Improvement in FDI overshadowed by political instability

Shift political volatility on the first rung of the risk ladder; foreign direct investment, an already scarce inflow in the country, is likely to get a serious blow this time.
Call it a misfortune, a reasonable improvement six percent YoY in the FDI figures released by SBP for the first half of FY13 has to be celebrated half heartedly as uncertainty on the political front has gained momentum.
During December 2012 alone, foreign direct investment rose sharply by more than 100 basis points amid the ongoing energy crisis, lack of proper infrastructure and adverse law and order situation.
Foreign portfolio investment also witnessed an impressive increase of over two folds due to the remarkable performance of the countrys equity market. For the first half of FY13, the portfolio investment netted an inflow of 128 million dollars compared to an outflow of approximately 110 million dollars during the similar period of FY12
Though it needs much appreciation as the foreign investment has been freefalling for over five years now, the latest political jolt rocked the stock market which dipped by more than 500 points leaving the investors bewildered and uncertain.
And the rivalry between uncertainty and investment is more than just a perceptual one. Studies have time and again shown the negative correlation between the two: Political instability can cause a run on the exchange rate as evident from the rising dollar rupee rate.
This not only makes investing in Pakistan less attractive and costlier but also impossible for the foreign firms to get good infrastructure. Moreover, high political risk is a sign of complexity in raising taxes and investing in the telecommunication and road, thus a signal for higher return by the investing firm in compensation of greater risk.
Ideally, a country should adopt a pragmatic approach towards FDI, which is somewhere in between the radical approach that prohibits FDI in the name of nationalism and free market approach with restrictions on FDI at the cost of local industries.
All in all, where the overall improvement in the foreign direct investment was being attributed to the upcoming general elections, the investor mood can take a U-turn if the political chaos is not pacified.