In an article carried by this newspaper on May 15, 2022 I gave the projected foreign exchange cash flow of the state of Pakistan for the years 2023 to 2026. These projections were picked up from the latest IMF Report available on their website. In that projection there is a projected Foreign Direct Investment (FDI), including portfolio investment, of around USD 9.90, 12.57, 12.57, 12.38 billion in the years 2023 to 2026. This is an optimistic projection and in the present environment I do not see FDI of such magnitude forthcoming in these years. It should therefore be our objective that we understand the nature of FDI in Pakistan in the present scenario and the future we expect for this state.
Pakistan’s currency has declined to Rs 210 against one US dollar. Even if we achieve reasonable results from the ongoing negotiations with the IMF the reversal is not expected to lead to Rs 190-USD 1 parity. The question that arises in this situation is whether or not there can be returns from the investments in Pakistan for the foreign investors to match the currency valuation.
This means that unless there are abnormal profits or guaranteed returns in USD as we have in Independent Power Projects (IPPs) there will be no incentive for foreigners to invest in Pakistan. While projecting future cash flows this serious problem is unfortunately not being taken into account. What I state in the following paragraphs is the ground reality as commercial decisions are purely based on return from investment after taking into account the country’s risks and other factors. In the present environment our situation is not conducive and we are required to take immediate steps to fill the gaps in our foreign currency balances. Optimism in this aspect may lead to unexpected shocks at that time.
The historical perspective on this subject can be identified with the example of a Pakistani bank which was acquired by foreigners in 2012. The entity was valued at $ 1 billion in 2012. The present valuation of that bank which is effectively Pakistan assets is less than $ 750 million on account of serious devaluation of dollar-based return. There is a net loss.
The situation in most of the cases — unless there is guaranteed dollar-based return — is the same. The bottom line is the dollar-based return for the foreign investor has substantially reduced on account of a significant and constant devaluation of rupee. Therefore, there is no commercial reason for investment by foreigners in Pakistan. This subject can be further elaborated by the fact that the constant devaluation of rupee, which was Rs 35 to $ 1 in 1995, does not make any sense for foreigners to consider investing in Pakistan if the returns from their investment arise in rupee in Pakistan.
This is a 500% increase which can never be absorbed by the increase in rupee return. The purpose of this discourse is not to create any sense of hopelessness. However, this position is being highlighted to let the economic policymakers understand that in this situation foreign direct investment by the private sector will not be forthcoming as expected. This requires an out of the box strategy for foreign investment required in particular sectors. Unlike the recipe generally provided by the economists who broadly agree that market-oriented economies produce better economic outcome, I would, however, advocate ‘state intervention’ to fill in the gap for the shortfall in the foreign direct investment.
The best example in this situation is the power sector. The foreign investors, including the Chinese, are asking for 17% dollar based returns. They may be right in asking for this quantum of return; however, the question for the Pakistan government is whether it is desirable to issue bonds with guaranteed return to these companies or invest by borrowing internationally at the cheaper rate of 7% to 8%. If the government of Pakistan is bound to pay 17% on these projects then there is no sense to continue this policy. The better strategy will be to raise energy bonds outside Pakistan at 7% or 8% and acquire the projects where 17% is being paid. The total cost will be less than $ 5 billion.
This issue has another dimension. As usual, we are trumpeting that the power sector will be privatised. In the present scenario the issue under consideration will be whether or not any FDI will be available unless there is 17% plus guaranteed return from the Government of Pakistan and that too in dollars. This is not a feasible proposition. If so, the alternate buyers will be Pakistani investors. In that situation it would have to be decided whether or not there exist the requisite appetite and strength with the local investor.
The purpose of this article is to demonstrate that there is an urgent need to understand that Pakistan would have to redo its sums with respect to FDI as projected because of the significant devaluation of the rupee that has eroded the base required. A vicious spiral has started. This has to be intercepted and countered. It, however, appears that our policymakers and intellectuals are yet to realise the gravity of the situation and are busy in dealing with day to day matters. We have to look beyond 2022 and project for a sustainable strong Pakistan for years to come.
Copyright Business Recorder, 2022