A downturn in Net Foreign Investment (NFI), visible during the first half of the current fiscal year, has suddenly reversed during January, 2011 but, for all intents and purposes, the real productive gains to the economy from the transfer of funds from abroad, from this source, are almost going to be negligible. According to the latest data released by the State Bank, the NFI jumped by 44 percent to dollar 1.18 billion during July-January, 2011 as compared to the same period of FY10.
In July-December, 2010, it had registered a fall of 15.4 percent over the same period last year, declining from dollar 1.24 billion to dollar 1.05 billion. While the overall level of the NFI during the current year would seem to be encouraging, it was its composition which was unsatisfactory. Portfolio investment stood at dollar 234.8 million in sharp contrast to the decline of dollar 309.1 million in the same period last year, while Foreign Direct Investment (FDI) nose-dived to dollar 947 million from dollar 1.13 billion during July-January, 2010. In addition, total private investment also posted a decline of 14.2 percent or dollar 206.3 million from dollar 1.46 billion to dollar 1.25 billion during July-January, 2011. Needless to say that while FDI spurs growth, creates employment, reduces poverty and introduces technical know-how, portfolio investment flows into the country to make quick bucks and generally discourages local investors and increases volatility in the stock exchange.
The latest composition as well as the size of foreign investment flowing into the country is disturbing for a number of reasons. While portfolio investment is generally speculative and hardly serves any useful purpose, the shrinking FDI is definitely a cause of worry, especially when other developing economies are attracting much higher levels of foreign investment these days. It needs to be highlighted, however, that the continuous decline in FDI is not because of lack of conducive policy framework but due to certain other prohibitive factors and are really unique to the country, for which one can only feel sorry. For instance, in order to lure foreign investors, there is no limit on foreign equity and restriction on the repatriation of capital, profits and dividends. An attractive package of tax incentives is in place and foreign investment is given comprehensive legal protection.
Ample investment opportunities are available in energy sector, oil industry, port development, mining and minerals, agriculture etc. Located at the crossroads of Central, South West and East Asia, Pakistan has a market size of 180 million people. While foreign investors should practically jump at the opportunities available in the country, they seem to avoid Pakistan and usually try to invest in projects having a short gestation period. Reasons for such an attitude are not difficult to comprehend. Political instability, bureaucratic hurdles, lack of good governance, corruption, poor infrastructure, growing militancy, lawlessness and violence in the society are some of the factors scaring away foreign investors in greater numbers. While foreign investors could live with realities like corruption, they would not invest in a country where their life and capital is not safe.
The latest negative development on this front is the suspension of the SBA with the IMF due to non-fulfilment of certain conditionalities by Pakistan. The uncertainty surrounding the IMF programme has provided other bilateral and multilateral donors, including the ADB and World Bank, an excuse to stop the release of aid and loans by linking their assistance with the restoration of the IMF programme. Since the existence of an IMF programme is a kind of a seal of approval for the country's reform policies, private investors would also be thinking on those lines and hesitate to invest in Pakistan. All these negative developments are huge impediments in the smooth flow of foreign investment, without which it would be very difficult for the country to grow and ensure a better future for its population. Domestic savings are too low to finance the growing needs of the economy and the budget. We can only hope that the relevant authorities of the government would try their best on all fronts to create a business-friendly environment in the country in order to attract high levels of foreign investment. Recognised that difficulties are formidable for such an effort, but this is probably the only way to jumpstart the economy and expect good results.