Daily Times

Despite the continuing business slowdown and the energy crunch, foreign direct investment (FDI) inflows are improving. Is there anything significant to note on the policy front as the government staggers on without much vision? This is a big question mark. If it were not hanging like a sword on the economy, things would have been much better. The country and the business, however, keep going on, on their own inherent strength. Something, however, needs to be done as other developing nations are lapping up billions and billions of dollars of private investment that cross the international borders every day.

The economy, overall, offers good prospects for investors, which will become more attractive with the easing of the energy situation, a turnaround in the business slowdown and domestic demand. Although the net FDI is in a negative position, yet it crossed $ 1.0 billion mark, which is an encouraging figure. The inflows for the first five months of the current FY2011 are much better than the like period of FY2010 when these had declined 28.4 percent during July-November 2010.

An improvement on the FDI front is a positive sign for the economy. If the upward trend builds up, it will surpass the inflow in FY2010. But the State Bank of Pakistan (SBP) reported this week that the net inflow of FDI was down 15.4 percent to $ 1.05 billion during the first half year to December 31 of the current FY2011 down from $ 1.24 billion in the like period of FY2010. The first half of FY2011 saw the FDI declining 14.5 percent to $ 828.5 million, compared to $ 968.9 million in the like period of FY2010. Portfolio Investment (PI), at the same time, was down 18.6 percent to $ 221.5 million, from $ 272.1 million in the like period of FY2010.

The bourses and the equity analysts attribute the FDI and PI decline to “economic slowdown, high interest rates, and rising corporate debt which hampered the growth in FDI”. Investments in the past years were mainly made in telecommunications and banking — the two sectors that are currently in a consolidation phase. So investment has slowed down.

The SBP is pursuing a tight monetary policy for the last three years, and is pushing discount rates up, leading to high lending rates by commercial banks, which, in turn, are forcing the cost of production and operation for industry and business. It has dented the last decade’s fast expansion of the banking system. The telecom sector, which saw a major growth in cellular phones over the last decade, has expanded. A tough competition is going on in this sector but fast cellular companies’ average return per user (ARPU) has declined.

The chief sector for present investment is energy. It includes oil and natural gas exploration and production, hydel and thermal power, and non-conventional sources of electricity. The rates of return in these areas are enormous, and the demand is skyrocketing. These prospects for investors are already showing up in the FDI inflows. Oil and gas exploration benefited from an FDI inflow of $ 269 million in the fist half of FY2011, compared to $ 255 million in the like period of FY2010.

The SBP says investment from key developed countries declined 39.5 percent to $ 560 million from $ 926 million in the like period the previous year. But inflows from developing nations rose 262.6 percent to a total of $ 402.9 million from $ 111.1 million in the like period.

As expectations for the FDI inflows to grow may take a little longer to realise, bourses report a good response to Pakistani equities and shares. The Karachi Stock Exchange (KSE) this week touched a 31-month high on the back of strong foreign interest. Investment analysts attribute the KSE-100 index spike to 12,681.34 points to positive activity originating from strong foreign interest and Pakistani institutional investors on strong valuations. The week saw a new foreign portfolio investment of $ 29 million. The overall market capitalisation of shares quoted at KSE rose to $ 458 million to a total of $ 40 billion.

The market is expected to have a new leverage product — Margin Trading System (MTS) — in February after a gap of 21 months. The absence of MTS had brought KSE turnover volumes down to an average of $ 71 million in 2009-10, from a historic high average of $ 249 million in the period before that year.

The KSE share market attracted $ 41.072 million foreign portfolio investment in the first fortnight of 2011. The National Clearing Company Pakistan Limited reported that foreign investors purchased stocks valued at $ 72.853 million during the fortnight, and sold shares worth $ 31.78 million — putting the net inflow at $ 41.072 million. Even at this level, portfolio investment inflows indicate that the market is upbeat. Foreign investors are returning.

The sentiment is reflected by Finance Minister Dr Hafeez Sheikh who discussed FDI prospects with Bader Al-Sa’ad, the visiting chairman of Kuwait Investment Authority (KIA) last week. Mr Sheikh informed KIA, “Pakistan has a very liberal investment regime. There are no restrictions on FDI and inflow of capital and outflow dividend income. The current investment policies are tailor-made to meet the investors’ needs.” Sheikh also said, “There is a great potential for investment in the fields of oil and gas, corporate faring, agriculture and infrastructure.”

The writer is an Islamabad-based journalist and former Director General of APP