Wanted: new policies to attract FDI

Posted on March 7, 2011

By Muhammad Aftab

Even at this early stage of the Middle East-Africa turmoil, investment inflows into
Pakistan have been hit. Will they be hit harder still or return to normal times? In order to
gear up the economy, the country needs new policies to attract foreign direct
investment (FDI). And, lot and lots of good governance. Are they coming?

Business, industry, and the central bank are seized with these questions. Is the
government listening?

Why? If the current adverse situation continues or deteriorates further, Pakistan’s hard-
earned highest in history forex reserves, the current account and the external balances
will be in trouble. Add to that the ongoing business slowdown the country has faced
since the present government came into power three years ago. Expanding domestic
poverty, high inflation, declining domestic and foreign investment and a sluggish output
of the industrial sector are leading to stark forecasts of a Middle East-Africa style
agitation to oust the government in Pakistan. Elections are due in less than two years,
but major opposition parties are already demanding, and gearing up for, new national
polls.

Impacted by the foreign and spreading troubles from Libya to Iran, Bahrain and Oman,
and even initial sparks in the form of the Chinese Jasmine Revolution, the benchmark
Karachi Stock Exchange (KSE) Index, KSE-100, nosedived this week.

The latest weekend report from the Karachi bourse indicates a 6.8 percent decline,
eating up Rs 221 billion from the market capitalization, reducing it to Rs 3.037 trillion.
The index witnessed a single week fall of 817.63 points and closed at 11,223.52 points.
Analysts attributed the decline to “the unrest in the Middle East” and “prevailing
political uncertainty in Pakistan”. This comes on the back of the break-up of the
Pakistan People’s Party (PPP)-Pakistan Muslim League-Nawaz (PML-N) coalition in the
country’s biggest province of Punjab. The PML-N has just ousted the PPP ministers from
the Punjab cabinet. The PPP-led coalition heads the federal government in Islamabad,
which stays in power though considerably weakened.
What is the news from the State Bank of Pakistan (SBP), the central bank? It reported
FDI inflows of $ 1.182 billion in seven months to January of the current FY-2011. This is
an improvement over a mere $ 819 million FDI inflow in the like period of FY-2010. But
it is a far cry from FDI inflows like $ 5.41 billion in FY-2008, $ 3.719 billion in FY-2009,
and even $ 2.15 billion in FY-2010. If FDI inflows continue to decline or stagnate, it may
hit the external balances because these are the key source of foreign exchange.

The rising home remittances sent by overseas Pakistanis, particularly those working in
the UAE, Saudi Arabia, the US, the UK and the European Union (EU) have helped
Islamabad build up its official forex reserves, and reduced the current account
imbalance to just $ 81 million so far this year and positively impacted the external
balances. Pakistan was hit, too, by the global financial crises that erupted in 2007, and
affected most countries of the world. It adversely impacted the FDI inflows in Pakistan,
which have still not normalized.

As the domestic political turmoil is adversely impacting the economy, adding worries to
the local and foreign FDI and portfolio investors, other factors have been quite positive.
Pakistan’s external balances have been quite strong on the back of record high official
forex reserves, a small deficit in the current account, growing exports due to high prices
of textiles, rice and wheat exports, and record home remittances.

However, the question remains: is this favourable situation sustainable over the long
term? Good policies to attract FDI will have to be evolved. But a lack of growth in such
investment will strain the external balances. The prospects of an increase in bilateral
and multilateral assistance are fairly poor, as Pakistan’s several traditional bilateral
donors and helpers have either failed to provide the committed assistance and credits,
or reduced the amounts significantly. This is due to the strains on the donors’ own
resources following the global financial crisis and controversies involving the present
Pakistani government’s credibility, lack of good governance, failure to cut waste in
government spending and even outright corruption.

Islamabad may not see an improvement in FDI volume in the coming months as “the
economy offers no attraction, while uncertainties have strong presence on the political
and economic horizons,” one analyst says. The dismal performance of the bourses in
Pakistan in recent weeks has seen several foreign investors pulling out, although the
overall situation is still in Pakistan’s favour. This is borne out by SBP data for eight
months to February 25. It shows the overall foreign investment into shares during FY-
2011 was $ 768 million. The outflows were $ 571 million. It indicates $ 179 million net
portfolio investment.

For sure, the government has to put its own house in order, launch fresh policies that
are attractive for foreign and domestic investors, and come to grips with the ongoing
energy crisis which is gravely debilitating the entire economy, particularly industry.
Politicking apart, the government should do it. The time is now!