FOREIGN DIRECT INVESTMENT

S.KAMAL HAYDER KAZMI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Oct 15 - 21, 2012

Global Foreign Direct Investment (FDI) flows exceeded the pre-crisis average in 2011, reaching $1.5 trillion despite turmoil in the global economy. However, they still remained some 23 per cent below their 2007 peak.

It was predicted that the slower FDI growth in 2012, with flows leveling off at about $1.6 trillion. Leading indicators - the value of cross-border mergers and acquisitions (M&As) and greenfield investments - retreated in the first five months of 2012 but fundamentals, high earnings and cash holdings support moderate growth. Longer-term predictions show a moderate but steady rise, with global FDI reaching $1.8 trillion in 2013 and $1.9 trillion in 2014, barring any macroeconomic shocks. FDI inflows increased across all major economic groupings in 2011. Flows to developed countries increased by 21 per cent, to $748 billion.

In developing countries FDI increased by 11 per cent, reaching a record $684 billion. In the transition economies FDI increased by 25 per cent to $92 billion. Developing and transition economies respectively accounted for 45 per cent and 6 per cent of global FDI. The predictions show these countries maintaining their high levels of investment over the next three years. Africa and the least developed countries (LDCs) saw a third year of declining FDI inflows. But prospects in Africa are brightening.

In contrast, inflows to sub-Saharan Africa recovered to $37 billion, close to their historic peak. Sovereign wealth funds (SWFs) show significant potential for investment in development. FDI by SWFs is still relatively small. Their cumulative FDI reached an estimated $125 billion in 2011, with about a quarter in developing countries. SWFs can work in partnership with host-country governments, development finance institutions or other private sector investors to invest in infrastructure, agriculture and industrial development, including the build-up of green growth industries. The international production of transnational corporations (TNCs) advanced, but they are still holding back from investing their record cash holdings.

In 2011, foreign affiliates of TNCs employed an estimated 69 million workers, who generated $28 trillion in sales and $7 trillion in value added, some 9 per cent up from 2010. TNCs are holding record levels of cash, which so far have not translated into sustained growth in investment.

In the developing countries, Pakistan has a very fertile market for foreign investors given its very large consumer base of 180 million people. People need food, energy and other amenities to live and thrive. There is a great potential in the power and infrastructure sector and in natural resources. There seems to be huge scope for investment in hydel and coal based power projects, alternative energy like wind power, and natural gas transmission from foreign lands. Pakistan also needs infrastructure, world class education systems, exploration of its natural resources and mechanization of industries. Foreign investors can exploit all such opportunities.

Presently, FDI in Pakistan in the last fiscal year (July 2011 to June 2012) showed a massive decline of 50.3 per cent to $812.6 million from $1.634 billion the preceding year.

COUNTRY WISE FDI INFLOWS ($ Million)

COUNTRY 2011-12 2012-13 (JULY)
USA 233 4.2
UK 142.8 2.7
U.A.E 36.6 11.6
Japan 22.8 1.4
Hong Kong 80.3 4.1
Switzerland 127.1 1.3
Saudi Arabia -20.2 0.4
Germany 28.2 0
Korea (South) 25.4 0.5
Norway -275 0
China 120.9 5.1
Others 290.7 10.7
Total including Pvt. Proceeds 812.6 42
Privatization Proceeds 0 0
FDI Excluding Pvt. Proceeds 812.6 42

In June 2012 alone, total FDI inflows amounted to $56.3 million from $170.8 million in the same month last year. The FDI touched its peak level of $5.41 billion in 2007-08. FDI recorded a 65.6 per cent decline to $680.4 million in FY12 compared with $1.979 billion in FY11. The portfolio investment at the local capital market reported a hefty outflow of $71.1 million in FY12 as against the inflow of $364.6 million in FY11.

The foreign private investment amounted to $741.5 million from $1.999 billion, showing a decline of 62.9 per cent while public investment inflows were stood at $61.1 million compared with $20.1 million in FY11.

The total FDI received from different countries totaled $741.5 million in FY12. Country-wise the largest direct investment of $233 million was received from the United States followed by Italy which invested $200 million in FY12.

Pakistan received a total $274.8 million worth of foreign investment form the US, $114.8 million from the United Kingdom, $141.6 million from Switzerland, $68.8 million from Austria and $53.6 million from the UAE in FY12, respectively.

Out of 36 various economic groups, oil and gas exploration, petroleum refining, beverages, electrical machinery, automobiles, construction, and textiles sectors recorded higher growth in during the period. Nevertheless, FDI in telecommunications, power and financial sectors witnessed a negative growth.

The foreign investment in Pakistan has been falling persistently due to number of domestic factors such as energy shortages, macroeconomic instability and poor law and order situation. The ongoing war on terror has had a negative impact on the foreign direct investment inflows that is evident from the fact that the business cost of terrorism is very high in Pakistan. Further country's credit rating downgrades turned down investors' sentiments as well.

OUTLOOK

The Government needs to improve foreign investors' perception about the country and its major economic indicators. Despite getting higher return on equity, the investment environment of the country is risky, which is a negative factor for foreign and domestic investors.