close
Money Matters

Luring investors

By Zeeshan Haider
Mon, 08, 16

FOCUS

The security environment in Pakistan has improved considerably since the military launched operations in the north-western tribal region against al Qaeda and Taliban linked militants two years ago.

The law and order situation in the commercial hub of the country, Karachi, has also significantly improved. The incidents of target killings and violent clashes have shown a significant decrease since the rangers began a targeted crackdown in the mega city.

Alongside the security situation, the economy of the country has also been showing signs of improvement over this period. The economy, which was on the verge of default three years ago, has been largely stabilised.

These two factors could have led to increase private investment in the country, but the recent investment figures released by the State Bank of Pakistan are not very encouraging.

According to the central bank, the foreign direct investment (FDI) in July fell by over 14 percent to 64.3 million dollars from 75.3 million dollars in the first month of the last financial year.

Moreover, nearly four million dollars of shares had been offloaded by investors at the Pakistan Stock Exchange in the last week of July. Saudi Arabia and the United States, which traditionally have been the major sources of FDI to Pakistan, pulled out 102 million dollars and 65.5 million dollars of FDI in the last fiscal year.

At a time when foreign investment should show an upward trend because of economic recovery and improving security situation, it is showing a downward tendency. Ironically it came at the time when the Atlantic Media Company (AMC), an international rating agency, has rated Pakistan among the top emerging economies of South Asia because of what it said was political stability and consistency in the economic policies of the government.

The AMC report said Pakistan’s investment in infrastructure building and other development projects would lead its GDP to grow substantially in the years to come.

Officials attribute the decline in foreign investment to continuing gas and electricity shortages, though they believe that there would be considerable improvement in energy supplies in the coming years.

The analysts, however, say the government needs to cut down red-tapism and provide incentives to attract investors to put in their money into Pakistan.

So far, no serious effort has been made to attract foreign investment by the current government.

During the prime minister’s visit to US, Germany and the United Kingdom there have been investment conferences, but no serious follow-up effort was made to convince them to make investment in Pakistan.

Moreover, they say the government needs to focus on attracting foreign investment from countries other than China.

Analysts say Pakistan and China have been time tested friends and this peculiar kind of friendship was reflected in China’s strong interest in development and energy projects in Pakistan.

The China-Pakistan Economic Corridor (CPEC) has a strategic significance also as it would provide the easiest access to Chinese goods to Gulf region and beyond.

However, they believe that Pakistan should explore other sources of foreign investment as being done by other regional countries.

There has been a net inflow of nearly 600 million dollars in the last fiscal year by China, making it the principal foreign direct investor in the country.

Much of this investment is related to the CPEC. But these inflows slowed down last month leading into decline in the overall direct investment.

According to the analysts, the security situation of the country is much better than what it was in 2013, but it cannot be termed ideal.

While the frequency of major attacks has come down drastically, bombings like the one in Quetta earlier this month, in which the whole line-up of senior lawyers was eliminated, make investors think twice before deciding to put in their money in Pakistan.

Quetta is the capital of Balochistan which is a major destination for private investment, particularly in the energy sector and has been a thorn in the eyes of anti-Pakistani forces for long. The government needs to ensure proper implementation of the National Action Plan to consolidate the gains made through the military operations, the analysts say.

Senior economist Dr Shahid Hasan Siddiqui believes that Pakistan’s economic recovery under the present government is not strong enough to motivate foreigners to invest their capital in the country.

He said the government has announced good bye to the International Monetary Fund with fanfare, but this government or the next one would have to revert to the IMF within a couple of months.

“Our exports are falling, the privatisation process has been stalled, investment and remittances are also declining... than how would we return the money we have borrowed to build our foreign reserves?” Siddiqui questioned.

“We have two years of grace period and after that we have to pay back the loans. So inevitably we will go back to IMF in 2019,” he added.

He said the world is also scrutinising the economic performance of the government, which is why the private investors were not taking the risk to invest in Pakistan.

“All we have left for investment is China,” he maintained.

Analysts say Pakistan needs to focus on the implementation of the much-needed structural reforms to put the country’s economy on sound footing.

Policy Research Institute of Market Economy (PRIME) in a recent report maintained that Pakistan has been missing its net foreign investment targets since 2013.

“Pakistan has lost these targets because it has failed to improve its business environment,” it added.

According to the report, Pakistan has come down two notches in its doing business rank to 138 in 2016.

“It is this negative performance in terms of providing a business friendly environment which is behind the slow takeoff of foreign direct investment into Pakistan.”

It maintained that if Pakistan has to reverse these trends and monetise on its liberal investment policy, it has to become a business friendly economy.

Improvement of law and order situation is vital for attracting foreign investment but it is not the only factor that influences the decision of the investors to put in their money into some project.

Investors shy away from putting their capital into anything that is riskier for them

Issues like ever-increasing taxes, a hefty regulatory burden, and a weak intellectual property rights regime also discourages foreign investment in a country.

“Unless we improve on these areas, we will fail to reap the benefits of a stable macroeconomic outlook and a liberal investment policy,” the PRIME report said.

The writer is a senior journalist based in Islamabad