Pakistan was termed as one of the top emerging economies in South Asia by the Atlantic Media Company (AMC), an international rating agency, in June 2016. This arrangement has come on the back of improved macroeconomic outlook and better law and order situation prevalent in the country as terrorist attacks have undergone a 70 percent reduction. The natural byproduct of this nomenclature is rising private investment both foreign and domestic.
On the contrary, Pakistan’s investment climate presents an entirely different picture. Private investment outlook still appears far from promising. Total foreign investment was $214.2 million in September 2016 down from $635.0 million in the same month last year. This represents a 16.37 percent reduction per month from September 2015 to September 2016. On the domestic front, investment scenario does not seem hopeful either. However, few businesses particularly construction business have invested to expand production capacities. But such examples are rare to come across.
This poor investment performance seems contradictory to the bullish commentary we have been hearing on Pakistan’s economy by government and other international agencies like the one mentioned above. To understand this apparent contradiction one does not have to look far.
High-risk perception of the economy has not completely receded. Despite recent positive developments like the China-Pakistan Economic Corridor (CPEC), Pakistan is still earmarked as a security economy rather than an emerging economy by investors. Investors in Pakistan spend more time devising ways to hedge against economic risks than adding value. For example, there has been a practice in Pakistan to hoard large amount of money in real estate. While underlining reasons behind this practice may be manifold, the riskless characteristic of this asset is significantly attractive to nervous investors.
Even the improved macroeconomic outlook is brittle and economic managers of the country are always busy firefighting to maintain a stable macroeconomic outlook. One bad news, from within or without, and the leash of economic ills will hem in to strangle the marco progress. Take the case of Brexit. Pakistan Stock Exchange plunged by 1,400 point right after Brexit. Quite recently, it nosedived in response to protest claims by Pakistan Tehreek-e-Insaf (PTI) in Islamabad on 2nd November 2016. Pakistan Stock Exchange is still in negative region and yet to recover all of its losses at the time of writing.
The net result is the phenomenon of cautious investing in Pakistan. There are signs for this brand of investment as well. Commercial banks prefer to keep their capital in government securities just because it is riskless rather than loaning it out to an upstart that creates employment. Even when they loan out money to such small borrowers, banks charge as much as 30 percent interest rate as a hedge against prospects of failure. Resultantly, while it does help government’s business to run smoothly, it comes at the expense of private investment. Per one estimate, banks’ share in overall investments in government securities has ballooned to a whopping 91 percent in 2016. Pakistani economy has to pay security mark-up in terms of low domestic private investment.
Minding economic risks, foreign investors are withdrawing capital from Pakistan. Despite the multi-billion price tag of CPEC, once much-clamored foreign investment by China is unaccounted for, net foreign direct investment decreases by half as much for FY16. There is sizeable outpour of funds from Pakistan. In FY16, $100 million and $65.6 million worth of FDI outflow was observed from Saudi Arabia and USA respectively. Interestingly, these two countries are considered among top countries by FDI historically. Even Pakistan Stock Exchange has observed such an outflow of funds. While estimates vary, during first half of 2016 foreign investors were net sellers of shares worth $11.8 million. Take another indicator. Foreign portfolio investment tumbled by 65 percent between FY15 and FY16.
If Pakistan is to reverse these trends and monetise on its emerging economy status, it has to cease being a security economy. The dynamics of security economy in Pakistan is not limited to law and order condition only. It is anything that makes the Pakistani economy riskier to investors, like ever-increasing taxes, a hefty regulatory burden, a weak intellectual property rights regime, lax contract enforcement regime and poorly framed investment policy. Currently, Pakistan’s ranking among these parameters is quite low. Unless it improves on these areas, Pakistan will fail to consolidate on stable macro outlook that is already wobbling on shallow grounds.
The writer is a research associate at the Policy Research Institute of Market Economy