ISLAMABAD, July 6: As inflows of foreign direct investment (FDI) to South Asia have turned around with an increase of 23 per cent, Pakistan has emerged as third largest country in the region with FDI inflows of $1.3 billion in 2011, says the World Investment Report 2012, published on Friday.

The report published by the United Nations Conference on Trade and Development (UNCTAD) says that inflows of FDI to South Asia touched the figure of $39 billion in 2011 after a slide in 2009-2010.

The recovery derived mainly from the inflows of $32 billion to India, the dominant FDI recipient in South Asia. Inflows to Iran, the second largest recipient of FDI, amounted to $4.2 billion.

Bangladesh has also emerged as an important recipient, with inflows increasing to a record high of $1.1 billion in 2011.

The report forecast cautiously optimistic prospects, saying that “whether countries in the South Asia region can overcome old challenges and grasp new opportunities to attract investment will depend to a large extent on governments’ efforts to further open their economies and deepen regional economic integration.”

Countries in the region face various challenges, which need to be tackled in order to build an attractive investment climate for enhancing development, suggests the UNCTAD’s flagship publication.

In a special feature on ‘attracting investment for development: old challenges and new opportunities for South Asia’, UNCTAD points out that South Asian countries face different challenges in building a conducive business environment and an attractive investment climate, which are crucial for promoting economic development.

The challenges facing the region are stabilisation in Afghanistan, security concerns in Iran and Pakistan, and macroeconomic as well as political issues in India. Two issues stand out as major concerns, it points out, by noting that at the country level, high political risks and obstacles have been an important factor deterring FDI inflows.

Countries in the region rank high in the country risk guides of political-risk assessment services, and political restrictions on both FDI and business links between countries in the region have long existed. This has deterred FDI inflows and negatively affected the countries’ FDI performance.

However, recent developments in the region have highlighted new opportunities in the wake of political relationship between India and Pakistan, the two major economies on the subcontinent, which has now been moving towards greater cooperation, with Pakistan granting India most-favoured-nation (MFN) status in November 2011 and India recently announcing that it will allow FDI from Pakistan.

In Afghanistan, some FDI has started to flow into extractive industries.

The report regrets that at the regional level, progress in economic integration with the South Asian Association for Regional Cooperation (SAARC) as the key architect has been slow, and the trade barriers between neighbouring countries in the region are among the highest in the world.

PIDE Study

As potential of workers’ remittances to Pakistan is now been estimated to be over $20 billion a year, the Pakistan Institute of Development Economics has suggested adjustments in government policies to harness this large pool of untapped remittances and diverted into formal channels.

A study published by PIDE on Friday stated that untapped remittances of over $10 billion per annum can be diverted into formal channels, which requires continued efforts by the State Bank of Pakistan and commercial banks.

Major commercial banks, according to the study, have a grievance that their efforts which have yielded positive results are being hampered by changes in policy and or non-payment of incentives offered to banks to transfer remittances.

By doing so, confidence of banks abroad that transfer such money is seriously impaired, reveals the study.

The study concludes that there is a need to examine current procedures and rules and regulations in countries which encourage transfers through informal channels, as well as transfer of such resources into foreign accounts. Some commercial banks were also of the view that Pakistanis should be allowed to open foreign accounts abroad. This would encourage them to deposit money in Pakistani banks abroad rather than foreign banks.