THE steep fall in foreign investment is a vote of little confidence in the turnaround story the government enjoys telling everybody.

Latest figures show that foreign investment in the first quarter of the current fiscal year dropped by 26pc from the same period last year. This is putting pressure on the massive debt service obligations due this year, as well as challenging the resumption of job-creating growth.

Outflows in the form of dividends and repatriation of profits has risen, ie foreign investors prefer to take out whatever money they are making in Pakistan rather than risk new investments.

The trade deficit is widening, which indicates that difficulties are accumulating on the external front where the government likes to claim its biggest success. Thus far, reserves have not seen any adverse impact, but if the situation is not rectified, that could change.

Much of the government’s turnaround story hinges on external-sector developments. They claim they stabilised reserves and strengthened the currency, and obtained a vote of confidence from Moody’s. But a deeper look reveals darkening clouds.

The fall in foreign investment is only partially the result of the political turmoil in the country. The turmoil certainly hasn’t helped, but the decline in foreign investment began long before the protests, and is more closely related to the difficulty of credibly selling the government’s growth story.

Inflows of foreign investment did see an uptick from 2013 on, when the new government took the reins, but that trend tapered out by January of this year and appears to be worsening.

reasons have more to do with the underlying fundamentals that fail to inspire confidence, such as law and order, the state of governance, the perception of favouritism in the way the government operates, the precarious nature of external-sector developments, etc.

This vote of little confidence that investors are casting by abstaining from acquiring stakes in an economy the government claims is on the mend cannot be addressed through mere statements. Yes, political stability is badly needed, but clearly the authorities need to do more to establish their credentials as a business-friendly government. Their insistence that they are one does not seem to find any takers.

Published in Dawn, October 21st, 2014