WASHINGTON, May 30: The Foreign Direct Investment (FDI) inflows to Pakistan increased from $2.2 billion in 2005 to $3.5 billion in 2006 with much of investment in the oil and gas and financial sectors, says a World Bank report released on Wednesday.
The total FDI inflows also include instalments made on a major telecom privatisation deal in 2005.
The World Bank’s Global Development Finance Report of 2007, however, points out that Pakistan’s GDP increased by 6.6 per cent in 2006 significantly down from the 7.8 per cent growth rate recorded the previous year.
The World Bank said that since 2003 the period for which imports could be covered by foreign reserves has declined by about four months in both India and Pakistan.
While reserves in India remain significantly above the level of three months worth of imports, they are much closer to that level in Pakistan and below in both Bangladesh and Sri Lanka, suggesting that each country would be vulnerable to a significant terms-of-trade shock, such as another hike in oil prices.
The report notes that net capital flows to South Asia reached a record $40.1 billion or 3.6 per cent of GDP in 2006 from $28.3 billion in 2005, which was 2.8 per cent of GDP. Most of the increase went to India.
But the report warns that sustaining recent high growth in South Asia will require continued economic reform, expansion of infrastructure capacity, and further reduction of security threats.
The report predicts that these efforts will also contribute to higher capital inflows, which have been spurred by progress in these areas in recent years.
“Increased political instability represents another main risk. Heightened security concerns could hurt investor sentiment and undermine foreign capital inflows, which have contributed to the region’s record four-year expansion,” the World Bank warns.
It notes that continued easing of political tensions between the governments of India and Pakistan bodes well for progress toward improved relations.
Although India attracted a major chunk of the record capital inflows into South Asia in 2006, restrictive policies could stunt investment growth leading to slower economic expansion, says the report.
“India’s restrictive policy conditions are expected to lead to deceleration in investment growth and weaker private consumption and government spending, contributing to a slowdown in GDP growth to 7.8 per cent and 7.5 per cent in 2008 and 2009, respectively.”
India’s GDP grew by 9.2 per cent in 2006-07, although signs of slowing appeared at the end of the fiscal. Total FDI inflows last fiscal (April-March) was $15.7 billion.
Net equity inflows to South Asia, however, increased only slightly as a $3 billion increase in FDI was partly offset by a decline in portfolio equity flows, the report said.
The World Bank points out that high growth rates posted in recent years have helped South Asia make significant progress toward achieving the Millennium Development Goals. The GDP in South Asia expanded a robust 8.6 per cent in 2006.
Most notably, the percentage of people living on less-than-a-dollar a day declined to just over 30 per cent in 2003 from 40 per cent in 1990 and is now projected to be about 13 per cent in 2015, below the initial goal of 20 per cent.
