THE country’s financial team may take satisfaction in the fact that its decision to allow foreign investment in government papers has fetched $713 million at a time when foreign exchange inflows were falling short of expectations.
Along with a huge drop in imports and a nominal increase in export earnings, foreign investment in government securities has helped improve the external position. After four years of deficits, the current account recorded a surplus of $99m in October.
Critics, however, say that it is hot money which is being attracted at prohibitive costs. They argue that this footloose money is like a migratory bird, which flies out at the first sign of economic distress.
In the last auction held on Nov 6, investments in three- and six-month Treasury bills were attracted at cut-off yields of 13.28 per cent and 13.29pc, respectively. Pointing out that interest rates offered were the highest in the world, critics question as to what kind of stability the hot money will deliver. This costly borrowing also indicates the kind of efforts which are being made to achieve macroeconomic stability.
Similarly, Prime Minister’s Advisor on Finance Hafeez Sheikh wants to offer incentives to bring back money parked abroad, a task which, he says, seems “almost impossible”. He thinks that the only way to do so is to introduce a policy regime in such a way that it becomes attractive to bring money from abroad.
Addressing a regional conference in Islamabad recently, he pointed out that “money has no nationality”. Here, one may recall that even the United States had to offer one-time tax concessions to attract funds legally kept overseas by its multinationals.
Amnesty schemes have not been a real success. The government should consider proposals that investors should be allowed to bring their money with no questions asked if the funds are invested in prioritised manufacturing sectors identified to improve trade balance
Referring to expectations from overseas Pakistanis, he observed that they “are very smart and they would (also) bring money here just as anyone else thinks, when it is attractive to bring their money”.
Capital flight occurs when the domestic business environment becomes inhospitable, as is the situation today. In a meeting with members of the leading trade body, Mr Sheikh said, “The most difficult period has been managed. We are on the road to recovery.”
Disagreeing, a segment of the audience argued that “a reality check was needed” and pleaded that their concerns needed to be addressed. To quote a Pakistani social scientist, when capital crosses domestic frontiers it loses its links with national, social and economic progress.
A part of the outflows can be explained by some people investing in euro/dollars to protect the value of their money because of almost continuous depreciation of the rupee. Then these hard currencies are used for under-invoiced imports to evade customs duties for lowering the cost of plants and machinery. The rupee is currently undervalued by 6pc, independent analysts say.
With falling global foreign direct investment (FDI) flows contributing to a surge in global debt stock, it would be worthwhile to make a fresh effort to bring back money stashed abroad and encourage overseas Pakistanis to invest in the country of their origin. As free flow of funds is legally allowed in developed Western markets, money has to be incentivised to take Pakistani nationality.
FDI is plummeting the world over because of the faulty approach towards globalisation. Pakistan also represents this global trend, but not the improved one witnessed in resurgent Asia. The FDI inflow to Pakistan during the July-October period was a mere $385m.
According to UNCTAD’s World Investment Report 2019, global FDI flows fell by 13pc to $1.3 trillion in 2018, which is the lowest level since the global financial crisis of 2007-08. FDI flows to developed countries reached the lowest point since 2004. On the other hand, the share of developing economies in the declining FDI flows increased to a record 54pc, with Asia being the largest recipient.
Another study shows that in the first half of 2019, global FDI flows decreased further by 20pc compared to the second half of 2018. This is attributed to “uncertainty regarding trade tensions and prospects to future economic growth”. The world is witnessing a return to protectionism and the international market is getting fragmented.
The global debt, to quote a report of the Institute of International Finance, is on course to end 2019 at a record high of more than $255tr, three times the world’s annual output.
Amnesty schemes floated by Pakistan have not been a real success. The government should consider proposals made years ago that investors should be allowed to bring their money with no questions asked if the funds are invested in prioritised manufacturing sectors identified to improve trade balance. The revenue approach to taxation should be replaced by a growth-oriented tax policy.
Simultaneously, steps should be taken to divert surplus cash in the domestic market engaged in speculative activities to productive pursuits. That may also attract money parked in developed yet faltering financial markets.
Published in Dawn, The Business and Finance Weekly, November 25th, 2019
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