LAST year in October, the government announced that it had firmed up a plan to attract nearly $30 billion worth of foreign direct investment (FDI) in the next five years.
And true enough, by June 30 this year, the highest ever inflow of the foreign direct investment of over $2 billion was recorded excluding the privatisation proceeds officially categorised as FDI which adds up to a total of $3.5 billion. For the inaugural year, this should not be taken as low an amount compared to what is being targeted to come in the remaining four years.
But of course, the task would surely be an uphill one from all counts. An optimist would surely expect the remaining period to witness a much larger average inflow of FDI, but with the final year (2010) contributing the largest share.
As a first step towards achieving this FDI target, the government is said to have already identified about 300 well known international investors and set up an ââ¬ÅInvestment Deskââ¬Â to keep regular liaison with these investors to keep them updated and informed on Pakistan and investment opportunities that exist here.
With Pakistanââ¬â¢s savings rate still stagnating at around 17-18 per cent and the investment needs growing at the rate of 24-25 per cent to achieve an annual average growth rate of at least eight per cent over the next 10 years for the trickle down theory to take effect to a visible extent, the country does need significantly thick and fast inflows of FDI. Therefore, the government is more than justified in making ambitious plans and also taking perceived to be suitable steps to attract accelerated inflows of FDI in the coming years.
But then making plans are easier than implementing them. And keeping such plans on target and in the right direction is a job even more challenging than coming up with out-of ââ¬âthe box schemes.
Take for instance, the governmentââ¬â¢s efforts now spread over almost three years, to clinch a bilateral investment treaty (BIT) with the US under which it expects the officials in Washington to encourage the American private investors to increase their investment in Pakistan.
However for various reasons, many obvious and many not-so-obvious, the US government has been dragging its feet on the matter and after every fresh meeting between the experts from the two countries on the subject, one gets the feeling that the conditions imposed by Washington for governing such investment from the US are becoming ever more unacceptable.
There are many countries in the world including our neighbours, India and China which have received billions of dollars in direct investment from America, with the latter getting the bulk of it but without having any formal bilateral investment treaties with the US.
China pursues a political philosophy directly opposed to the one being followed by the US. Its economy is still overwhelmingly state controlled. And the language barrier is almost impossible to cross. And India is still a mixed economy with the public sector still serving as one of the two engines of growth. And the law and order situation in that country is far from perfect. And both China and India are still lagging far behind Pakistan on the matter of structural reforms.
But still, the US investors appear more inclined to go to India and China rather than to Pakistan. Our planner would do well to study how these two countries have accomplished this. The reasons for this must be found out to make Pakistan as attractive an investment destination as the two countries have become instead of wasting time on entering into a bilateral investment treaty with the US while its investors themselves are not too keen on investing in Pakistan.
Even the proposal to set up reconstruction opportunity zones (ROZs) in the least developed districts including the earthquake-hit areas of NWFP and Azad Kashmir with the help of the USAID for the export of duty free products to the United States is taking its own time to materialize. The list of the districts for setting up the ROZs has been finalized and the details of rules of origin, customs clearance and other logistic needs required for the zones have also been framed.
But not only the green signal is still being awaited from the USAID for launching the scheme but the most important part of the deal that of identifying the products that would be made in these zones for export have yet to be identified and agreed upon.
Besides, we seem to have lost the direction soon after having announced the grandiose five year investment plan. Quite a sizeable part of the FDI resources which came in during 2005-06 went into purchase of public sector units having no export bias. This would mean in the longer term the country would end up remitting more foreign exchange in the shape of repatriation of profits and dividends than what it had earned through the sales of these units.
A report published in this newspaper recently estimates that the outflow in the form of dividends of four major deals done last year would be around $102 million in 2006 which would go up to $119 million by 2008.
These four deals include sale of 51 per cent shares each of HBL, UBL and the National Refinery and 26 per cent share of PTCL. In the coming months the majority shares in Pakistan Steel Mills, the Sui Northern and the Sui Southern and the PSO are also expected to be sold most probably to foreign buyers. This will also bring in a lot of foreign exchange. And when in due course of time, all these foreign investors purchase the rest of the shares in their respective companies, Pakistan would surely be able to rack in at least at least a quarter of what is being targeted to be mobilized through FDI by 2010.
But by then, a hefty outflow of foreign exchange would also have started adding a considerable burden on our foreign exchange budget which has already begun to show an escalating deficit due to fast rising imports that outpace exports by a wide margin.
Of course, with remittances coming in at an annual average rate of $4-5 billion, this burden would surely be reduced to some extent, but if the gap continues to increase to more than what the remittances and the export proceeds can cover and if by that time we had exhausted all the units which could be sold to the foreign sponsors, then perhaps we would be facing a highly untenable current account situation. Also, Pakistanââ¬â¢s external debt is seemingly creeping up. If not arrested this would certainly increase our debt servicing burden in the coming years putting more pressure on our foreign exchange budget.
If this overall trend continues over the next five years, we would ultimately end up with most of our strategic assets going into the hands of foreigners. The risks of such an eventuality are too obvious to be detailed here. It is, therefore, imperative at this juncture that the official economic managers take a closer look at their policies and redesign them to avert the looming risks.
For the last many years the successive governments in Islamabad have been promoting Pakistan as a potential trading hub of the region. More recently, this government has also started expressing its desire to turn Pakistan into a regional trade corridor. But without the required physical infrastructure like roads, railroads and bridges, sans the needed utilities like power, water and gas and grossly lacking in social infrastructure like educated and skilled manpower and health facilities, the country could become neither a hub nor a corridor.
And in order to acquire an adequate provision of all this, a lot of investment, especially foreign investment, is required. Also, we need foreign investment in export industries to take full advantage when and if we actually become the trade corridor of the region. So, it is for these investment opportunities that we need to attract the FDI and not for trading the family silver.
