REMOVING THE BOTTLENECKS FROM FDI
Dec 19 - 25, 2011
Investment is usually directed in sectors that enjoy comparative advantage, thereby creating economies of scale and linkage effects and raising productivity. On the contrary, an important argument in favour of foreign investment is that it consists of a package of capital, technology management, and market access.
For foreign investment, repayment is required only if investors make profit and when they make profit, they tend to reinvest their profit rather than remit abroad.
Another benefit of foreign investment is a confidence building effect. While the local economic environment determines the overall degree of investment confidence in a country, inflows of foreign investment could reinforce the confidence, thereby contributing to the creation of a virtuous cycle that affects not only local and foreign investment but also foreign trade and production.
Especially, the effect of foreign investment on balance of payments of the host country has one of the important implications. In fact, foreign firms typically have a comparative advantage in their knowledge of international markets, in the size and efficiency of their distribution networks, and in their ability to respond quickly to changing patterns of demand in world markets.
Many developing countries have increasingly turned to foreign direct investment (FDI) for sustained economic growth and development.
A country's success depends crucially on the enabling environment it creates for foreign investors with the help of investment policy. A satisfied foreign investor, operating an efficient, growing enterprise and re-investing in that country is the best testimony to the country's "investor friendly" environment. Even the success of investment policies can be judged by the size of the inflows of foreign investment.
Currently, Pakistan is facing a constant decline in foreign investment flow because of the worsening law and order situation.
Also keeping the investors away are energy crisis and red-tapism. The investment-to-GDP ratio nosedived to 13.4 per cent in 2010-11 from 22.5 per cent in 2006-07 being serious consequences for job creating ability of the economy. Foreign direct investment dropped from $2,150.80 million in 2009-10 to $1,739.40 million in 2010-11. For the last four fiscal years, foreign investment has declined by $3.83 billion. In 2007-08, FDI peaked at $5.409 billion.
GDP growth has decreased and at the same time, gross investment in each sector has fallen. Then here foreign loans, grants and foreign private investment are the major external sources of funds to meet the obligations of external resource gaps and developmental goals in Pakistan. Increasing external debt and declining share of official grants indicate that Pakistan will have to rely more on attracting private investment inflows to meet its future requirements of sustained economic growth and to retire external debt. And, no doubt Pakistan has been making efforts to attract foreign investment and such efforts have been strengthened with the commencement of deregulation, privatization, and liberalization policies initiated in 1990s and accelerated during 2000s. Pakistan has huge potential to attract the investors, for the reason that
* Located in the heart of Asia, Pakistan is the gateway to the energy rich Central Asian States, the financially liquid Gulf States and the economically advanced far eastern tigers. This strategic advantage alone makes Pakistan a marketplace filled with possibilities and opportunities.
* Pakistan possesses extensive agricultural land, crop production (wheat, cotton, rice, fruits, vegetables), mineral reserves (coal, crude oil, natural gas, copper, iron ore, gypsum, etc.), and fisheries and livestock production.
Despite offering competitive incentives over the last 64 years, geographical location and relatively large size of population, Pakistan could not attract FDI like those of many developing countries.
A number of factors is responsible for low FDI in Pakistan. These include war against terrorism and related terrorist activities, lack of internal security particularly during the five years, and unsatisfactory law and order situation in all over the Pakistan and particularly in the city of Karachi.
The macroeconomic imbalance and the slowing down of economic activity together with inconsistent economic policies, and severe energy crisis have also discouraged foreign investors to increase their participation in Pakistan. The slow bureaucratic process, inappropriate business environment and inadequate infrastructure facilities have played their role in discouraging foreign investors.
The lack of trained, educated and disciplined labour force, along with complicated and overprotective labour laws, have inhibited business expansion and frightened away productive investment.
* Political stability factor is essential to attract foreign direct investment because it creates confidence in the foreign investors. In the past, lack of political stability has been the hallmark of Pakistan economic progress, especially in 1990's when the musical chair for power played by two major political parties.
* Unsatisfactory law and order situation keeps the prospective foreign investors on the sidelines. Safety of capital and the security for the personnel engaged in the project are essential ingredients, which govern foreign investments. Especially, in this present government duration, terrorist activities in Khyber Pakhtunkhaw and Punjab, target killing incident in Karachi, and worst law and order situation in Balochistan discouraged the foreign or even local investors to set up their business in Pakistan.
* Foreign investors would not want to invest in a country where the economic fundamentals are so week that it is unpredictable what the government would do next to shore up a sagging economy. Foreign investors are concerned about government policies that could in one way or another affect business - trade and investment. In particular, the inconsistent economic policies discourage foreign investors in undertaking projects of medium- to long-run duration. Pakistan's track record in maintaining consistent economic policies has been poor. The abrupt change in policies with a change in government even change in policy within the tenure of a government have been quite common in Pakistan. Everyone wants to see his or her name or contribution in any development policy.
* In countries of high economic strength, the investor is assured of increased opportunities for business, as more government development projects and private sector investments put purchasing power in the hands of the people. Increased purchasing power means increased positive multiplier effects on the economy and a source for stability. Macroeconomic indicators show that Pakistan is loosing its macroeconomic strength, which is likely to adversely affect investment.
