FDI declines alarmingly

Foreign Direct Investment (FDI) from July 2008 to January 2009 has fallen by 13 percent, according to the latest figures released by the State Bank of Pakistan. The main contributor to this decline was portfolio investment. Between July to January 2007-08, total FDI was 2,555.7 million dollars with 21.1 million dollars of portfolio investment exiting the country leaving a grand FDI total of 2534.2 million dollars.
However, portfolio investment remained positive at 0.4 million dollars. The bulk of FDI July 2007-January 2008 was from privatisation proceeds ie a total of 2555.3 million dollars with 2401 million dollars realised with the privatisation proceeds taken out of the equation. These figures reflect two facts. First, that the privatisation policy was a major source of foreign capital inflow into the economy during Musharraf's reign, a one time inflow unlikely to be repeated. And second portfolio investment declined as Pakistan was no longer an attractive market for the speculators.
The figures for July 2008 to January 2009 are even more disturbing from the perspective of portfolio investment. A total of 321.4 million dollars left the country under this head which may partly be explained by the global financial crisis and partly by the loss of confidence in the Pakistan economy that appears to persist to this day. It is unfortunate that the newly elected government has failed to establish its economic bonafides one-year after it won the elections on February 18, 2008.
What is interesting is the fact that the FDI with privatisation has been estimated at 2587.7 million dollars with a massive portfolio investment decline of 321.4 million dollars, giving a total FDI for the half year as 2231.7 million dollars. The interesting fact in these latest statistics is that the bulk of this FDI is sourced to privatisation proceeds ie a total of 2587.7 million dollars. Since the advent of the new government there has been no activity with respect to privatisation.
As recently as on February 18 the Cabinet Committee on Privatisation announced a list of state-owned enterprises (SOEs) targeted for what is being termed as public-private partnership, which is being defined as divestment envisaging a change in management rather than a change in ownership. Thus the privatisation proceeds noted by the SBP are instalment payments from privatisation that was carried out during the previous government. It is relevant to note that 208.6 million dollars are from the sale of MCB Bank's shares to Maybank Malaysia.
Thus during the tenure of the present government (July 2008 to January 2009) around 321 million dollars of portfolio investment left the country giving a total of negative 356 million dollars under this head and only 2,587 million dollars entered the country.
This encompasses a rise of 6.8 percent from the comparable period last year under FDI minus privatisation proceeds; however there are some disturbing figures in this regard with a 99 percent decline in paper and pulp, 83 percent decline in rubber and rubber products, 41 percent decline in chemicals, and transport declined by 35.5 percent. Gainers were in food packaging, 9840 percent, petrochemicals 193 percent, power (thermal) by 100.9 percent, or from 33 million dollars to 66.3 million dollars - grossly inadequate to meet our energy shortfall.
There is no doubt that foreign investment has not only bridged the huge saving-investment gap but has also provided much needed macroeconomic stability and emerged as a reliable source to fill the external sector deficit. If utilised properly, FDI could also trigger technology spillovers, assist human capital formation, contribute to international trade integration and help in creating a more competitive business environment. Crucially, foreign investment is a non-debt creating inflow, which could spur growth in a relatively short period of time.
Looking at the importance of foreign investment for our economy, the latest trend, though still not very disturbing, needs to be watched very carefully. Obviously, there is nothing we can do about the financial crisis in the rest of the world which has the potential to reduce the level of foreign investment drastically but efforts must be made to remove bottlenecks at the domestic level to facilitate and, if possible, to accelerate the flow of FDI as soon as possible. The recent Stand-By Arrangement with the Fund and subsequent improvement in some of the macroeconomic indicators of the country would certainly encourage foreign investors to have a favourable view of the country but much more needs to be done to boost their confidence.
Unfortunately, certain problems are unique to the country and are not easy to resolve. For instance, lack of security, worsening law and order situation, perception of a failing state and poor infrastructure are some of the factors which weigh heavily on the minds of investors and discourage them even if the rate of return on investment in Pakistan is relatively attractive. The government could at least try to remove these kinds of impediments to facilitate the inflow of higher level of investment for improving long-term prospects of the economy.