FOREIGN DIRECT INVESTMENTS (FDI) GLOBALLY TO REACH USD 1.6 TRILLION IN 2012 - HOW IS PAKISTAN POSITIONED?
SAAD ANWAR HASHMI
Oct 22 - 28, 2012
The global economy has been affected with recession first through the subprime mortgage crisis reducing trade on a global scale and now the European crisis which may bring another wave of rescission. Coupled with these economic impacts, the oil prices continue to be volatile as global pressure forces the oil prices down whereas OPEC increases prices to maintain exporting countries GDP targets. Stock markets operate on a global scale and investment flow from one country to another based on the viability of the project and the expected returns through cash flows. In such instances, investing in stock markets and projects becomes critical. In western markets where returns are low, investments to less developed markets are seen as an attractive option as returns are higher. Global FDI investments in 2011 was USD 1.5 trillion with FDI is expected to reach USD 1.6 trillion by December 2012. Reasons were high investments in Mergers and Acquisitions (M&A) and Greenfield investments. Global FDI investments are expected to be USD 1.8 trillion in 2013 and USD 1.9 trillion in 2014. Investments are flowing in developing economies primarily in Middle East, Central and East Asia, Africa, South America registering a growth of more than 11 percent to 15 percent per year. Investments are being channelized in infrastructure, agriculture and industrial development primarily focusing on Greenfield investments.
According to United Nations (UN) mobilizing investment should ensure it contributes to sustainable development in all countries. When it comes to Greenfield investments, Cross-border M&A rose 53 per cent in 2011 to USD 526 billion in 2012 with developing economics holding 67% of all green field flows. Although the growth in global FDI flows in 2011 was driven in large part by cross-border M&A transactions, the total project value of Greenfield investments remains significantly higher than that of cross-border M&A transaction. In developing economies FDI investments have also made their way to gas, chemicals, mining, petroleum exploration, transportation as part of infrastructure and communication.
Pakistan is the kind of environment where such investments are required to uplift the economy through investments which would create jobs. The key is to eliminate poverty and increase reserves. SBP recently reduced the discount rate to 10 percent to stimulate credit, domestic as well as international investments economy. In 1QFY13, FDI was USD 87 million compared with USD 263 million in the same period last year which shows a major reduction. The overall FDI inflow 1QFY13 was USD 286.7 million while the outflow was USD 199.6 million with 50 percent outflow from telecom. SBP in light of lowering of inflation has given an incentive to the economy to boost the private sector through expansion of credit with hopes to increase production and GDP growth. A source for liquidity pressures in the economy is sluggish economic growth and foreign direct investments which could substitute low tax base. SBP has stressed time and again that the government must devise fiscal and energy sector reforms and plan foreign financial inflows to mitigate uncertainty and pressure on reserves.
With respect to the economic situation of Pakistan, the country is plagued with high prices of fuel, shortage of power and gas along with high inflation which is a major cause of concern for the masses High prices commodities and food stuff is further pushing the middle class below the poverty line. There is no price control mechanism or authority which keeps a tap on unjustified price increases therefore; exponential increases are observed time and again resulting in people reaching the streets to voice their concern. It is said that with a population of 180 million people, an increase in the population automatically creates inflation through demand of food and resources.
The government continues to support the budgetary deficits through borrowing from financial institutions which has resulted in crowding out, increasing interest rate and inflation. With a poor tax base and imports double of exports, the only major source of funding for the government is borrowing from the private sector, outstanding stock level reaching of Rs. 1,660 billion. The year-on-year growth in the private sector credit is only 4.2 percent. Since government securities yield a healthy risk free return, banks prefer financing the fiscal deficit through investment in fixed income securities rather than focus more on taking risk and extend private sector credit which declines investment to GDP ratio
To encourage the environment of investments and foreign flows in Pakistan, the country needs to have an enabling environment through proper infrastructure, ample supply of energy and power, low input costs and an environment where tax rebates should be given for new initiatives just as witnessed in UAE. The interest rates to encourage investments would need to be reduced further. Once again, private sector investments will not increase through offtake of credit if the economic environment and macro issues which include political uncertainty, terrorism and law and orders issues are resolved. Even these issues remain in status quo and interest rates are further reduced by 300 bps, we may not witness FDI inflows due to such uncertainties. It is ironic that FDI investments are increasing on a global scale with an incremental rise of USD 1 trillion each year whereas FDI is experiencing a reduction in Pakistan.
The opportunities in Pakistan are vast for Greenfield investments. Pakistan with its strategic geographic location in South Asia can capitalize on trade. Pakistan is an aggregation economy as this sector needs vast investments. Similarly infrastructural developments including roads, dams and bridges need to be revamped. With the ongoing energy crisis, investments are required to be made in power projects which are a basic necessity. If only the petroleum and diesel prices are reduced, the gas used for transportation can be directed towards the industrial sector for gas generated power which would reduce the cost of production and the Fertilizer sector. FDI investments in Pakistan would therefore depend on a number of factors where the question does not reside in the reduction in interest rate alone.