THE capacity of the national economy to cater to increasing domestic demand remains constrained by the low pace of both private and public sector savings, investment and capital formation. Meanwhile, the impetus provided for GDP growth from foreign capital and financial flows falters.

According to the State Bank of Pakistan’s (SBP) annual report, net Foreign Direct Investment (FDI) inflows to Pakistan increased marginally to $2.8 billion in FY18 from $2.7bn in FY17 as repatriation of profits by foreign companies increased. A further sharp drop of 42 per cent in FDI inflows was recorded during the first quarter of the current fiscal year.

Expressing dismay over the poor FDI inflow, Overseas Investors Chamber of Commerce and Industry (OICCI) President Irfan Wahab told newspersons that OICCI members expect the government will soon unveil growth-oriented economic and trade strategies — especially some practical and out- of- the- box new policy initiatives — to attract sizeable FDI and spur local investment.

The private sector wants policymakers to revisit its foreign investment policy so as not to crowd out local investment

For the past six years, FDI inflows have remained stuck at one per cent of GDP, much below the potential of three per cent estimated by OICCI.

The share of investment and exports in GDP growth pales into insignificance when compared to that of domestic consumption.

The contribution of domestic consumption to GDP rose to 93.2pc during FY18, up from 91.7pc a year ago — significantly higher when compared to an average share of 88.7pc over the last five years.

Fiscal and monetary policies are now being re-oriented to depress domestic demand. Sharp depreciation of the rupee and its purchasing power, hike in policy interest rates and increase in customs tariff are designed to curb domestic consumption, particularly of imported goods, and create trade surpluses for export earnings.

Yet, these steps will make investment costlier.

Private sector investment is also likely to be adversely affected by falling public sector development.

During FY18 development spending declined by 6.5pc due to a sharp 20.6pc contraction in the federal public sector development programme and the provincial development expenditure slowing down to 3.3pc in FY18 from 43.8pc a year ago. This trend is unlikely to be reversed any time soon, at least as far as federal development spending is concerned.

According to the OICCI, many foreign research agencies have assessed Pakistan’s retail sector as the fastest-growing market in the world worth approximately $150bn. The domestic market remains an attractive destination for foreign investors.

In the last fiscal year private sector credit to GDP ratio shot up to an eight-year high of 17.4pc although it remained lower than the peak of 27.2pc achieved just a decade ago. This ratio for Pakistan stands lower than that of other regional economies such as India (49.7pc), Bangladesh (47.6pc) and Sri Lanka (45.7pc).

As it is, Pakistan has been no exception to the global trend of nations focusing on their domestic market; even those developed economies, such as the US, which were earlier great champions of globalisation and free trade.

The PTI-led government is trying to attract FDI in commodity producing sectors from regional countries while apparently primarily seeking balance of payments support from the International Monetary Fund in order to ease external sector pressures.

Pakistan’s imports — which have a negative contribution to GDP — were 2.3 times the country’s exports in FY18. A World Bank report states that Pakistan may continue to breach the debt limitation law for next 10 years due to high expenditure and low revenue. The country has been in the breach of the said law since 2010.

During his visit to China next month Prime Minister Imran Khan is expected to ask the Chinese to shift their focus to investments in agriculture and industry. Efforts are already underway to attract investment to boost food production for exports to China.

Nine agriculture zones are planned along CPEC to produce commodities in demand in the Chinese market as China is investing heavily under the ‘Belt and Road Initiative’ to outsource its food supplies.

Construction of food storage and processing zones is planned to reduce post-harvest losses in Pakistan. A chain of cold storage stations and meat processing plants will be built to enhance productivity. And the domestic private sector is seeking joint venture foreign partners for industrial projects.

The private sector wants policymakers to revisit its foreign investment policy so as not to crowd out local investment in such areas as the domestic consumer industry. The Pakistan Business Council says FDI should be welcomed in sectors where the domestic private sector has neither the capacity nor the appetite to invest.

jawaidbokhari2016@gmail.com

Published in Dawn, The Business and Finance Weekly, October 29th, 2018