No FDI, no portfolio cash | Business Recorder

January 19, 2012
BR RESEARCH

By financing the current account deficit, transferring new technology and creating employment, foreign direct investment (FDI) can provide important macroeconomic benefits to the host country.
After somewhat calm journey, Foreign Direct Investment (FDI) has been going though a jittery phase since the end of 2008 when the financial crisis resulted in global recession.
Before the effects the global financial crisis could subside, the world entered another gloomy phase with European bloc nearing bankruptcy, MENA region falling apart and Iran-US relationship intensifying.
Such ambiance raises serious concerns about the tendency and ability of multinationals to continue their investing activities.
UNCTAD has also painted a very bleak picture, expecting a sharp decline global FDI.
This is not surprising given the euro crisis tipping the world into a recessionary pit.
This is a bad news for country like Pakistan that has its FDI falling rapidly since FY09.
To some extent the falling trend of FDI in Pakistan can be attributed to the global investment scenario.
Though China posted a 9.72 percent rise in FDI in CY11 to a record high of $116 billion, FDI has fallen for a second straight month in December by almost 13 percent.
However, amongst its regional peers, Pakistans position is apparently weaker, particularly due to due to domestic issues.
According to the World Investment Prospects 2011 by The Economist Intelligence Unit, Pakistan ranks the lowest in FDI inflows amongst China, India and Vietnam, based on the averages of 2007-2011 FDI, Inflows of FDI in Pakistan have dipped by 37 percent to $513 million during 6MFY12 from $840 million in 6MFY11.
The net foreign investment (foreign direct investment and portfolio investment) has contracted by 64 percent during the first half of FY12.
Portfolio investment witnessed a decline of 165 percent during 6MFY12 as investors shun the countrys main stock exchange due to rising incidents of violence.
The figures reveal a very depressing picture of approximately $1 billion of FDI for FY12, a decline of more than 80 percent of the highest from FY01-FY11.
The reasons are hidden from no one.
Lack of foreign investors interest as a result of ongoing energy crisis, adverse law and order situation and political uncertainty top the list.
Amongst the critical factors for FDI, Pakistan performs poorly in Macro economic stability, institutional efficiency, and security and worker education.
Indirect signals are being given out by the MNCs as they adopt the policy of remitting high dividends and repatriating profits.
A little better law and order situation at present can result in a tentative respite in FDI in Pakistan next year.
However, macro economic indicators still remain pretty weak for any recovery.
Amongst the regional peers, US is expected to remain the top destination for FDI.
China is to remain the biggest emerging market destination followed by India.
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