Pakistan has so far failed to attract foreign direct investment (FDI) and portfolio investment and there are no signs of improvement in the near future, largely due to political uncertainty and over-all law and order situation in the country.

The multinationals who had left Pakistan because of the fast-changing situation in the region, have not returned despite the assurances given by the government, specially to the USA, Japan, UK and Germany.

And the reality is that the number of projects in Pakistan has declined from 42 in 1997 to 15 as of April 30, 2001 resulting in the cancellation of net outstanding commitments of $1.2 billion. According to the World Bank, the decline in new entrants to the portfolio relative to the closings can be attributed to a number of factors including: the fiscal constraints to counterpart funds, political turmoil, uneven progress on policy reforms and the lack of an adequate macroeconomic framework; G-7 sanctions; borrowers weak capacity; and the strict adherence to “quality at entry” and the social/environmental safeguards.

The International Finance Corporation (IFC)— the World Bank’s window— has not offered any loan to Pakistan’s private sector during the last two years, with the result that there is no significant investment. The IFC’s ability to do business in Pakistan has been constrained. The 1998 balance of payment crisis, the large indebtedness, political instability, disputes with investors, specially in the power sector, and the loss of investors confidence have increased the perceived risk and discouraged the new investment. Moreover, wrong policies, concerning cement, automotive, oil and gas, have further deterred the private investment and proved a handicap against the IFC’s support.

According to a latest official study, the overall investment has come down from over 20 per cent of gross domestic product (GDP) during 1992-93 to an all time low of 14 per cent of GDP in 2000-2001. In fact, over the same period, while public investment is almost halved, it has failed to attract private investment and in some instances has ‘crowded out’ the private investment, which has fallen by one forth. With the result that the new employment opportunities have failed to keep pace with the needs of the rising population.

The country has not been generating adequate savings to finance its investment needs. Recent reductions in debt resourcing, (e.g. National Savings Schemes) have led to a reduction in interest payment on domestic debt. However, that has lowered incentives for household savings in such schemes. The meagre national savings at the rate of 12 per cent of GDP leaves no option but to rely on external resources for financing investment.

“It is important to note that there are considerable resource constraint over the medium term, as the country tries to reduce the current account deficit, which will put additional pressure on investment financed through foreign savings. Additionally the country is faced with the spectre of net resource transfers, thus a part of domestic savings is not available for investment. Hence the process of increasing domestic savings will have to be achieved by reducing government dis-saving rates and macroeconomic framework will be crucial for increasing private savings and investment”. To this end the sustainability of the investor uncertainty, increasing employment opportunities, reducing poverty, and reviving growth will be important elements of the government’s strategy.

To have an encouraging investment environment and sustained pro-poor economic growth based on robust private sector activity and enhanced investment are the main elements of Pakistan’s poverty reduction strategy. In this respect, investment— both domestic and foreign— is the vital link. Therefore, the essence of poverty reduction strategy is to maintain an environment conducive to trade and investment. Foreign investors have already been allowed participation in industrial projects on 100 per cent equity basis, without any need of securing permission from the government.

Moreover, full repatriation of capital, capital gains, dividends and profit is allowed. In fact, the policy has been further liberalized to open up all sector of the economy for foreign and domestic investment with particular emphasis on agriculture, manufacturing sector specially small and medium enterprises (SMEs) information and communication technology, oil and gas and other infrastructure sectors.

Regarding the net foreign investment, the first quarterly report of the State Bank for 2001-2002, says that the realized inflows of foreign investment in Pakistan were $16 million as against of $27 million in the corresponding period last year. The fall is attributed to higher outflows of foreign investment from the stock market, as bearish trends induced foreign investor to liquidate their holdings. On the other hands, direct foreign investment increased by $33 million during this period mainly in the oil and gas sectors. This is in contrast to last year when the FDI fell due to disinvestment and exit of the Bank of America from Pakistan. The FDI, which stood at $323 million in 2000-2001, is projected to increase by $600 million during the current financial year. “However, the events following September 11 have made this target unrealistic”, the report said.

In terms of portfolio investment in securities, the impact of maturing 3-year special US dollar bond from August 2001, has not been realised in the first quarter.