While addressing the Overseas Investors Chamber of Commerce and Industry the other day, Federal Finance Minister Shaukat Aziz said the government would take further steps to attract more foreign direct investment (FDI) to the country.
The minister revealed that the flow of FDI into Pakistan in the first seven months of the current financial year was around $600 million.
In the minister's view this was not bad, considering the low flow of FDI into the region.
However, this statement is hard to swallow when the flow of FDI into India, China and even South East Asia is compared with Pakistan's figures.
What the Finance Minister in particular and the government's economic managers in general fail to address are the constraints holding back foreign investor confidence.
It is difficult to disagree with the Finance Minister that many of the economic indicators are positive.
GDP growth is expected to reach 5.5 percent according to the State Bank of Pakistan's latest quarterly report, and 6.0 percent if the optimism of the minister proves justified.
The major contributor to this healthy growth pattern has been the manufacturing sector, which has grown by 15 percent.
Agriculture's contribution, on the other hand, is still open to discussion, since the cotton crop has not been a bumper one, and the next wheat crop, therefore, assumes crucial importance. Both exports and imports are up, the former reflecting the ability of our export sector to sustain itself against international competition and the negative impact of quota restrictions in some developed countries and the anti-dumping duties on cotton products being levied by the EU and some other countries. Buoyancy in imports reflects enhanced economic activity.
The external account balance appears manageable, if not positively healthy. Forex reserves too are healthy. Inflation is claimed officially to be running at 4 percent, although the SBP warns against food prices-led pressures on the price line, which may call for a tighter monetary policy.
Although the increase of Rs 186 billion in credit to the private sector is cause for joy for the SBP, it is not yet clear how much of this has gone to productive investment and how much to consumer financing.
Inward remittances seem to have steadied at $3.5 billion, but unemployment is high and rising, with no relief in sight.
Relief in the shape of new jobs can only come from investment. If domestic investors are shy (except for those with capital on the ground who have no choice but to modernise to face international competition in the impending WTO regime), how can foreign investors be expected to have confidence?
There are some crucial areas in which both the perception and reality of Pakistan are proving an obstacle to business confidence and therefore to the inward flow of FDI.
First and foremost is political stability. With no succession system in place, the current political edifice is overly dependent on the life and health of one man, President General Pervez Musharraf, himself the target of various assassination attempts over the last two years.
This has brought the sustainability of the existing system into question. With political stability comes as a close second long term consistency of policies. Infrastructure inadequacies too are a bottleneck, and even this sector cannot attract FDI unless the other factors are addressed, thus landing us in a chicken and egg situation in this instance.
Security, law and order, and crime have to be tackled if both domestic and foreign investors are to feel safe enough to do business in this country. Last, but by no means the least, foreign investors have to be persuaded that contracts will be honoured, and judicial redress in the case of violations or disputes will be credibly available.
Previously any brave foreign investor who ignored all the other bottlenecks and ventured into the Pakistani market asked for clauses in contracts ensuring dispute resolution through international arbitration, as a way to address no-confidence in the country's judicial system.
Now that too is suspect after the HUBCO experience and non-operation of the protocol/treaty on International Arbitration signed but yet to be ratified by Pakistan.
What Pakistan needs is FDI, ie asset creation on the ground, not portfolio investment, which is notoriously unstable. It is no good government ministers giving reassuring statements every now and again that more will be done to attract FDI, without tackling the obstacles that have been identified above.
In the absence of the political wisdom and will to change things in these matters, FDI will remain a will-o'-the-wisp.
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