May 28 - June 3, 20

Political instability and disturbed security environment caused a serious dent into the external economy of Pakistan with net inflow of foreign investment in the cash-strapped economy moving downward for last five years. In the first ten months of current fiscal year, foreign investments decreased 68 per cent to $563.3 million compared with $1.6 billion in the corresponding period a year ago, according to the data compiled by the State bank of Pakistan (SBP).

A major component of foreign investment i.e. private portfolio investment dropped staggering 122 per cent in July-Apr 2012 as investors withdrew $72 million from equity securities that include global depository receipts (GDRs) of MCB Bank, UBL Bank, and Lucky Cement. Total foreign private portfolio investment in equity securities was recorded at $329 million in July-Apr 2011. Last investments in debt securities including bonds were registered in fiscal 2007 ($250 million) and 2008 ($25 million) and outflows of $100.6 million and $13 million had occurred in fiscal 2009 and 2010, respectively. There were outflows of foreign public portfolio investment of $32 million in the first 10 months of current fiscal year and $27 million in the corresponding period last year.

Foreign investment is very important for the economy of Pakistan. In the recent past, it has led to massive economic activities specifically employment generation in telecommunication and banking sectors. The continuation of overseas investments directly in the economic sectors or indirectly in the debt and equity markets can restrain the relentless acquisition of loans by the government from international lenders, of which the whole country has to endure heavy costs in shape of withdrawal of subsidies and economic adjustment programme focussing on only ensuring repayments of loans. International lenders present economic crisis management plans to Pakistan and most of them claw back funds with interest or interest through encouraging or overlooking anti-people measures and none of them has been capable enough to help government to tap the untapped sources of tax revenue.

Government of Pakistan also takes loans from internal sources mainly commercial banks and the state bank of Pakistan to meet its expenditures. The acquisition of loans for budgetary supports diverts the banking system money from financially strained private sector. Commercial banks have also been risk aversive in extending loans to private sector due to high nonperforming loans as well as attractive returns on investments in the government securities including treasury bills.

This is, however, highly inflationary since government borrowings normally end up in non-development expenditures instead of some productive or growth oriented avenues. In July-Mar 2012, government borrowings from scheduled banks climbed 57 per cent to Rs373 billion and 19 per cent to Rs218 billion from the SBP on year on year basis. In the same period, however, private sector credit rose only 4.2 per cent. Private credit is considered as growth-prone. Economists say Pakistan's economy needs seven to eight per cent growth per annum to accommodate its burgeoning workforce and reduce alarming poverty in the country.

Review of previous five years shows constant decline in net inflow of foreign investment. For example, foreign investors (both public and private) poured in $8.4 billion in the economy of Pakistan during the fiscal 2006/07. In the following year, foreign inflows fell considerably at $5.4 billion, then to $2.6 billion in FY09, two billion dollar in FY10, and for the fiscal 2010/11 net inflow of foreign investment slid to $1.9 billion.

Foreign investments in an economy like Pakistan indicate, among other things, confidence of the foreign investors on the efficiency of investments or in the words of SECP, transparency, best price, and efficient execution.

Securities and exchange commission of Pakistan (SECP) emphasizes Pakistani capital markets are highly attractive compared with the regional markets. 'They trade at lower levels based on price earning (PE), price by volume (PBV), and payout,' it said.

"The regulator of capital markets protects the rights of investors, facilitates capital formation, and develops an efficient and dynamic regulatory framework in line with the principles of the international organization of securities commissions (IOSCO)," it added.

What could be the possible reasons of alarming drawdown foreign investments from debt and equity securities of Pakistan in view of the claim of the regulator that 'capital markets of Pakistan offer best opportunities for foreign fund managers'? Have fund managers not regained confidence on the market that was badly shaken because of 2008 stock market crash in which, SECP said, index nosedived to 4,500 points from 15,500 level in a matter of few days? If that is the reason, there is an urgent need of restoration of trust through trotting out the regulatory and operational robustness of Pakistani capital markets internationally and how it is chiming in with, as SECP maintained, IOSCO's benchmarks.

Of late, SECP has been elected to the IOSCO's board, which will help improving Pakistan's image globally since it is an internationally acclaimed think-tank comprising of members from 115 countries to upgrade international securities regulatory standards. The board consists of 30 securities regulators from the U.S., UK, Japan, France, etc.

The Finance (Amendment) Ordinance 2012 under which stock buyers will not be questioned of sources of funds invested in stocks till June 30, 2014, elated the investors. At the close of trading on Tuesday last, Karachi stock market was up by 266 points to above 14,000 points. Local institutional buying on healthy corporate results, according to the analysts, drove the rally. It is interesting to note Pakistan's stock market behaves bullish or bearish on the movement of foreign investors and it has always been a source of comfort for the local shareholders to see foreign asset managers engaging in equity trading in the market.

Recent global financial crisis brought down the foreign direct investment in the world, says a World Bank's report on Global Investment Promotion Best Practices 2012.

Investment promotion intermediaries, who provide investors with basic important information about opportunities and business conditions, can steal the show, it says.