CROSS-BORDER INVESTMENTS AND PAKISTAN

AHMED NADEEM
(feedback@pgeconomist.com)

May 21 - 27, 20
12

Cross border investments are those in which a person, rather than investing in local businesses, puts his money in an institute functioning or incorporated in another country. Pakistan is one of those countries where cross border investments would be a good option for companies.

Developing countries usually have a shortage of capital, required for economic development. Therefore, marginal productivity of capital is higher. On the contrary, investors in the developed world seek high returns for their capital and investment opportunities. Hence, there is a mutual benefit in the international movement of capital. The ongoing process of integration in the world economy and liberalization (of economies) in many developing countries has led to a fierce competition for inward foreign direct investment (FDI) in these countries.

A research by Dunning (2002) finds out that FDI from more advanced industrialized countries depends on government policies, transparent governance, and supportive infrastructure of the host country.

In Pakistan, decades of internal political disputes and low levels of foreign investments have led to slow growth and underdevelopment. Agriculture accounts for more than one-fifth of output and two-fifths of employment. Textiles account for most of Pakistan's export earnings, and the country's failure to expand a viable export base for such industries has left the country vulnerable to shifts in world demand.

Official unemployment is six per cent, but this fails to capture the true picture, because much of the economy is informal and underemployment remains high. Over the past few years, low growth and high inflation, led by a spurt in food prices, have increased the amount of poverty. A UN human development report estimated poverty in 2011 at almost 50 per cent of the population.

Inflation has worsened the situation, climbing from 7.7 per cent in 2007 to more than 13 per cent for 2011, before declining to 9.3 per cent at yearend. As a result of political and economic instability, Pakistani rupee has depreciated more than 40 per cent since 2007. The government agreed to an International Monetary Fund (IMF) Stand-by Arrangement in November 2008 to overcome balance of payments crisis.

Although the economy has stabilized since the crisis, it has failed to recover. Foreign investment has not returned, due to investor concerns related to governance, energy, security, and a slowdown in the global economy.

Remittances from overseas workers, averaging about at one billion dollars a month since March 2011, remain a bright spot for Pakistan. However, after a small current account surplus in fiscal year 2011 (July 2010 - June 2011), current account turned to deficit in the second half of 2011, spurred by higher prices for imported oil and lower prices for exported cotton.

The country remains stuck in a low-income, low-growth trap, with growth averaging 2.9 per cent per year from 2008 to 2011. Pakistan must address long-standing issues related to government revenues and energy production in order to stimulate the amount of economic growth that will be necessary to employ its growing population. Other long-term challenges include expanding investment in education and healthcare, and reducing dependence on foreign donors.

FOREIGN DIRECT INVESTMENT (BY SECTOR)

SECTOR JUL 11-MAR 12 (MILLION US $)
Oil & Gas Explorations 428.9
Chemicals 66.9
Construction 53.3
Financial Business 45.6
Information Technology 32.9
Beverages 29.6
Source: State Bank of Pakistan

FDI has played a key role in the economy, according to Khurram Shakeel & Muhammad Azam. It is stated that the FDI and remittance have a positive and significant impact on household savings. Pakistan can attain a greater foothold in the world economy by getting access to international capital.

Moreover, Syed Hasanat Shah, in his paper published in the international journal of finance and economics, showed that the foreign direct investments are positively and significantly correlated with domestic investments. Usually , domestic investments increase the credibility of host economy and encourage foreign investors.

However, in Pakistan FDI is a sign for credibility for domestic investors. Pakistan has had a favorable policy towards foreign investors such as by allowing them 100 per cent equity of industrial projects without obtaining permission from the government and maintaining of foreign currency accounts with the approval from the State bank of Pakistan.

