EconomyArticle 1 FDI: obstacles and prospects By Haris Zamir Foreign direct investment flows in any country indicate the

economic condition and the kind of environment that is available to institutions or investors. However, in Pakistans case, while the market is flourishing, according to one analyst, the only thriving business is that of corruption, theft and extortion. Issues such as gas and electricity shortages remain unresolved and rationing has been adopted as a coping mechanism. Industries in Punjab textile, general industries and fertiliser companies did not receive gas supply throughout winter. Prolonged power outages are the new norm for industries. These last anywhere from eight to a staggering 16 hours a day. In these circumstances, even domestic investors are reluctant to expand or invest and are choosing to shift some of their businesses abroad. Textile representatives say that due to non-availability of electricity, production losses amounted to a billion dollars in two months. Recently, the chairman of the Board of Investment (BoI) and minister of state for finance presented an investment policy to Prime Minister Raja Pervaiz Ashraf. According to a BOI official, the goal of the investment policy is to address and adjust economic priorities in the face of the economic slowdown coupled with domestic complications such as power outages and the war on terror. The policy will be instrumental in achieving a progressive increase in the net foreign direct investment (FDI) inflows of two billion dollars in the first year then growing by about 25 percent in subsequent years $2.5 billion in 2014, $2.75 in 2015, $3.25 in 2016 and $4 billion in 2017. Assuming average annual GDP growth of five percent, the FDI stock would account for 20 percent of GDP, which is close to the current global average. The policy 2013 is supported by an Investment Strategy for five years (2013-2017), outlining enhanced facilitation procedures. The following are the guiding principles that influence the policy: 1) reducing the cost of doing business in Pakistan, 2) reducing the processes of doing business, 3) ease of doing business with the creation of industrial clusters and special economic zones, 4) linkages of trade, industrial and monetary policies for greater convergence. The policy and framework devised on paper appeared to be helpful and could generate foreign investment. However, with several countries having identified Pakistan as a high alert zone and buyers being reluctant to visit Pakistan, foreign investment could take longer than expected to reach Pakistan.

Even the recent note from Moodys investors is alarming in terms of their assessment of certain factors: low economic and government financial strengths, very low institutional strength and high susceptibility to risks from financial, economic, and political events. They added that, the macroeconomic environment remains lackluster, with the main constraints to growth being a protracted energy crisis that has deterred investment; a chronically weak fiscal structure that has fuelled high government borrowing and inflation; and continued policy uncertainty. Moreover, the contentious state of domestic politics and weak governance standards which have blocked economic reforms support Moodys view that Pakistans institutional strength is very low. Tensions within the country are escalating in the run-up to parliamentary elections to be held between March and May. These developments indicate that relations between the executive, judiciary and military arms of government are worsening. Such events also undermine Pakistans ability to formulate policies to address pressing economic challenges, bolster investor confidence and attract external financial support from the countrys official creditors and donors. Moodys assesses Pakistans susceptibility to event risks as high. This stems from an increased level of economic risks due to continued pressures on the balance of payments. Political risks are also high given uncertain relations with the US and tension with India. The increasing credit concentration of the countrys banks to the sovereign remains a source of credit risk. The State Bank of Pakistan (SBP) has given different points of view and pointed out that, initially, the fall in FDI flows to Pakistan was considered to be in line with the global trend. However, while the FDI flows to a number of regional countries have improved recently, in Pakistans case they have yet to recover. The country therefore needs to make more efforts to attract FDI, especially when debt inflows are also low. Interestingly, Pakistan has a better standing in terms of the ease of doing business ranking, which was compiled by the World Bank. The ranking shows that Pakistan is better placed than Bangladesh, India, Indonesia and Philippines. A report on the cost of doing business assesses regulations affecting domestic firms in 183 economies and ranks the economies in 10 areas of business regulation, such as starting a business, resolving insolvency and trading across borders. On the other hand, Pakistans standing is not as encouraging with reference to the macroeconomic environment, quality of institutions, infrastructure facilities, human development indicators and political risks, which are considered important determinants of FDI. According to the Global Competitiveness Report for 2011-12, Pakistan lags behind its peers in most of these

areas. While other countries have improved or remained stagnant, Pakistan has slid further down. Pakistan now ranks above 100 in all the indicators of competitiveness. Unfortunately for the country and for this government, FDI has been on the decline in recent years. During during 2007-08 it stood at a decent $5.15 billion but has declined to a paltry $0.81 billion in 2011-12. This, despite Pakistans higher ease of doing business ranking in relation to neighbouring India, Bangladesh and Indonesia. Taha Khan Javed, head of research at Taurus Securities, said on paper, the investment policy and capital mobility rules in Pakistan are conducive to FDI. However, in my opinion, the issue has more to do with the government not being able to provide a business-friendly environment due to the law and order situation, energy crises and the overall political instability. Brand Pakistan has suffered immensely in recent years and foreign investors are afraid to visit the country. Therefore, expecting them to invest in Pakistan is a little unrealistic. The governments inability to solve the circular debt issue over the last five years had impeded investment in the power sector. International Power and Xenel Group (founder of Hubco) decided to sell their entire stake in the company. In order to improve the flow of FDI in the country, the government needs to uplift Brand Pakistan which will only happen when it improves the business environment in the country. Ahsan Amir Ali, senior analyst at ABL Asset Management, said that Pakistan offers a lot of opportunities for FDI and the government-in-waiting should focus on the following to attract and retain FDI: 1) A predictable and non-discriminatory regulatory environment should be followed to increase investor confidence in capital intensive and long term projects; 2) an enabling environment should be provided in terms of ensuring the provision of energy resources, human capital and raw material; 3) a clear path to macroeconomic stability should be followed in terms of controlling inflation, interest rate outlook, energy prices resulting in a win-win situation for every stakeholder. The writer is the head of the business desk at GEO TV.