September 18, 2006	Monday	Sha'aban 24, 1427

FOREIGN direct investment (FDI) inflows have increased in the last two financial years, peaking at $3.5 billion during 2005-06. The figure was 131 per cent higher than $1.52 billion for 2004-05.

The government sees the volume of capital inflows as a major achievement. Yes, as far as the numbers go, the official claim is very much justified. But there are certain points to ponder over the FDI trends and the emerging scenario.

The economic turnaround achieved about 2-3 years back, started attracting foreign investment which had practically shied away in the last decade.

Now, the all-important question is, where does this enormous capital go and what impact it has on the economic landscape? Did it really generate new economic activities and employment opportunities?

If we look at the FDI inflows in 2004-05 and 2005-06, a major chunk went to communications sector. In 2004-05, communications (including telecom) attracted FDI worth $517 million (34 per cent) followed by financial business $269.4 million (17.7 per cent), oil, gas and petrochemical $217 million (14.3 per cent), power $73.3 million (4.8 per cent), trade $52.1 million (3.4 percent), chemicals $51 million (3.3 per cent) and others $343.1 million (22.5 per cent).

Almost the same pattern continued in first ten months of 2005-06. Telecom was the largest recipient with $1.0 billion, followed by energy Sector ($304 million), financial services ($265.5 million), trade ($81.9 million), construction ($54.4 million) and others. As far as big amounts against the telecom sector are concerned, these have largely come from Telenor, Warid and Etiselat.

The figures speak for themselves. The two cellular operators paid $291 million each for licences, adding to it considerable investment in infrastructure and related developments. The investment enhanced economic activities and created much needed new employment opportunities. The official claim of rise in employment against annul averages of yester years were perhaps well aided by these investments.

On the other hand, nearly half of the FDI came from privatisation proceeds, including the mega deal of PTCL with UAE’s Etiselat. The privatisation of vital public utility and assets, bringing in $2.59 billion in total, makes Emirates the single largest country of origin of FDI to Pakistan, surpassing USA by a big margin that held the position for long. Can it, nonetheless, be labelled as productive capital inflow?

True that some of the Arab investors, their coffers overflowing with fresh petro-dollars, are willing to buy profitable enterprises. But does it indicate that Pakistan has become an investment destination and money coming in will change the economic scene?

First, it is not correct to include privatisation proceeds as FDI, because privatisation does not represent any asset creation or real increase in economic activity. Even including the privatization proceeds, the aggregate inflows remain far below the international trends and even by regional standards - with modest chances of any new production activities and employment generation that is required the most.

How are we faring on FDI front can be gauged from a recent survey of 82 countries conducted by the Economist. Pakistan is placed at number 74.

With FDI figures going up, it is time to ponder for policy planners. FDI’s role in development of developing nations needs no elaboration. But it is important to consider hich sectors need the FDI the most, and how to prepare these sectors for the same. While capital from abroad should be welcomed, rather solicited, efforts should be made to channellise the inflow of funds to priority sectors after accurate identification.

Economics observers believe that certain sectors have the potential of not only becoming new attraction for foreign investors, but can prove to be a cure for un-employment and poverty. For instance, construction is one of these sectors and it has already started attracting notable foreign investment.

Just one mega project in Islamabad, a joint venture of a Saudi and a Pakistani firm, is expected to net in some $350 million. The joint-venture is building a multi-purpose complex containing a 19 storey residential tower, 22 storey offices tower, a five floor mega shopping mall and above all, Pakistan’s tallest 37 storey hotel.

The project is underway on a 6.59 acre plot at accost of over Rs5 billion. Initial total cost of the project was $300 million, but was revised upward to make the complex an earthquake-proof structure.

Thai and other Gulf-based investors have also shown interest in construction sector. As some 35-40 industries are involved in construction, the sector enhances across the board economic activities. FDI in this sector becomes even important considering the shortage of housing units, particularly urban areas.

Then there are sectors like livestock and dairy forming, processing of vegetable and fruits, tourism, engineering and other employment-intensive fields awaiting investments.

Although big FDI investments can provide a sense of satisfaction to the policy makers, the actual requirements of the economy and its masses remains far from fulfilled. A comprehensive, well thought-out strategy, formulated in consultation with stakeholders in every sector is needed to benefit optimally from the surging foreign investment.