private: Pakistan and FPI

Despite the war-like situation within and at the outskirts of its boundaries, Pakistan continues to compete hard with other emerging markets to attract Foreign Portfolio Investments (FPI) with a view to sustaining the inflow of portfolio investment. Now it is the job of policymakers to ensure that Pakistan is at least as attractive an investment destination as other emerging markets.
This induces policymakers to a situation where they have to ensure that the returns from the local stock markets are high.
The cuts in development expenditures have brought the minuscule job creation process to a complete standstill and flood calamities has not only enhanced the budget deficit but have enlarged the gulf amongst the already poor and ruling elite. Growth is the function of human resource skills and continuous supply of capital. The State Bank is unable to maintain adequate supply of funds required by entrepreneurs for setting up of new projects and resultant job creation due to excessive government borrowings.
Be it post-9/11 or the aftermath of May 1998, it is the scarcity of foreign reserves which has always forced our leadership to compromise on just principles and sovereignty of the Islamic Democratic of Pakistan. The think-tank at the helm should ponder that despite being in possession of superior natural resources and a far more lucrative strategic location as compared to Singapore, Switzerland and Japan, how and why we are stagnating with low standard of living. The changes in global forces and trends provide specific opportunities and threats to nations. The degree to which a nation captures the opportunities or copes with threats depends upon the vision and the bravery of its leadership. Therefore, our policymakers should be concerned with our nation's capabilities not just in terms of scope and intensity, but also the substitution and synergistic effects amongst these elements at this juncture.
Walt Rostow and Michael Porter are best known for presenting models for classifying countries by stages of economic development. Both models lay a clear emphasis on "Capital Market Development"; in fact stage three of Rostow and Porter's 2nd amongst key factors for economic development, call upon the consensus in favour of investment in capital equipments. Alluding to Rostow's 3rd stage of Economic Development, the Capital Market has to be very active and dynamic. In this stage, some key sectors generate sufficient capital and back high-level of profits to finance further growth. Both the models stress upon the need to obtain foreign exchange to finance development expenditures.
Dependence on the FPI is pushing many developing countries towards a more stock market-oriented financial system and by the way Pakistan is not an exception. In this context, it becomes particularly important to find out how a stock market-based financial system can benefit the economy and the industry of our country. The FPI can boost the real sector of our country by providing a non-debt source of foreign funding. Our marginal propensity to save is peaking from the downward due to unfavourable employment numbers. The advent of portfolio investment can supplement domestic saving for improving the investment rate and can reduce the pressure off the foreign exchange gap.
This is the time that we should understand that the increased inflow of foreign capital will enhance the allocative efficiency of the capital, and will give an upward thrust to domestic stock-market prices. The incidents of our gross failure to observe rules, regulations, policies and procedure must not result in the imposition of rules which are counterproductive in the short-run and a strategic-drawback in the long run.
The FPI has an impact on the price-earnings ratios of the firms, a higher P/E ratio leads to a lower cost of finance, and stock purchases on the secondary market can result in a higher amount of investment. The first impact is to increase the price of the shares rather than the flow of funds to the companies that wish to increase investment. Increased wealth of local investors may actually increase consumption. This way some amount of capital inflow can be directed towards consumption.
The lack of or unwillingness to understand the linkage of capital market to the macro economy and the overall job-creation process is one of key impediments hindering the development of the economy and the capital market, whose capitalisation was once half of the size of our GDP and which used to generate around 1.2 billion rupees to the national exchequer in term of previous taxation model.