Pakistan - Virtual collapse in foreign investment

There is hardly a day when the Finance Minister or the Prime Minister do not claim credit for improving the investment climate in the country and the positive perception of foreign investors about the economy. The situation on the ground, however, appears to be different. According to the latest data released by the State Bank, foreign direct investment (FDI) declined by dollar 112 million or 24 percent to only dollar 351 million in July-October, 2016 as compared to dollar 462 million in the same period last year. FDI inflows stood at dollar 652.3 million while outflows amounted to dollar 301.4 million during this period. Portfolio investment, with outflows of dollar 144 million as against the inflows of dollar 167.7 million in the comparable period last year, witnessed a very sharp decline of dollar 312 million or 186 percent during the first four months of the current fiscal. 

Notwithstanding the optimism at the highest level of the government, reputed analysts of the country continue to show concern about the dismal state of foreign investment. Talking to this newspaper, former Advisor to the Prime Minister on Finance, Hafeez Pasha, said that FDI had virtually collapsed and there is regular monthly outflow of portfolio investment. Compared to other regional countries, our export performance is very poor and current account deficit reflects a fragile situation of the economy. Pakistan would face grave difficulties if exports continued to decline despite a fall in imports. Ashfaque Hasan, former Economic Advisor to the Ministry of Finance, toldBusiness Recorder that existing foreign investors prefer to remit their entire profit instead of retaining it in Pakistan and this does not augur well for the economy. Government does not seem to be serious about the declining trend in exports. "There is no alarm anywhere in the government and the country's exports have been declining since January, 2014," he added. Industrial activity has decelerated in spite of the lowest interest rates. The government has created relative disadvantage for exporters by blocking their funds. SBP has also documented that "low foreign direct investment continues to remain a major concern, as inflows declined further in first quarter of the current fiscal year". Sources in the Ministry of Finance were also not sanguine about the evolving situation. They were of the view that the decline in FDI in the first four months of the current fiscal reflects economy's fragility with serious risks for balance of payments position in case oil prices in the international market increase. 

The data and observations of those who are well conversant about the latest position of FDI show that the situation evolving during the current fiscal on this front is highly disappointing. This is all the more regrettable when the rate of domestic savings is among the lowest in the world and our policymakers had pinned all their hopes on FDI for the rehabilitation and recovery of the economy. The mass movement of portfolio investment is an indicator that foreign investors are not even confident about the short-term prospects of the economy. Some other aspects of FDI are also worrying. Dollar 272 million or 78 percent of the total amount during July-October, 2015 was received from China and it may be added that inflows from China under the CPEC would be mostly loans and technically cannot be considered FDI. The indifference shown by the investors from other countries speaks a lot about their negative perception about the prospect of Pakistan's economy despite seminars and conferences conducted routinely by the government of Pakistan to attract them. Unfortunately, however, the decline in FDI would also adversely affect the current account deficit which could assume serious proportions in the coming months when the country's exports are falling constantly. The fall in international oil prices may be short-lived due to rising tensions in the Middle East. Pakistan would be deprived of latest technology and other innovative ways of doing business in case the present trend in FDI continues. 

We feel that the government needs to ponder seriously over the falling trend of FDI and think earnestly why global investors are reluctant to capitalise on Pakistan's "improving" economy, especially when they seem to be quite eager to invest in the regional markets. There could be many reasons for this state of affairs but some of the obvious ones are continuing electricity crisis, failure to reform the energy and tax sectors leading to high utility rates, an overvalued rupee and endemic corruption in the system. In this context, the government could consult the existing foreign investors and learn more from their experiences of doing business in the country. Redressal of foreign investors' grievances is particularly essential because the situation with regard to FDI could turn from bad to worse after the termination of the EFF with the Fund.