differentiation. They are very conscious of the value of their funds and are always on the look out for markets that are capable of appreciating their money both in literal and financial terms. Equipped with modern analytical techniques and sophisticated economic forecasting tools, they can visualize, well before others are able to do so, the market response to any political or economic policy changes that are in the offing in a particular economy. The sovereign and hedge funds engage high-profile and highly-paid financial technocrats to handle their money with the foremost objective of increasing the wealth of the fund sponsors. To attract these funds, the markets have to be dynamic and operational in a vibrant economy. Pakistan used to be a dynamic market till 2007 when it attracted a historically high foreign investment of $8.4 billion. With the destabilization of an economically stable government that had accumulated $17 billion in reserves and had got rid of IMF, foreign investors had no reason to stay in a tumbling market.

The political change that was in the air at the fag end of 2007, made the foreign funds manager skeptical of the efficacy of the replaced material - the democrats - and they exited the market en masse. The two and a half year rule of the elected government simply ratifies the foreign investors' decision to quit Pakistani market. While we continue to take pride in such irrational statements: the worst form of democracy is better than the best form of dictatorship, the foreign investors put their faith in our economic history which shows that growth and stability indices invariably remained low during the so-called democratic periods. Our worsening economic condition and the effects of global recession should make it clear that it's going to be a long wait before the foreign investors decide to return to our markets. The steep fall in the size of foreign investment after 2007 is indicative of the foreign investors' perception of our markets. This perception is not going to be changed soon.


(All Amounts in Million US$)








Foreign Direct Investment-1 3,521.0 5,139.6 5,410.2 3,719.9 3,331.1 2,030.7
% of Total Foreign Priv Invst 90.9% 73.8% 99.6% 115.9% 120.3% 70.8%
Private Portfolio Invst-2 351.5 1,820.4 19.3 (510.4) (561.0) 539.4
% of Total Foreign Priv.Invst 9.1% 26.2% 0.4% (15.9)% (20.3)% 29.2%
Foreign Private Invst-3=1+2 3,872.5 6,960.0 5,429.4 3,209.5 2,770.1 2,570.1
Public Portfolio Invst-4 613.0 1,468.3 20.8 (544.1) (542.6) (673.2)
Other Public Invst-5 - - - - - -
Foreign Public Invst-6=4+5 613.0 1,468.3 20.8 (544.1) (542.6) (673.2)
Total Foreign Invst-7=3+6 4,485.5 8,428.3 5,450.2 2,665.4 2,227.5 1,896.9
Y-o-Y % Increase/(Decrease) - 87.9 (35.3) (51.1) - (14.8)

It's better to forget the foreign investment issue till such time the economic situation takes a turn for the better. Instead, we should focus on things we can do to change the situation. An economic roundup would perhaps be of some help to know what needs to be done. The world is still grappling with the aftereffects of global financial meltdown. Having recognized the event as a great recession, the world economic pundits are busy in devising means to stop it from becoming a great depression. There is a clear divide between the developed economies on this issue; some insisting on prudent economic management, while the others talking of fiscal stimulus. Amongst the economies that profess the fiscal stimulus theory, some lie in our neighborhood - India and Sri Lanka and some others in our region - Japan, Thailand, Malaysia etc. The fiscal deficits of these economies for 2009 ranged between 6.5 (Malaysia) and 10.7 (India). So, on the fiscal side, we should not raise much hue and cry for preparing high-deficit budgets so long as the debt-based money goes to the development side and is used to stimulate economy and create employment.

Pakistan's debt to GDP ratio, although recording a rapid increase during the democratic rule, is still far from being alarming. Against Pakistan's debt exposure of 59 percent (of GDP), Sri Lanka and India have debt exposures of 84 and 81 percent respectively. Japan's debt to GDP ratio is more than 200 percent. Again, the debt is simply not to be raised for lavish, non-development government spending or for siphoning-off to Swiss banks; it must be used in the economy in a way that guarantees maximum job creation and sustained economic growth. Our total national debt - external and domestic - totals to more than Rupees eight trillion. Domestic debts that are never intended to be repaid - all maturities are paid off by raising still larger amount of debt - are less harmful to the economy vis--vis the external debts which require timely debt servicing and pay-offs. Moreover external debts put unnecessary pressure on the economic managers who find it difficult to carry out economic programs of national importance. These pressures come from the international lenders. But again, these lenders never approach us to lend their money; it is the other way round. If we feel IMF pressure on issues like VAT, subsidies etc, it is because we approached it after committing economic suicide for the sake of democracy which, as usual, has failed to deliver.

The increase in the debt size, brings with it additional burden in the shape of higher debt servicing cost and this is where the support of monetary policy is required. An out-of-tune monetary policy and an uncalled for fiscal restraint have almost choked our economy. Under the delusion of inflation control, SBP has stuck to a policy rate that is almost double the average rate in the region. Pakistan fiscal and monetary policies when compared with those of the regional economies single us out as an economy from some other planet. The SBP rate needs to be bought down to around 8 percent, may be even less. This will hugely reduce the cost of domestic debt servicing and government borrowing. The money so freed can be used to stimulate the economy.

With an immensely underutilized resource base, a tight monetary stance - high policy rate and choked money supply - can only help to worsen the situation. We need to expand money supply to cater to the needs of the starved sectors of the economy. Pakistan's currency to monetary ratio of 23.7 percent is very high in comparison to other economies which means that there is a lot of room for money stock expansion. This space can be exploited through credit expansion for genuine economic use. This is the only recipe to get out of the severe recessionary condition we find ourselves in. In fact, it is not the credit expansion that needs to be checked at this stage, rather it is the will to monitor its end-use that needs to be created. We have already learned our lessons. During the recently concluded low-interest-rate period, the cheap and unrestrained credit was allowed to be misused in the speculative markets. We want to see those days back but with a sharp difference: the credit be made accessible only for those who are credit worthy and who are interested in setting the country's economic wheel in motion.

Foreign investment or no foreign investment, we are to move forward with the help of our domestic resources that are fortunately abundant. We have an economy that is crying for expansion. A comparatively low debt to GDP ratio, a high currency to monetary ratio, a low fiscal deficit in the region and a huge space to bring down the interest rate, what else is needed.