FOREIGN INVESTMENT CONTINUES TO PLUNGE TO NEW LOW LEVELS
May 28 - June 3, 2012
Major macroeconomic indicators like the fiscal and external sector deficits, prices, and exchange rate are abysmal. Foreign investment also continues to plunge to new low levels, undermining the prospects of the economy further in the coming years.
According to the latest data released by the State Bank of Pakistan(SBP), foreign private investment in the country dropped to only $595 million in July-April, 2012 as compared to $1.622 billion in the corresponding period last year, showing a sharp fall of over 63 per cent. Out of this, foreign direct investment (FDI) fell to $667 million as against $1292.8 million in the comparable period of 2011-12, while portfolio investment showed an outflow of $71 million in sharp contrast to an inflow of $329 million in the corresponding period last year.
Sector-wise, the most discouraging news was in the telecommunication sector, which used to be the favorite area of investment of foreigners. It witnessed a profoundly high net outflow of $327 million of investment during the first ten months of the current fiscal as against an inflow of $73 million in July-April, 2011.
The power sector also recorded a net outflow of $25 million compared to a net inflow of $129 million in the same period of last year. FDI in financial business declined to only $54 million compared to $223 million in the corresponding period of 2010-11.
Transport and trade sectors also witnessed massive declines of 83 per cent and 55 per cent, respectively, in FDI during the year.
A steep fall in FDI during the first 10 months of 2011-12 is definitely disturbing news for the country, especially at a time when the economy is in dire need of liquidity to revive its growth prospects to create job opportunities and reduce poverty.
Also, foreign investment is crucial for technological upgradation, innovative improvements, and overall modernization of the industrial base to allow it to be competitive at the international level and enhance exports to narrow the widening trade gap.
Although, there are ample opportunities for investment in various sectors of the economy and Pakistan has one of the most conducive policy frameworks to attract FDI, the inhibiting factors are so dominant and pervasive that foreign investors seem to avoid the country without giving much thought to the positive gestures of the government. Some of the deterrents to foreign investment include poor infrastructure, energy crisis, very poor law and order situation, corruption, political instability, lack of good governance and increasing militancy.
FDI refers to long term participation by a country A into country B (in this case Pakistan). It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative). FDI is a measure of foreign ownership of productive assets such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization.
The Lahore Chamber of Commerce and Industry (LCCI) President Irfan Qaiser Sheikh has expressed grave concern over sharp decline in foreign investment.
According to him, rising risk perception about investing into Pakistan is hitting hard the entire economy and needs to be tackled through a comprehensive policy approach by involving chambers of commerce in the country. The severest-ever energy shortfall, bad law and order situation, institutional fragility and the political instability were the major factors keeping the foreign investors away.
The LCCI President feared that the fall in foreign direct investment was likely to affect adversely the country's economic growth. Therefore, the government should adopt remedial measures to reverse this trend and attract foreign investment.
At the same time, he said, the slow government response to deal with aggravating energy crisis was also spoiling not only the local investment scenario but also sending a very negative signal to potential foreign investors.
LCCI president said that a special committee comprising members of the parliament, presidents of chambers of commerce and industry and representatives of association should be formed to identify the solutions to attract foreign investment that is a prerequisite to economic growth.
The LCCI president said that the proposed committee should also be tasked to look into the existing policy framework and if there is a need to redesign new policies, it should immediately initiate work on them.
He said that all the developed countries accord special importance to economic issues and the challenges. But, in Pakistan the situation is the other way round and the economy is on the bottom of government to do list. He said key issues including power shortage, poor infrastructure, law and order situation and other vital factors should be addressed on priority basis to improve the bleak foreign investment condition to put the country on track of economic growth and development.
"At the same time the government should ensure that all institutions remain immune to any sort of undue interference as this will help improve quality of governance without which foreign investment can not be attracted," he added.
The LCCI President said that a number of sectors in Pakistan including infrastructure development, coal, energy, agriculture, livestock, textiles, and pharmaceutical offer lucrative investment opportunities to foreign investors but unfortunately due to absence of a proper marketing strategy these opportunities are unattended even today.
It may be mentioned here that Pakistan's investment rate was only 13.4 per cent at the end of last fiscal year, which was lowest since FY74. The low saving rate, coupled with wary foreign investors, led to record low investment rate in the country.
The FDI inflows registered phenomenal growth during the last decade, as it grew from $483 million in FY02 to $4.509 billion in FY08. However, political instability discouraged the foreign investment and investment plunged to $2.15 billion in FY10 and further declined to $1.573 billion in FY11.