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Foreign investments in Pakistan – A perspective for 2012

Published on 31st dec, 2012, Edition 01, 2013

 

FDI requires an enabling environment to ensure flow of funds and capital in different investment ventures. Investments are required in Pakistan for infrastructural development and industrial growth which would create jobs and translate into a higher GDP through enhanced production. The per capita income of Pakistan is only USD 1,254 considered low. The key is to eliminate poverty and increase reserves. With respect to the economic situation of Pakistan, the country is plagued with high prices of fuel, shortage of power and gas along with high inflation which is a major cause of concern for the masses High prices commodities and food stuff is further pushing the middle class below the poverty line. There is no price control mechanism or authority to keep a tap on unjustified price increases therefore; exponential increases are observed time and again resulting in people reaching the streets to voice their concern. It is said that with a population of 180 million people, an increase in the population automatically creates inflation through demand of food and resources.

According to latest indicators released by Board of Investments (BOI), Green Field investments in Pakistan is on a decline since FY07. The investments in this sector were USD 1,634 million in FY11 versus USD 812 million in FY12. Upto Nov 2012 during the current fiscal year, FDI was recorded at USD 305 million. This is also the FDI received in Pakistan during the given time frame. No privatization proceeds have been witnessed in Pakistan since FY08, last receipt being USD 133.2 Million. There were discussions to push for privatization of all state owned organizations mainly PIA and Pakistan Steel Mills Limited. Unfortunately due to a bureaucratic structure and personal gains, these organizations are being eaten from within. Private Portfolio Investments witnessed an inflow of USD 344 million in FY11 which a net outflow of USD 46.9 million in FY12. During the current fiscal year upto November 2012, Private Portfolio Investments were only USD 144.8 million. With respect to sectors, the oil and gas sector has received the highest proportion of FDI being USD 247 million.

SBP recently reduced the discount rate to 9.5 percent to stimulate credit, domestic as well as international investments economy. SBP in light of lowering of inflation has given an incentive to the economy to boost the private sector through expansion of credit with hopes to increase production and GDP growth. A source for liquidity pressures in the economy is sluggish economic growth and foreign direct investments which could substitute low tax base. SBP has stressed time and again that the government must devise fiscal and energy sector reforms and plan foreign financial inflows to mitigate uncertainty and pressure on reserves.

The government continues to support the budgetary deficits through borrowing from financial institutions which has resulted in crowding out, increasing interest rate and inflation. With a poor tax base and imports double of exports, the only major source of funding for the government is borrowing from the private sector, outstanding stock level reaching of Rs. 1,660 billion. The year-on-year growth in the private sector credit is only 4.2 percent. Since government securities yield a healthy risk free return, banks prefer financing the fiscal deficit through investment in fixed income securities rather than focus more on taking risk and extend private sector credit which declines investment to GDP ratio

 

To encourage the environment of investments and foreign flows in Pakistan, the country needs to have an enabling environment through proper infrastructure, ample supply of energy and power, low input costs and an environment where tax rebates should be given for new initiatives just as witnessed in UAE. The interest rates to encourage investments would need to be reduced further. Once again, private sector investments will not increase through off-take of credit if the economic environment and macro issues which include political uncertainty, terrorism and law and orders issues are resolved. Even these issues remain in status quo and interest rates are further reduced by 300 bps, we may not witness FDI inflows due to such uncertainties. It is ironic that FDI investments are increasing on a global scale with an incremental rise of USD 1 trillion each year whereas FDI is experiencing a reduction in Pakistan.

The opportunities in Pakistan are vast for Greenfield investments. Pakistan with its strategic geographic location in South Asia can capitalize on trade. Pakistan is an agrarian economy as this sector needs vast investments. Similarly infrastructural developments including roads, dams and bridges need to be revamped. With the ongoing energy crisis, investments are required to be made in power projects which are a basic necessity. If only the petroleum and diesel prices are reduced, the gas used for transportation can be directed towards the industrial sector for gas generated power which would reduce the cost of production and the Fertilizer sector. FDI investments in Pakistan would therefore depend on a number of factors where the question does not reside in the reduction in interest rate alone.

Investments in Pakistan is expected to increase in the near future, however, foreign investors looking at healthy double figure return potential in Pakistan are waiting for both political stability and control over law and order issues. Hong Kong, United States, United Kingdom and Switzerland are the top investors in Pakistan. The potential demutualization of KSE with sale of 40 percent stake is also being viewed as a positive sign for inflow of funds. With adverse macro issues from January 2012 to date, Pakistan has not provided an investor friendly environment. Pakistan is under pressure with declining reserves and devaluation of exchange rate which will further put pressure on the import bill. Some argue that change in the government will make a difference to uplift the image of Pakistan which would in turn attract investments. Investors in actual are more concerned with economic stability and favorable macro indicators regardless of democracy. It is yet to be seen how foreign investments would be triggered through year 2013.

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