It is sad to see that Foreign Direct Investment (FDI) has declined steeply during the current financial year. According to the latest statistics released by the State Bank of Pakistan on 15th February, the FDI posted a sharp fall of 54.6 percent to stand at only $1.17 billion during the first seven months of FY10 (July-January, 2010), as compared to $2.79 billion in the corresponding period of last year.
A massive fall in investment was noted in the telecommunication sector, which received just $209 million or 70 percent lower than $713 million during July-January, 2009. Under this head, information technology suffered heavily as it faced disinvestment of $96 million, as compared to a net investment of $53.3 million last year. A major blow was also received by financial business as investment in this sector fell to $86.4 million, as compared to $635 million in the same period last year. Cement was another victim, attracting investment of only $5.5 million, as compared to $30.5 million in the same months of 2008-09.
The level of attraction in oil and gas exploration also seems to be diminishing as investment in this sector also fell from $417.9 million to $320 million during July-January, 2010. Foreign investment in the power sector, food sector, chemicals and construction was, however, higher during the first seven months of FY10 as compared to the corresponding period last year. Paper and pulp sector, which had not received any investment in the previous year also attracted $80.5 million during the current year.
A surge in portfolio investment was, nonetheless, a kind of surprise. Net investment in equity market by the foreigners during this period swelled to $290.7 million, in sharp contrast to a net disinvestment of $355.8 million in the corresponding period of last year, due probably to some improvement in the shares market. In a way, it also goes to show that foreign entities are more interested in making some quick bucks, rather than making a long-term commitment to the country.
Taken FDI and portfolio investment together, net foreign investment fell by 34.4 percent to $1.466 billion during July-January, 2010 as against $2.234 billion in the same period last year. A sharp fall in foreign investment is indeed a disturbing development, especially for a country like Pakistan, which depends heavily on its robust and continued inflow to finance a substantial part of its investment effort due to paucity of domestic resources. Clearly, a profound decline in FDI would not only hurt growth and employment levels, but also serve to deprive the country of the latest tools of production, including positives such as modern technology, innovations and skills.
Also, it needs to be noted that FDI is a reliable source to narrow down the gap in the external sector and build foreign exchange reserves of the country. In a country which has a structural imbalance in its foreign sector and depends heavily on loans from the International Monetary Fund to keep itself solvent, foreign direct investment is a kind of boon, reflecting the confidence of foreign investors in the sound management of the economy.
Its continued inflow, in high doses, is all the more important when the US Ambassador to Pakistan has stated publicly that her country had to use its influence to ensure the continuity of the IMF programme with the country. That means that Pakistan has to create the domestic conditions, which are much more conducive to autonomous and increased flow of FDI and could reduce the need to resort to IMF programmes, which are subject to influence by foreign powers.
Anyhow, factors behind the decline in the FDI during the current fiscal year need to be analysed carefully by the authorities, with a view to making necessary amends and providing an enabling environment to foreign investors. There is every possibility that FDI this year is down due to the global economic recession and the fact that some of the sectors within the country, like telecommunication and financial business, have almost reached a saturation point, but other inhibiting factors on the domestic front appear to be much more potent and dominant in dampening the interest of foreign investors.
The slow process of privatisation, the poor law and order situation, the war on terror, power shortages, lack of infrastructure, uncertainty on the political front and the absence of good governance must have played a meaningful role in scaring away foreign investors. We don't wish to go into the details of these factors, because so much has already been written on the issues involved, but we would only urge upon the government to give more attention to the subject or area of FDI due to its importance in affecting the course of economic development.