FDI inflows need policy impetus

With the domestic banking and telecom industry nearing its saturation point, FDI inflows shrank by 58 percent in the last quarter to $463 million from $1.11 billion in the a year ago period. But the consolidation in these two services industries isn the only reason behind declining inflows.
One major reason appears to be the poor law and order situation and widespread corruption in the country that hampered the potential flows in energy and other minerals extraction businesses. The country attracted just $103 million in oil and gas sector in the first quarter FY10 - down 46 percent over last year.
This should be one of the biggest points of concern for the policy makers, as there is an imminent need to route foreign savings in the E&P and other energy related sectors, in order to become energy independent.
Something parallel to the India Energy Conference 2009 planned next month should be in the offing soon. But the catch, of course, in Pakistans case, is the security threats amid politically disturbance in Balochistan, which ought to be resolved on a priority basis.
The other possible reason is ineffective diplomacy; despite being a major ally in the war against terror, FDI inflows from the US decreased by 21 percent to $165 million. Such a performance in a global economic environment, which is flooded with stimulus-driven cheap liquidity, raises serious questions.
Similarly, all those visits by Pakistani officials to China and a series of commitments by Sino officials seen in the last few quarters seems to be going in vain so far. FDI numbers in case of China show an outflow of $3.8 million in the last quarter, a continuation of outflow worth $101 million in fiscal year 2009. These trends, amid talks of strengthening Pak-Sino friendship and Chinas plans to diversify its reserves in real assets, including energy, questions the success of Pakistans ambassadorial activities.
Still, there might be some light ahead. In the medium to long term, US interests in Pakistan amid continuation of its aid and its encouragement to other countries to tilt in Pakistans favour might turn the table around.
At one end, the likely passage of Kerry Lugar Bill might pave way for the materialisation of FoDP pledges, and the other, IMFs oversight on Pakistans economic management and conditions of transparency arising out of several aid and loan packages can give a comfort level to foreign investors who have been eyeing the potentials in Pakistans economy but shy away due to corruption and absence of economic justice.
But thats in the long term, in the short term falling FDI inflows threaten the countrys gross capital formation, and if security risks result in flight of investors from the economy, then it can adversely affect the GDP as well.