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FDI
inflows: more substance needed, not rhetoric
By M. Osman
Ghani
Foreign direct investment (FDI) plays a
crucial role for rapid economic development of a country. But to attract
high level of FDI, a conducive investment environment is the first
pre-requisite. Investors are a better judge to determine their best
destinations and scope to put their valuable assets. Whatever
opportunities a country can offer to the willing investors would be
analysed, evaluated and weighted by them, to enable them ultimately to
decide whether to put their valuable assets at risk and try their luck.
Factors that may positively influence an investor’s decision include;
reliability and stability of investment policies of the destination
country, its strategic location, size of local as well regional markets,
cost of inputs, abundance of raw materials including primary and
intermediary goods, its weather and climatic conditions and the cost of
skilled labour force.
China, which has been receiving very high figures of
FDI continuously during the last 17-18 years, is the most glaring example
of a super successful candidate to attract huge foreign investments. For
example total FDI, including capital flows to the financial sectors of
China such as banking, insurance and securities hit $83 billion in 2007
while those increased by 4-6 per cent during 2008. China maintains its
position as one of the world’s top destinations of foreign direct
investment continuously for so many years. No excuse of law and order
situation and no preposterous propaganda against it could put even a minor
dent towards its rapid march to socio-political goal.
To improve the standard of living of its 170 million
people, provide income and employment to a large segment of working age
population and to address effectively the rising poverty level, Pakistan
must achieve a high economic growth of 7-10 per cent for a prolonged
period of next 20 to 30 years. For such a big leap forward what is needed
is a most favourable and stable investment environment to capitalise both
domestic and foreign investors. Although, the domestic investors should be
convinced to play the leading role, Pakistan may require $15-20 billion
FDI per annum to revamp its docile manufacturing base, modernise its
dilapidated infrastructure network and upgrade its primitive farming
system.
Since the last few years, we have been listening to a
lot of good news about huge FDI inflows, but at the end of the day the
good news mostly dry out like morning dews on the grass. Few years back
stories like; Gulf investors are investing $50 billion to develop a dream
Island city near Karachi, or Islamabad and Rawalpindi are having most
modern residential cities, developed by Arab Sheikhs etc. have all fizzled
out. On the other hand, latest report indicates that inflow of FDI have
declined by about 30 per cent in the first quarter of the current fiscal
year.
Italian government has reportedly agreed to provide a
credit line equivalent to $10 billion for Italian investors, willing to
invest in Pakistan. This was stated by Board of Investment (BoI) Chairman.
BoI Chairman said that leading Italian companies have shown a keen
interest in having joint ventures in Pakistan, during a recent visit of
the President of Pakistan. According to the Chairman BOI, some leading
South Korean firms including Daewoo, Hyundai, LOTTE and K Water, are also
keen to invest in Pakistan.
A five member delegation from People’s Republic of
China headed by Mr. Hui Jinsong of M/s Chengdu, He Hong Investment &
Management Co. Ltd., China recently visited Board of Investment to discuss
the investment opportunities available in Pakistan, especially in the
financial sector. The delegates were informed that the new investment
policy of Pakistan allows 100 per cent foreign equity in the major sectors
and full repatriation of profits and dividends in all the sectors. Mr. Hui
Jinsong appreciated the financial services sector of Pakistan as it has a
lot of potential with trained personnel. Chinese companies are ready to
make investments in Pakistan including the growing financial sector.
In the field of education, the delegation informed
that they plan to setup a program with Sichuan University, China and
University of Management Sciences (UMT), Pakistan and wants to start an
exchange program between the two institutions. Many other companies are
also willing to make investment in Pakistan. They are waiting for the
right moment especially when the dust of war on terror is finally settled
down which by the look of it would take some time.
It is a fact that due to its strategic location, a
large population with comparatively higher percentage of young and
working-age population, enormous but mostly untapped natural resources,
Pakistan can easily become a top destination for FDI. Pakistan is ranked
85th among 183 economies of the world and it is leading in South Asia
including its neighbour, India, in many vital business indicators. But
poor ratings continued for another year in the category of employing
workers, said the WB report on ‘Doing Business 2010.’ The country has
seen a boom in the investment sector after economic recession hit major
economic powers of the world. Pakistan is providing better environment for
doing business in South Asia. Pakistan also made it easier to start
business by introducing e-service registration system. According to the
World Bank report, Pakistan is improving at the South Asian level. (see
table)
As shown in the table above, FDI inflows in Pakistan
are concentrated in a few major sectors namely telecommunication, oil and
gas exploration, and financial business while commodity producing sectors
and infrastructure are almost neglected. FDI on power sector is also
declining which stood at $80 million only in 2008-09. If Pakistan wants a
real breakthrough in her economic growth, increase employment level, bring
down inflation to around 5 per cent and address growing poverty level,
then infrastructure, energy, manufacturing and agriculture need to be
given priority. During the next 10 years Pakistan will need to create at
least 30 million new jobs and the above four sectors have the potential to
create such huge number of jobs. For this gigantic task investment of $400
to $500 billion would be required from both domestic and external sources
in the next 10 years. A new commitment to agriculture by the global
community is clearly emerging. The FAO estimates the number of going
hungry in 2009 reached an all-time high at more than one billion. There is
no other way to bring them out of poverty except with booming agriculture
in countries like Pakistan.
Global FDI is expected to increase up to $1.4 trillion
in 2010 and reach $1.8 trillion in 2011. The catch line is that Pakistan
should create such conditions to attract at least one per cent of this
global fund in 2011. To create a vibrant business environment and to
attract high level of FDI a lot more needs to be done, especially to
improve the law and order situation. About 1,500 industrial units have
been closed down in NWFP alone due to the escalating war on terror. With
this situation up north and the deteriorating law and order in Baluchistan
and also Punjab, it will be some time investors could be persuaded to
‘think Pakistan’.
NET INFLOW OF FDI IN PAKISTAN
($ Million)
Economic Group 2005-06
2006-07
2007-08
2008-09 *
Food groups
62
516
57
146
Textiles
47
59
30
28
Oil & Gas Exploration
313
454
635
612
Power 321
205
70
80
Trade 118
173
175
148
Communication
1938
1900
1627
829
Financial Business
329
930
1608
681
All others
393
853
951
515
Total 3521
5140
5153
3039
* July - April
Source: SBP
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