The nose diving foreign investment

So this is finally happening. Pakistan is fast becoming lonely and blue as far as attracting foreign investment to the country is concerned. Foreign investment inflows peaked in FY07 at $8.4 billion and its been a downward journey since then.
Figures released by the State Bank of Pakistan (SBP) show that Foreign Private Investment stood at $1,588 billion in the ten months ended April 2011 and declined by 30.8 percent compared to the same period last year. Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), its two key components, also declined over the period by 28.6 percent and 37.7 percent respectively.
Just like the previous two years, Foreign Public Investment - comprising foreign portfolio investment in the governments debt and equity securities - has seen a net outflow of $54 million during this period due to repayment against debt securities.
The net inflow of foreign investment has deteriorated to $1.53 billion during July 2010 to April 2011. At best, this figure could touch $2 billion by the end of FY11. Even then, this would not do much about the whopping decline of more than 75 percent in a span of five years since FY07.
While the liberal profit repatriation regime might have attracted huge sums of FDI in the years leading up to 2007, it is also a fact that profit and dividend outflows are increasing every year in the face of declining FDI and FPI inflows. As per SBP figures, foreign entities repatriated around $650 million in July to April 2011, equal to 42.4 percent of total foreign inflows during the period.
Declining portfolio investment, also termed as hot money, is a worry. However, it is the persistent downslide in the FDI which should concern policymakers more, as it declined by 58 percent between 2007 and 2010. Portfolio investors are akin to migratory birds, they come and go. It is FDI that creates an investors stakes in the system in the real sense, along with positive externalities.
While the telecom and financial services sectors together accounted for more than half of the FDI inflows into Pakistan in the last decade, they are getting increasingly saturated. Its time the economic managers created investor-friendly policies in those sectors which are aching for investment.
Take power production for instance. Power crisis has only worsened in the last three years due to ballooning electricity shortfall, while FDI inflows in the sector have only been $208 million since 2008 restricted to thermal power plants only. Investment in hydel and coal-based power plants is negligible.
Oil and gas exploration is another area. Although this sector has attracted more than $3 billion in FDI inflows since June 2006, there are still loads of untapped and unexplored oil and gas reserves in Pakistan calling for investment.
Foreign investment in petroleum refineries can save the country from importing POL products, thereby releasing the pressure on foreign exchange.
There is no denying the grim ground realities in Pakistan today. The law and order situation is a general impediment; however, sector-specific issues also hold back foreign investors. Small and declining FDI inflows need to be taken serious note of. Failing to do this would make stagflation even worse and put formidable pressure on foreign exchange reserves.