Foreign investment takes deep plunge

[Naveed Yaseen]

By Mushfiq Ahmad
KARACHI: Foreign direct investment in the country took a deep plunge of $1.688 billion or 31.2 percent to $3.721 billion during 2008-09. The country had received foreign direct investment worth $5.409 billion in 2007-08.

During 2008-09, foreign investors withdrew $1.053 billion they had earlier invested in Pakistan’s securities including government bonds, according to SBP’s data. As a result, net foreign investment declined by $2.781 billion or 51 percent to $2.668 billion.

In the early part of the year, the PPP government was claiming that the decline in net foreign investment was because of a fall in portfolio investment and that the foreign direct investment was still rising. But as the year progressed, it became clear that the PPP government was also failing to attract foreign direct investment.

Economists say that the decline in foreign investment coming into the country was inevitable because the sectors that had been receiving these foreign investments have now come to a saturation point.

Dr Asad Saeed, an economist, says the wave of foreign investment seen in previous years when Shaukat Aziz was in charge of country’s economy was not sustainable. “It was restricted to a few sectors only,” he said.

Telecom and banking were the two main sectors that received the bulk of the foreign investment that came from 2001 to 2007. There is no more room for any other player to enter the telecom market now because of immense competition while profits in banking sector are also declining because of rising number of non-performing loans and economic slowdown.

One very important reason why investment flows from abroad are falling is the economic slowdown in Western countries. Multinational companies have been hit hard by the recessionary conditions and they are unable to invest in developing countries. In fact, those who had been operating for long are considering abandoning it.

Muhammad Imran, head of research at First Capital Equities, says Pakistan has been affected by the recession in the West indirectly as the flow of funds from developed countries to emerging economies has been choked.

The problems at home also send a negative signal to foreign investors, he says. These include law and order situation, lack of infrastructure, power shortages and political uncertainty; he says and adds that foreign investment has declined because the government focus has deviated from economic development.

Foreign investors who had put their money in Pakistani stocks in the previous years when there was a boom in our markets pulled out large amounts last year owing to continuous decline in all three stock markets of the country. Foreign investors became net buyers at the Karachi stock market only recently—after a gap of fifteen long months.

But Saeed says that decline in foreign portfolio investment is good for country’s economy because it is highly volatile and, therefore, damaging for the economy. “It doesn’t boost production when it comes in, but when it goes out—for whatever reason, domestic or international—it puts pressure on foreign exchange,” he says.

http://www.dailytimes.com.pk/default.asp...2009_pg5_1