01 March 2004	Monday	09 Muharram 1425

In spite of the notable economic recovery in Pakistan and rise in industrial production by 14.5 per cent in the first six months of this fiscal year and the boom in the Karachi Stock Exchange (KSE) which has made it to be hailed as one of the best performing exchanges in the world, foreign direct investment (FDI) fell by 43 per cent in the first seven months of this financial year ending January compared to the same period last year.

In the same seven months period, exports rose by 13.52 per cent and imports by 14.9 per cent reflecting the increase in economic activity. The FDI in the first seven months was a low $339 million against $596 in the same period last year while the target for the whole year is $1.4 billion.

The world's money-men are ready to heavily over-subscribe to our Euro bonds for $500 million because of its attractive interest rate but are not yet ready to make fixed large commitments through direct investment in the economy.

For that matter even in the portfolio investment in the thriving stock market there has been an outflow of $37.9 million during the seven months in place of the inflow of $21.4 million in the same period last year. That means the world's portfolio investors, too, are watching, preferring to invest on fixed interest bonds, rather than take the plunge or the risk in the capital market.

Investment by the US in the seven month period declined by $140.8 million compared to its performance in the previous seven-month period, by the United Kingdom by $58.3 million and by United Arab Republic by $107.2 million. It is a kind of all round decline.

Foreign direct investment last fiscal year was 798 million dollars, primarily because of the investment made by the UAE ruling family and the Bestway Enterprises of Sir Anwar Pervez of Britain on the privatization of United Bank Ltd.

That means that unless the privatization of some major enterprises take place with the strategic partners coming from outside instead of their shares being sold to the Pakistani public, the $1.4 billion target or over a billion dollars more than invested so far may not be realised.

A number of factors are making the foreign investors reluctant to make large fixed commitments in Pakistan. While they notice the economy improving, they see the law and order situation as bad, and was highlighted by the two assassination attempts on President Musharraf.

They see Osama bin Laden still at large between the borders of Pakistan and Afghanistan and his Al Qaeda men are still hurling threats at Pakistan and marked by various bomb explosions and sabotage attempts. Then came the nuclear weapons controversy with Dr A.Q. Khan as the central figure with its far reaching ramifications.

The Muttaheda Majlis-e-Amal (MMA) is still very active in Pakistan preaching extremism and its leaders demand enforcement of Sharia system from time to time on a national scale. Then there is the lasting political strife in the country.

And the police through their own excesses seem to create more problems for the government and the country than they solve. On the positive side is the increasingly improving relations between India and Pakistan and the hope of that offering a larger market for foreign investors.

The western countries are now more appreciative of the role of General Musharraf and the need to strengthen his hands, as the alternative to him, in their opinion, is far worse.

They also admire the manner he had handled the nuclear controversy in a very difficult situation and want to be supportive of him. But that does not mean the private sector in those countries will go along with their governments and make large investments on that score. They let real business considerations prevail in the manner our own businessmen had been holding themselves back for a long time.

But now the domestic entrepreneurs are making investments as the banks have become liberal with their loans and interest rates have truly hit the bottom. Pakistan industrialists also realise if they do not make the necessary investment and prepare themselves to face the challenges of post-textile quota world from 2005 and the WTO regime they would lose their markets at home and abroad as well to competitors like China and India.

Their own machines are getting old and they have to renovate or replace them in a world whose manufacturing is getting more and more sophisticated. But the investments they have made so far is rather small compared to the total need and the scope in what is being regarded as the Asian century.

When it comes to the portfolio investment, foreign investors say that our market is small and subject to manipulations by a few individuals or small groups of them.

They had also suffered heavy losses in the past after the KSE index had reached its peak of 2616 in 1994. So even when they are appreciative of some of the new development in the KSE and the role of the Securities and Exchange Commission and the managing director of the KSE Moin Fudda, they want to see the stock exchanges in Pakistan to become more mature and reliable.

Meanwhile there has been an outflow of $37.9 million from the portfolio investment instead of the inflow of $21.4 million last year in the first seven months.

South Korea withdrew an investment of $9.4 million, Hong Kong %5.5 million and Singapore $5.2 million. As against that there was a small investment of $9.8 million by the US and $5.5 million by the UAE.

Evidently the foreign portfolio management's were impressed by the manner the KSE index was soaring towards 5000, and it has declined after touching 4,900. they want to wait and see. It remains to be seen how low will the index drop following the low declaration of profits by some of the major companies.

Meanwhile some positive developments have taken place in the investment sector. The Economic Co-ordination committee of the cabinet has approved the one-window facility for investment under the Board of Investment. And the Sindh cabinet has done away with the 0.5 per cent cess on infrastructure in the Export Processing Zone. and it has also reduced stamp duty on transfer of property form 4 per cent to one per cent in spite of the resistance of the Board of Revenue.

The KSE is also to revise its 100 share index by next month for which it has given notice to the stake-holders. The gradually improving index should be made more satisfactory and more acceptable to the small investors who are now taking an active interest in the capital market and want to be protected by the managers of the KSE better.

Because of the reluctance of foreign investors to make adequate investment the Pakistani investors have to step in a big way after holding themselves back for too long causing wide-spread unemployment.

Otherwise the unemployment situation will become far more explosive, resulting in increasing crimes at one end and rising number of unemployment suicides at the other and horrendous violence in the unhappy households.

One country which has become a spectacular economic success in modern times through foreign investment is China despite its ruling communist ideology. In recent years the foreign investment has been running at the rate of $40 to $50 billion a year. But initially much of the foreign investment was overseas Chinese, including the Taiwanese, who wanted a foothold on the mainland. But since then foreigners have been coming in big way, and many of them are using China as a factory to manufacture their products for export.

A notable example is the Philips Electrical company of Holland which went in to set up a factory and sell to the billion Chinese consumers, but stayed on to set up 28 factories to manufacture its products and export to the world cheaply because of China's low wages and small production costs. Pakistan has a lot to learn from China in this regard to make a success of its foreign investment policy and make the investment truly substantial.