KARACHI, Sept 6: Pakistan’s potential performance rating on foreign direct investment (FDI) has dropped from 72 in 1989-90 to 129 1999-2001, according to an UNCTAD report.

The rating tumbled following nuclear blast, multilayer economic sanctions by US and European states, tensions with India and adverse impact of re-negotiations on tariff with Hubco.

Come 9/11, the situation changed, sanctions were withdrawn, debts were rescheduled and written off. Remittances soared. Huge foreign reserves provided comfort to foreign investors, that snags would not be created in repatriation of profits or capital as happened when the country came on the verge of foreign debt default in 1999. The regional tensions eased and Pakistan became US ally in US-led war on “terror”. The enabling environment for foreign investment improved dramatically.

These developments had a positive impact on foreign investment. In 2002-2003, FDI increased to $789 million, up from $485 million in previous year. It was marked improvement in foreign capital spending in an otherwise fast declining global volumes in FDI flows.

Total global foreign direct investment fell by 40 per cent in 2001 and then by 21 per cent last year to $651 billion, about half the record figure in 2000. Of the 195 countries surveyed by UNCTAD, 108 countries attracted less FDI in 2002 than 2001.

Putting Pakistan’s performance in perspective, $789 million FDI in the global volume of $651 billion is peanuts for a market with rich natural resources and over 140 million people, a majority of whom suffer from a poor quality of life. But policy-makers can draw satisfaction from the fact that Pakistan is now not among the majority of states which attracted lower FDI.

The global foreign investment flows have radically changed since the recession in US economy beginning second half of 2000 and 9/11. United States is no longer the world’s most attractive destination for investment capital. UNCTAD statistics show that US has been pushed to fifth position as capital inflows plummeted by nearly 80 per cent to $30 billion from $144 billion in 2001.

America has been replaced by Luxembourg which attracted $126 billion, put through the tiny country, to gain tax advantage. China has taken the second position with $53 billion.

UNCTAD says the overall slump in foreign investment in 2001 and 2002 has been the largest reduction for 30 years.

The decline is attributed to the world economic downturn, the collapse of stock market prices, a fall in company profits and a general loss of confidence due to corporate financial scandals.

The international merger and acquisition activity has shrunk to $370 billion in 2002 from $594 billion in 2001 and $1100 billion in 2000.

An illusive recovery of the US economy is inducing foreign capital to return to its original home. Money from the Middle East is being diverted from dollar to euro, from US to Europe. And the region in which the capital spending is being redirected indicate growth potentials offering opportunities for trade and investment. Investment is also flowing into real estate in ten East European states which would join the EU next May. Their integration into European Union would facilitate regional trade. China is emerging as the engine of growth for East Asia. For Pakistan, there are opportunities and challenges in a fast changing global investment environment.

Although the investment climate in Pakistan has improved, it is still handicapped by absence of the rule of law (security problem and weak enforcement of commercial contracts), confrontation between opposition and government on LFO and the risk of the military action against Taliban spilling into Pakistan territory.