Drop in foreign investment

Foreign investment seems to be the first visible casualty of the rising political tensions in the country. According to the latest data released by the State Bank on 18th August, 2014, foreign direct investment (FDI) plummeted to just dollar 24 million in the first month of the current fiscal (July, 2014) from dollar 119 million in the corresponding period last year, posting a huge decline of dollar 95 million or 79.9 percent. The country received foreign inflows amounting to dollar 148 million while outflows stood at dollar 124 million during the month. Compared to the corresponding months of the pervious year (July, 2013), inflows were some 50 percent lower and outflows 45 percent higher during July, 2014. The second component of foreign investment, ie, portfolio investment, nonetheless, surged to dollar 69.5 million as compared to dollar 15.4 million in the same month last year, indicating a sharp increase of 351 percent. Overall net inflows of foreign investment, comprising both FDI and portfolio investment, fell by about 47 percent during the month.
FDI numbers of July, 2014 as reported by the SBP are extremely depressing, to say the least and could cause incalculable loss to the economy of the country if the trend is not reversed soon. Pakistan had already lost attraction for foreign investors due mainly to acute energy shortages, poor law and order situation, continued terrorism, and rampant corruption but the month of July, 2014 has witnessed some extraordinary developments to further scare away foreign investors. For the last two months or so, PTI and PAT were preparing for mega protests in Islamabad and their continued belligerent statements have created a panic both among the foreign and local investors who would now obviously like to shift their assets to safer places abroad in the present circumstances. Recent refusal of the IMF staff to visit the country and discuss the latest economic developments only through videoconferencing is an indication of the fear of outsiders ingrained in their mind about the safety of their lives in the country. The latest announcements of the PTI about civil disobedience and not to repay the IMF loans granted to the Nawaz Sharif government in its procession in Islamabad must have added to the worries of the investors who were willing to tie their fortunes to the country. Anyhow, the plunge in foreign investment does not only indicate a highly negative perception of the country but is very disturbing for the present government, which had pinned its hopes on increasing foreign investment to revive growth, create job opportunities and reduce poverty. Foreign investment was also direly needed for technical upgradation and modernisation of the industrial base to enhance competitiveness at the international level and increase exports to reduce the C/A deficit. Needless to say that we should not be too happy about the rise in portfolio investment as such an investment usually flows to a country to make a quick buck and could make a rapid exit at crucial times and often proves disruptive for exchange rate of the country without making much difference to the productivity of the economy.
Obviously, foreign investors need to be absolutely certain about political stability for making investment besides improved economic conditions and the removal of infrastructural bottlenecks. Policy statements, road shows etc are not enough to convince the foreign investors who have their own sources to verify the realities on the ground in different countries of the world. It seems that foreign investors are so much pissed off at present that the relevant authorities of the government would have to fight consistently on all fronts, particularly to ensure political stability, reduce energy shortages, and create a conducive environment for foreign as well as local investors. We know that the effort would be formidable but the matter is too important for the economy of the country and the welfare of the people and should be taken seriously. Certain warning signals could already be seen on the radar. For instance, the impact of uncertainty is visible in the deterioration of the exchange rate of the rupee and the reluctance of foreign importers to place fresh orders for goods and services from Pakistan. The situation would have been much worse and the panic more widespread if the IMF was not prepared to grant certain waivers and continue the EFF programme negotiated earlier with Pakistan. The ground lost in July, 2014 in terms of loss of foreign investment needs to be covered in the remaining period of the year to accelerate the process of economic development.