NET FOREIGN PRIVATE INVESTMENT IN PAKISTAN
(BY COUNTRY) (MILLION US $)

RANK COUNTRY JANUARY FY12 FEBRUARY FY12 MARCH FY12 (P)
FDI FPI TOTAL FDI FPI TOTAL FDI FPI TOTAL
1 United States 16.28 -4.50 11.78 17.7 2.39 20.0 13.4 11.70 25.1
2 China 8.78 0.00 8.78 37.8 0.00 37.8 3.0 0.00 3.0
3 Switzerland 9.65 -0.73 8.92 12.4 5.13 17.5 9.6 4.98 14.6
4 Italy 6.60 0.00 6.60 6.3 0.00 6.3 22.5 0.00 22.5
5 U.A.E -6.41 0.68 -5.73 -3.5 4.74 1.2 32.4 1.11 33.5
Source: State Bank of Pakistan

The need for FDI arises for infrastructure developments. Effective policies need to be made to attract foreign investments.

Education is not only important, it is also a necessity like our basic needs i.e. food, shelter and social needs. Additionally, it promotes knowledge and brings issues facing by the underprivileged communities. One of the essential tasks of education is to enable people to understand themselves.

Students must be equipped with knowledge and skills which are needed to participate effectively as member of society and contribute towards the development of shared values and common identity.

Around 57.7 per cent of adult Pakistanis are literate. Male literacy is 69.3 per cent, female literacy 45.2 per cent. Literacy rates vary by region and particularly by sex. For instance, female literacy in tribal areas is three per cent. Moreover, education introduces world-class technology, technical know-how, and processes to develop the country. Furthermore, it enhances competition and improves the quality of human resource availability through exposure to globally valued skills.

The government launched a nationwide initiative in 1998 with the aim of eradicating illiteracy and providing a basic education to all children. Through various educational reforms, by 2015 the ministry of education expects to attain 100 per cent enrolment levels among children of primary school age and a literacy rate of 86 per cent among people aged over 10.

In a human development report, Pakistan is placed at 136th position, as only 49.9 per cent of its population is educated. Sustained efforts are needed to achieve the 2015 millennium development goals in education.

Primary school enrollment in Pakistan is merely 56 per cent in contrast to the average global primary enrollment of over 87 per cent.

Seventeen million Pakistani children who qualify as primary school students are not enrolled in any institution.

Pakistan's founder Quaid-e-Azam Mohammad Ali Jinnah said in one of his speeches, "Education is a matter of life and death for Pakistan. It is not a privilege but the right of every citizen."

According to the World Bank, Pakistan has more than 150,000 public education institutions serving over 21 million students and a big private sector that serves another 12 million. The private sector has established a strong foothold in the education sector.

There is a recognizable difference in the quality of education of private versus public sector. Private schools remain the first choice for parents when they consider education for their kids.

This has allowed private institutions to charge excessively high amounts of money and has become a somewhat money minting profession. If this sector is to improve, the quality gap has to diminish. Therefore, it is necessary that Pakistan is able to set strict policies, which it follows and also invite international organizations to establish institutes.

A very good example can be taken from our middle-eastern neighbor where 'Taaleem' PJSC an education initiative of National Bonds helped develop the UAE education sector. 'Taaleem' PJSC operates a number of schools in the UAE, which have done quite well for the society.

National Bonds Corporation views Pakistan as an important and a strategic market for investments. National Bonds Corporation is one of the world largest retail Islamic savings schemes having a substantial base of Pakistani customers.

As part of National Bonds Corporation's social responsibility, it invests in the community where it operates. With the current expansion of their operations in Pakistan, strategic investments are imperative and part of their core investment philosophy.

National Bonds is eying on entering the Pakistani education sector as an initiative to promote better quality of education and future for the average Pakistani. Their entrance in the country can be a very good choice for creating a more social oriented private education sector. Such foreign investments will be beneficial for the economy as a whole and maybe developments like these can help Pakistan break loose from the vicious cycle of corruption, poverty, lack of economic development and lawlessness.

The writer is an analyst at Emaan Financial Services.