At the inaugural session of the two-day international investment conference organised by the Board of Investment (BoI), Prime Minister Nawaz Sharif stated that the present government encourages investment as a tool of economic development as well as long-term friendly co-operation. Foreign direct investment (FDI) is proactively sought by all countries - developing and developed alike - as it not only strengthens foreign exchange reserves but also lubricates the economy through enhancing productivity and employment opportunities. Thus the competition for FDI is intense and this is in marked contrast to portfolio investment, which is of short-term duration and subject to overnight flight not only in response to domestic economic and security considerations but also if better returns are available in another country. In this context, Pakistan's ranking as the 62nd FDI-friendly country must be a source of serious concern to the government, which needs to take appropriate measures to improve this low ranking.
A 1999 Asian Development Bank report that continues to be applicable today argued that "Given its fragile balance of payments position and urgent need to boost industrial production, Pakistan needs to significantly increase its mobilisation of foreign resources. However, long-term official assistance will become increasingly scarce, while promoting large portfolio investments is not a proper policy option due to Pakistan's underdeveloped and narrow capital market. Significant increases in commercial borrowings are also not desirable. It is therefore crucial to accord high priority to foreign direct investment". The report cites the usual impediments namely "inconsistent economic policies, and government bureaucracy".
It is relevant to note that during the past 16 months FDI has actually declined in comparison to the last year of the five-year tenure of the PPP-led coalition government while portfolio investment has risen. This has raised the obvious question as to why the Nawaz Sharif administration, known for business-friendly policies has fared worse than the PPP government. To maintain that law and order problems, systemic macroeconomic issues that the Sharif administration inherited and the dharnas are the root cause of the low FDI inflows is perhaps a little too partisan and simplistic. Part of the reason for the low FDI inflow is, of course, the continued energy crisis which admittedly was inherited by the present government but, sadly, 16 months later the same governance issues remain within the power sector leading to reliance on increasing tariffs for those consumers who clear their bills to cover revenue lost not only through electricity theft/non-clearance of bills but also line losses (governance issues). Raising tariffs make our products uncompetitive in the world market thereby discouraging FDI.
The Lahore Chamber of Commerce and Industry President recently stated that institutional fragility and dharnas have been responsible for the decline in FDI. And while the Prime Minister focused on the dharna politics as the major impediment to FDI yet he must also acknowledge that institutional fragility is a factor that needs to be dealt with. The World Bank report titled "ease of doing business" released 2014 downgraded Pakistan four places to 110 instead of last year's 106. The World Bank's index to determine the ease of doing business contained eight benchmarks namely (i) starting a business, (ii) dealing with construction permits, (iii) getting electricity, (iv) registering property, (v) protecting investors, (vi) paying taxes, (vii) trading across borders and (viii) enforcing contracts and resolving insolvency.
Our economic policies too have been playing a negative role in attracting FDI. At present the Finance Ministry is committed to reducing the budget deficit with negative implications on growth while at the same time seeking investment for infrastructure development from abroad particularly for the energy sector. The ADB report cited above cautioned the government that: "another major problem is the concentration of FDI on the power sector, a domestically-oriented sector, which results in large foreign exchange costs and remittances. This has serious balance of payments implications".
To conclude, the Prime Minister was correct in stating that Pakistan has vast potential in terms of natural resources as well as human resources however, we continue to suffer from institutional fragility, high tariffs relative to our competitors and lack of infrastructure that are a stumbling block in our efforts to attract investment.
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