FOREIGN direct investment has plunged from its peak at $5.3 billion over the past half decade, according to the Board of Investment statistics, to $813 million in the year ending June 30, 2012.

“This is alarming since FDI flows, which comes under the country’s capital account, are more stable compared to portfolio outflows” says a leading economist, adding that a steep fall from this side of the overall balance of payment is perceived as a serious issue for policy makers”.

There seems to be an obvious disenchantment of foreigners to invest in the country’s long-term projects. But that is the secondary concern; the first: Is there a drain out of foreign investment from the country? The recent developments have been interpreted by some as ominously pointing to that direction.

A couple of months ago, the National Power International Holdings B.V, the foreign majority shareholder in Hub Power Company (Hubco) — the country’s largest Independent Power Producer (IPP) — stepped out, selling all of its strategic holding to a local conglomerate, the Dawood Group.

Earlier in autumn of 2011, the other major foreign sponsor in Hubco, Xenel had called quits, divesting its entire shareholding to local buyers. And lately the ICI Omicron, which held the controlling stake in ICI Pakistan, sold the strategic 75.81 per cent shares in the company to the highest local bidder—The Yunus Brothers and its listed cement company, Lucky Cement.

In an earlier restructuring, the ICI Limited had spun off its paints business into a separate stock market listed entity, AkzolNobel Pakistan.

But for all that most knowledgeable people did not subscribe to the view that big multinational players were moving out.

“It is easy to explain all those actions by the foreign entrepreneurs”, says Hamad Aslam, head of research at Lakson Investments. He pointed out that the trend started from the multinational pharmaceutical companies, which about a decade ago went into large scale merger and acquistions (M&A) among their parent companies abroad. The local subsidiaries also had to merge as a consequence, and several disappeared.

In case of the Hubco, Xenel left for its parent was shedding some businesses globally and power sector was one. National Power did opt out of Hubco, but it took stake, in the 700mw, Uch Power Plant. In case of the ICI, the parent was retaining paints business worldwide and so it did in Pakistan, while it went into global restructuring that had no place for Polyester Fibre and Soda Ash, which it scrapped through sale to local buyers at a price the market believes has turned out to be a fortune for the ICI.

Interestingly while the FDI is on the slide, the foreign investors have continued to earn and repatriate huge amounts in profit and dividends. According to the State Bank of Pakistan, during FY12, FDI inflows plunged to $812.6 million, from $1.63 billion the year earlier.

Yet the repatriation of profit and dividend on FDI rose by 36 per cent to $780 million in FY12, from $574 million in FY11.

Pakistan is therefore clearly not a bad destination for FDI, but it is all a matter of ‘perception’ that has painted the picture of ‘high risk country’. Pakistan offers healthy profitability margins and a return on equity (ROE) at 20 per cent, unmatched by any country in the region. The banks enjoy spreads of seven per cent compared to four per cent in the region and only half a per cent in the US. Analysts, therefore, believe that the high risk is compensated by high returns.

Yet no one can deny that the country has been embroiled for too long in political uncertainties, fearful law and order situation, energy crisis, lax governance and rampant corruption.

A study ‘Ease of doing business index’ prepared by the World Bank and its financing arm, the International Finance Corporation explains that a high rating on the index means the regulatory environment is more conducive to the starting and operation of business. On that index, Pakistan stands at a depressing 105th place among 183 countries of the world.

And the foreigners’ flight of capital is not Pakistan-specific. High income countries have been spooked by the prolonged global financial crisis, where strong economies such as of Ireland and Spain are on the verge of default. All of that has made foreign investors risk averse.

But should foreign investment be the key to country’s economic success? Many people believe that the country is not short of cash. Pakistan received record remittances of over $13.5 billion in FY12, which translates to almost Rs1.3 trillion a year. The World Bank in its latest review placed Pakistan among top 10 recipients of remittances among the developing countries.

“How much of this huge remittance once converted into rupees and encashed is being documented and how much of it goes into the informal economy?” asks an investment expert. And how big is the informal economy?

According to World Bank estimates, informal economy is at 35 to 50 per cent of the country’s GDP. In the last five years the size of informal economy has vastly expanded.

According to the Economic survey, the value add of four crops (wheat, cotton, rice and sugarcane) was around Rs530 billion in 2006-07.

But in 2011-12, the value add of those four crops has soared to over Rs1500 billion. That is to say almost a trillion rupees transference has occurred to the rural economy over the last five years. “If all that cash were to be documented and channeled into the formal economy, the country would have no need to be disturbed by the foreign outflows”, says this expert.

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