EDITORIAL: Former Prime Minister Imran Khan, the leader of the largest single party and with a government in two provinces and also in Gilgit-Baltistan and Azad Jammu and Kashmir, has once again reiterated his demand for early elections arguing that the existing political uncertainty is the root cause of the unwillingness of foreign and domestic investors to invest in the country.
The Shehbaz Sharif-led 11-party coalition government accuses Imran Khan of generating political uncertainty through his daily diatribes against their party leaderships though, significantly, there is agreement between the two that it is political uncertainty that is the root cause of investors unwilling to invest in Pakistan today.
Pakistan Tehreek-e-Insaf’s ‘long march’ was no doubt a source of great uncertainty, as have been long marches culminating in sit-ins in Islamabad by other groups - political as well as well religious – however, once the ‘long march’ was called off by Imran Khan uncertainty has since subsided a bit.
While markets are driven by perceptions and the prevailing perception today is no doubt that of uncertainty yet this argument ignores the economic conditions prevailing in Pakistan for decades as well as contributory economic factors that are a reflection of economic policy decisions.
Foreign direct investment during the peak years of China Pakistan Economic Corridor (CPEC) was 1.67 billion dollars in 2015, 2.58 billion dollars in 2016, 2.5 billion dollars in 2017, 1.74 billion dollars in 2018, 2.23 billion dollars in 2019 and 2.06 billion dollars in 2020. In 2021, it declined to 1.8 billion dollars. This indicates that Pakistan as an investment destination for foreign investors was never ever an attractive place compared to other regional countries.
If one takes the July-October figures for the current year the State Bank of Pakistan website notes that foreign direct investment declined to 348.3 million dollars while in the comparable period of the year before it was 726.5 million dollars.
Thus political uncertainty may be responsible for a decline of 378 million dollars which is a very small amount compared to the external financing needs of the country budgeted at over 40 billion dollars for the current year alone.
In terms of portfolio investment inflows (private sector), which can exit a country overnight due to unfavourable market perception or better returns in another destinations, declined from 178.5 million dollars in July-October 2021 to 15.6 million dollars in the current year.
Domestic investment is a function of not only market perceptions but also the policy rate (the PML-N argument is that the lower the policy rate the higher the credit sought by the private sector which in turn fuels productivity) as well as fiscal incentives that in recent years include a subsidised rate of electricity/gas, at a considerable cost to the exchequer as well as to the circular energy debt which at present stands at an unsustainable 2.4 trillion rupees though there has been no empirical study that requires undertaking a cost-benefit analysis of the actual outcome of the incentives.
Today the policy rate is at a high of 16 percent, against headline inflation of 23 percent and core inflation of over 14 percent. The Economic Survey 2021-22 indicates a slight fluctuation in terms of total investment as a component of GNP at constant prices 2015-16 since fiscal year 2015-16: 5,214 trillion rupees in 2016, 5,601 trillion rupees in 2017, 5,557 trillion rupees in 2018, 5,220 trillion rupees in 2019, 5,465 trillion rupees in 2020 and 5,625 trillion rupees last year.
The foregoing makes it obvious that Pakistan has never been a very attractive market for investment – domestic or foreign. At the same time flawed and inconsistent policies have exacerbated its unattractiveness and while politics no doubt is a factor yet elite capture has reached such a level that any incomer into our investment arena, without political influence, is not likely to decide to invest here.
In addition, in recent weeks the widening gap between interbank and open market rupee-dollar parity and the administrative and exchange restrictions to the outflow of dollars that include delays in procurement of fuel by the independent power producers is another major contributor to the current investment environment.
It may be convenient but also true to some extent to blame the opposition for keeping the political environment boiling that is contributing to the perception of instability but cognizance also needs to be taken of some of the policies of the government as well that have contributed to the current state of affairs as the atmosphere of uncertainty resulting in instability is also fuelled in large measure by the delay in reaching a staff-level agreement with the IMF under the ninth review of the programme.
It is hoped that the government would post haste implement the steps and reforms that have been agreed with the Fund if it wants to make good on its narrative that it is taking economically challenging decisions at the cost of its political capital.
Copyright Business Recorder, 2022