THE government has drafted a new investment policy, targeting gross foreign direct investment of $5.5 billion a year by 2017. The draft policy, according to a report, is designed to provide “comprehensive framework for creating conducive business environment” to attract foreign investors.

The policy seeks to remove the bottlenecks discouraging foreign and domestic investment, adjust economic priorities in the face of global economic slowdown and domestic difficulties — including energy shortages and the fallout of the war on terror, reduce the cost of doing business and remove unnecessary regulations.

Throughout its history, Pakistan has relied heavily on foreign capital inflows to support its growth and its wealth. Periods of high growth under military dictators since Ayub Khan's 'industrial revolution' to Pervez Musharraf's consumption boom have coincided with higher inflows of dollars from Washington, direct foreign investment and generous lending by multilateral lenders.

With official capital flows drying up in the recent years because of global financial troubles and Islamabad’s failure to implement fiscal and governance reforms, Pakistan needs to attract foreign investors to shore up its balance of payments position as well as bridge growing investment gap in the economy.

Will the proposed policy succeed in realising the envisaged higher amounts of foreign investments, an important non-debt source of financing a country's current account like the workers' remittances?Pakistan has never been an attractive destination for foreign investors barring the few years under Musharraf when international financial markets were flushed with liquidity prior to eruption of global financial turmoil in 2008.

Cumulative foreign direct investment inflows during 10 years to 2012, according to the Board of Investment, stood just above $26bn, including privatisation proceeds of $2.80bn. FDI inflows peaked to $5.40bn in 2008 from mere $483mn in 2002 to plunge to $820mn during the last fiscal. Foreign private capital flows showed a negative growth of 38 per cent against the world average surge of 20 per cent in 2011 from a year earlier.

Even Bangladesh has managed to maintain pace with the global trend.

The Inward FDI Performance Index (it measures the amount of FDI that countries receive relative to the size of their GDP) points out that Pakistan was the only country in a group of five emerging economies to receive more foreign direct investment relative to the size of its economy between 2006 and 2008. Bangladesh, India, Indonesia and the Philippines received far less FDI than the size of their GDP.

In 2008, nevertheless, India and the Philippines joined the ranks of countries attracting more FDI relative to their GDP. Both maintained their position the next year as well. The Index shows that Pakistan lost momentum in attracting FDI and its position as a possible destination slipped to the bottom in the group. While Indonesia succeeded in wooing FDI equal to the size of its economy in 2010 and 2011, India and the Philippines followed it closely.

"Global financial turmoil had an adverse impact on FDI in emerging economies… Initially, the fall in FDI flows to Pakistan was considered to be in line with global trend as most countries in the region were facing similar declines. While FDI flows to a number of regional countries have resumed recently, they are yet to recover in the case of Pakistan despite its better position in the Ease of Doing Business Ranking of the World Bank. This suggests that we need to make more efforts to attract FDI, especially when debt inflows are also low,” notes SBP in its new report.

There are some preconditions — consistent macroeconomic policies, good governance, political and economic stability, security, proper economic infrastructure, energy, guarantee of property rights, rule of law, etc., — to attract FDI, notes Mubashir Bashir, a Lahore-based chartered accountant who has helped foreign and local investors in mergers and acquisitions.

The central bank admits that Pakistan‘s standing is not as encouraging when it comes to macroeconomic environment, quality of institutions, infrastructure facilities, human development indicators and political risk, which are important determinants of FDI. According to the Global Competitiveness Report of 2011-12, Pakistan lags behind its peers in most of competitiveness indicators. While others have either improved or avoided deterioration, Pakistan has slid further downhill.

"When foreign investors were coming here, the economy was going strong. Energy shortages had not grown to the current unsustainable level. Security conditions were far from satisfactory, but there was hope of improvement. Exchange rate was stable. Political instability hadn't set in. And multilateral lenders, particularly the IMF, were showing faith in us," Bashir argues.

He says the conditions have changed dramatically ever since and the FDI target of $5.5bn a year now seems to be ambitious in the current state of affairs. He says Pakistan will be faced with a more serious challenge of improving its very poor country perception in the world even if it succeeds in fixing the economy.

A business leader, who didn't want to give his name, wonders why the government is overly focused on foreign investment as a panacea to fix the economy. "Why can't we just facilitate our own businessmen?" he asks. "Indeed, foreign investment is important because it brings new technology, modern management practices and assured markets with it. But foreign investors don't go to destinations where domestic investors are not comfortable in investing. We should adopt the Indian or Chinese model of facilitating their own entrepreneurs and convincing their expatriates to invest in their own country. This policy has paid off for them and it can work for us as well."