July 16, 2007	Monday	Jamadi-us-Sani 30, 1428

The surging capital and financial inflows are catching up with export earnings of merchandise and are close to initially reported exports at about $17.5 billion for fiscal year 2007.

A high economic growth is attracting global investors awash with excess money interested primarily in take-over of running local banks and other enterprises and encouraged by the measures taken to integrate the domestic market with the global financial system.

Foreign investment at $7 billion is top contributor to capital and financial inflows, exceeds workers remittances of $5.5 billion and is about three times the much lower levels of committed external assistance at $ 2.5 for July-March fiscal 2007.It follows the worldwide trend of foreign investment and remittances — both individually exceed the global aid flows.

Yet another major trend is that bulk of the foreign investment is in the form of foreign direct investment at $5.2 billion. While the privatisation proceed has dwindled to a mere $133 billion , much of the foreign investment has gone into take-overs of local private firms – banks, cigarette and telecom companies. Helped by reforms ( high capital requirements) foreign stakes are now close to fifty per cent of the paid- up capital of banks.

Despite the emerging political uncertainties, the foreign investors from the USA, the U.K. China South East Asia and the Middle East have invested in a wide range of economic activities during the last fiscal year. This includes hot money that has gone into portfolio investment in the local capital market, now close to$1 billion. Similar is the appetite by international capital market for global depositary receipts (GDRs) which fetched $888 million ( OGDC $738 million and MCB $150 million). The government also accessed the international markets for raising $750 million for Eurobonds which were oversubscribed.

With income tax reduced from 60 to 35 per cent for banks and from 45 to 35 per cent for private companies, foreign investors have been richly rewarded. They remitted profits and dividends of $760 million in eleven months of fiscal 2007 against $504 million of the previous year. Many multinationals and banks re-invested their earnings for buy out of local units or expansion of their local operations.

The capital and financial inflows not only helped to meet the widening trade gap of some $13-14 billion but contributed to an overall external surplus of $373 million and foreign reserves of some $15 billion. And despite the widening trade and current account gap, the inflows help to keep the exchange rate stable.

While the accessing a wide range of sources for money and investment does seem to help to exercise economic sovereignty, one cannot ignore the fact that nation states are required to submit to the” discipline” of the international financial system which itself suffers from lack of discipline. Much of the direct foreign investment is not going into creating new production capacity but into in acquisition of the existing enterprises. These investments are not meant to realise the export potentials but to meet domestic demands.

The GDRs or the Eurobonds are going into financing of fiscal and current account deficits. The portfolio investment mayl dry up at the first sign of an economic downturn or serious political instability.

The big question is whether the capital and financial inflows would raise production capacity and exports.( international finance is used to making more money from the capital market dominated by speculative activity rather than investment in real economy). The sharp fall in export growth indicates that this is not happening. In the present stage of development, export of manufactures could offer competitive advantage where foreign investment is not coming.