Substantial bilateral aid and larger financial assistance from international financial institutions, like the IMF and the World Bank, will be available for the next two to three years as long as Pakistan is an assiduous part of the US-led coalition against terrorism, but similar foreign investment even on the old moderate scale is a different ball game. Not political or military considerations weigh in there but pure economic considerations for the medium-term, while long-term projections are not ruled out.
It is true, the US Administration has allowed its OPIC and the EXIM Bank to assist the US investors wanting to make investment in Pakistan, and in fact provided for $300 million on each account. And following the visit of the German chancellor to Pakistan an announcement of its economic package its Hermez Bank will make available 100 million DM suppliers credit for Pakistan. And the Germany has made Pakistan priority partner of that country in economic assistance.
But when it comes to direct foreign investment or portfolio- investment that is done on the basis of pure profit projections, scope for expansion of the corporate sector or profiting by larger trade with our neighbours or regional states.
Reports like out of over 50 American companies in Pakistan one-third reported lower profits, eight per cent posted losses and two-thirds showed just a five per cent rise in sales in 1999 compared to their operating results in 1998 do not encourage foreign investors. In the same year two foreign companies had to be closed.
Nor is it encouraging to be told a company like Gillette was losing money for long as long as it was a manufacturing company but began making profits as soon as it became a trading company and imported its products. Last year the profits went up to 80 per cent.
Making investment around the world more sluggish is the global economic downturn which has become a recession, which may not ease until the after the middle of next year. Nevertheless, we may get some investment in the oil and gas sector a in the manner foreign investment came earlier in the power production sector. Those who invest in the oil and gas sector feel rewarded as some gas is invariably found in Pakistan without large investment, while large finds have proved to e rare.
Secondly, the progress of globalization and strengthening of the world trading system also discourage small foreign investment in countries with small markets. Unlike what has been happening in Pakistan China has received foreign investment of $40 billion each in the last two years. Ideological differences between China and the Western world and other gaps in their systems do not stand in the way of such a large foreign investment in China.
The Pakistan government has now set up a committee to reduce the import tariff to 25 per cent from 30 per cent from July 1 next year.
That kind of low tariff compared to the 120 per cent average tariff we had 10 years ago, encourages trading by major multinational companies of the world rather than making small investments in small markets with perpetually sluggish economies.
Even otherwise massive smuggling in of highly taxed goods in Pakistan has been a major deterrent to investment on manufacturing in Pakistan. Tea manufacturers in Pakistan have been protesting against the heavy smuggling in of tea in Pakistan, partly via Afghanistan. An official source has been quoted saying that one beneficial fall-out of the war in Afghanistan is that the Afghan transit trade has come to an end. But the smugglers will now look for new routes, like via Iran or bring their goods in boats more and dump them into the country via Balochistan which has become a major conduit for smuggling of manufactured goods from Dubai and other Gulf ports.
Foreign investment has been coming down in the second half of the 1990s. While it stood at $682 million in 1997 and $601 million in 1998, it came down to $182 million last year — the lowest in 12 years. Portfolio disinvestment last year was as heavy as $140.4 million.
The position far worse in the first quarter of this financial year ending on September 30. While foreign direct investment was $69 million, the portfolio disinvestment was $47.2 million, resulting in a net investment of a $22 million in the first quarter.
The US made a direct investment of $42.7 million and portfolio investment of 2.9 million dollars, making a total of $45.6 million. But the portfolio disinvestment of Britain in the same period was a hefty $47.2 million.
If the picture was so bleak even before the war the foreign investors would like to know how far the war in Afghanistan will last, and how will it end, and what will be the political and economical and economic pattern in the region with India threatening a war over Kashmir.
It is true the increased economic assistance by the West and the international financial institutions will improve the balance of payments of Pakistan and enlarge its foreign exchange reserve. The official reserve of 1.6 billion dollars is too discouraging to large foreign investors who want to feel free to take out their capital anytime they choose.
But the foreign investors now want to know the pattern of government to emerge after the elections by October next year. They want to know what would be the policies of that government as it cannot be that the elected leaders just follow whatever is laid down for them by the military rulers and their bureaucratic or technocratic assistants.
Foreign investors and their representatives in Pakistan are upset by the anti-Western and pro-Taliban demonstrations in Pakistan and the demonstrated strength of the protesters and their penchant for violence. They are also disturbed by he manner McDonald or Kentucky Chicken outlets are wrecked or burnt down when ever there is any kind of anti-Western protest.
In such a context law and order becomes a major issue for foreign investors. They say official assurances in this regard are not translated into matching performance on the ground and they do not want to spend too much on their own security and the security of their assets, and keep sending their wives back home too often.
Along with that all, there are some positive signals as well. The rupee is getting stronger and becoming stabilised.
The inflow of foreign currency as through aid and larger home remittances will strengthen the rupee further and foreign investors like that as that will give them better dividends in their own currency. The official foreign reserve will go up further while the rate of inflation has come down, although that has stabilised at a very high level for the low income groups. The lending rates of banks are also coming down making capital less expensive.
But while the officials talk of the very favourable investment climate or of even ideal climate, foreign investors ask in that case why are not the domestic investors not making investments, except to a limited extent in the textile sector?
In fact, this is the right time for local investors to come forward with official assistance as machinery has become cheap around the world particularly used machinery which has been ideal following the global recession and use of use new technologies in the West and Japan. Foreign loans have also become cheap because of the sharp fall in interest rates around the world.
Hence the governor of the State Bank Dr Ishrat Hussain has advised exporters to borrow in dollars cheap than in rupees at 12 per cent for export re-finance.
Foreign investors also want to see the new liberal fiscal picture following the promises of tax relief and reduction in the number of taxes, and successful implementation of the tax reforms as a whole.
As a result major investment decisions by key foreign investors may not be made until after end of the Afghan war and the general elections next year. Meanwhile Pakistani investors have to take the lead to attract foreign investors. China, however stands by its commitment to invest around a billion dollars.For the Third World states, these are difficult times. They are unsure if disagreeing with the United States on certain items of the agenda would amount to the same as being on the other side in the global war on terrorism. The dilemma of the anti-globalization groups is no less distressing.