* Protection of property rights is critical to encourage investment. The government of Pakistan is progressing slowly in bringing its intellectual property rights laws into compliance with the world trade organization's trade related aspects of intellectual property rights (TRIPS) agreement.
* Unfortunately, government bureaucracy could be the biggest 'burden' in any investment environment. The general perception of businesspersons in Pakistan is that there exists a large gap between the policies and their implementation. The implementation of policies has been slow and the bureaucracy has not responded to the initiatives with conviction. The existence of cumbersome process of getting permits and clearance not only guarantees administrative delays but it also breeds corruption and nullifies the usefulness of "one window operation". Various administrative delays, the unsympathetic attitude of labour inspectors and problem like these are common complaints of the foreign investors.
* According to administrative barrier report of the World Bank, payment of taxes and contributions in Pakistan is a complex and cumbersome process. In addition to corporate income taxes, a large number of direct and indirect taxes are levied at the federal, provincial, and local levels. Essentially, separate collection of taxes and contributions have forced enterprises to face unnecessary, cumbersome, and costly administrative procedures, and to deal with a large number of collecting agencies at all three levels of government.
* The availability, reliability and cost of infrastructure facilities (power, telecommunications and water supplies) are important ingredients of a business environment conducive to foreign investment. Pakistan also compares unfavourable in infrastructure facilities with other developing countries that have attracted higher levels of foreign investment. Present day severe power shortage restricted the local investors so in this griming situation it is impossible to expect a foreign investment in major sectors.
* A technically trained, educated and disciplined labour force along with the country's labour laws are critical factors in attracting foreign investors. Pakistan has been facing acute shortage of technically trained and educated labour force, which may have discouraged foreign investors.
Pakistan's economy continues to defy conventional logic. The general consensus and narrative continues to be that the economy has going to be collapsed. Pakistan has to make stronger efforts to attract as much domestic and foreign investment in the foreign exchange sectors at least in the short term to improve its balance of payments position. To encourage domestic and foreign investment, Pakistan has to remove all the bottlenecks for economic development and progress.
The country's political leadership must take practical steps to improve law and order situation particularly in the major growth poles of the country including Karachi.
Presently, Pakistan's fiscal and balance of payment situations and foreign exchange reserves position is under considerable strain for some time making the macroeconomic environment less conducive for foreign investors.
Some drastic and far-reaching measures are needed to reduce the fiscal deficit on the one hand and to raise trade surplus and foreign exchange reserves on the other.
Although, the investment approval requirement has been removed, numerous permits and clearances from different government agencies at national, regional, and local levels are still applied to investors, causing delays to complete the process.
The authorities should streamline administrative procedures regarding approval and official clearances. The laws and regulations should be simplified, updated, modernized, and transparent, and their discretionary application must be discouraged. Their is a strong need to reduce the number of taxes and contributions; streamline regulations and administrative procedures; and most importantly reduce the contact of foreign firms with a large number of tax and contribution collecting agencies.
In most infrastructure services, Pakistan is highly deficient as compared with many developing countries that have attracted higher levels of foreign investment.
If Pakistan wants to catch up gradually with the development of the economies of East and Southeast Asia, it will have to invest more in the areas of education and physical infrastructure. To promote investments, government should identify potential countries. Government should move from traditional investors (USA, UK, Japan, Saudi Arabia, UAE and other Gulf states) to new directions (China, Malaysia and Korea).
In this regard Pakistan can learn a lesson from its neighbouring country whose Prime Minister P. V. Narasimha Rao, the then Indian Prime Minister, about 20 years ago, unveiled a 'look east' policy that envisaged a dramatic restructuring of the country's foreign and trade policies, switching the focus away from the two superpowers and redirecting it towards the powerful economies that were in its neighbourhood and which had been ignored by successive governments. So far, FDI inflows from Asean into India have added up to a mere $12.63 billion - between April 2000 and December 2010 - with Singapore alone accounting for all but a billion dollars.
Next year sees the 20th anniversary of the launch of the 'look east' policy and the initiation of sector dialogue partnership between India and the Asean. For the first time, the country will host an India-Asean summit in 2012, where an India-Asean Vision 2020 document is to be unfurled. India's hunger for raw materials to fuel its power plants, steel mills and other major commodity guzzlers has seen entrepreneurs seeking acquisitions of mining assets in South East Asia, or joint ventures with local businesses there. Government should also identify new sectors for investment (mining and quarrying, tourism, construction, etc.) rather than focusing on traditional sectors financial business, textiles, oil and gas, etc.
In most infrastructure services, Pakistan is highly deficient as compared with many developing countries that have attracted higher levels of foreign investments.
If Pakistan wants to catch up gradually with the development of the economies of East and Southeast Asia, it will have to invest more in the areas of education and physical infrastructure. Investment particularly foreign direct investment is now perceived in many developing countries as a key source of much needed capital, foreign advanced technology, and managerial skills. Besides realizing its central importance to economic development, Pakistan still faces serious problems as far as implementation of investment policies are concerned.
There is a strong perception among investors that the pro-business policies and inducement used to attract prospective investors are somehow weak given realities when they actually begin to set up and operate their business in Pakistan.
While formulating investment policies, Pakistan should give priority to invite investments in foreign exchange earning sector in the short run.