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Jan 21, 2023

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EDITOR'S PICKS • Economic dist ress in Pakist an • Daily news briefing • SBP governor • IMF and Pakist an

OPINION

Political turbulence has affected FDI inflows

Zia Ul Islam Zuberi Published about an hour ago

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Given its brittle balance of payments position and urgent need to boost
industrial production, Pakistan must progressively increase its
mobilization of foreign resources; and that is not just an argument!
Foreign Direct Investment (FDI) has become increasingly scarce, and while
promoting large portfolio investments is not a proper policy option due to
Pakistan’s underdeveloped capital market, significant increases in
commercial borrowings are also not desirable.

It is, therefore, crucial to accord high priority to FDI. This brings us to the
worrisome fact that Pakistan’s performance in attracting FDI, especially in the
past 2 decades, has been lackluster.

While countries in the region, like Bangladesh, Malaysia, and Indonesia, got in
the race with the South Asian Tigers, Pakistan regressed.

Why could Pakistan not succeed in attracting sufficiently large FDI despite
liberalizing its economy, exchange rate, and FDI regime, is the question that
needs pondering and reflection, but also resolutions on an immediate basis!

Among all these factors, political instability takes priority as the most powerful
factor impacting the growth of FDI, or rather lack of it. Any incoming investor
needs guarantees, in addition to a long-term policy framework to strategize and
plan the feasibility of the business for seamless execution.
Unpredictable and continuously changing policies, turnover of authorized
personnel, and invested interests of third parties, go down hard on nascent
businesses and discourage investors from venturing into projects, or even
taking leaps of faith, eventually further clamping FDI inflows.

Political instability can be a deal-breaker for Multinational Corporations (MNCs)

attempting to establish a presence in a new country.

So, it is a no-brainer to assume that investors will be more comfortable

investing in a location that has a favorable environment in terms of investment,
financial implications, economic development, and social progress.

Out of 190 countries, Pakistan is ranked 108th in the World Bank’s Doing
Business 2020 rankings, a silver lining as we moved 28 places up from 2019, yet
FDI declined by 8.9% in FY 2021 compared to FY 2020.

A strong discouragement is the tedious and time-consuming approval process. If

the turnaround time is making the investor miss the train, he would rather
catch it for another destination.

A cumbersome and time-consuming approval process, involving multiple

entities including the SBP (State Bank of Pakistan), SECP (Securities and Exchange
Commission of Pakistan), and the Ministries of Finance, Economic Affairs, and
Foreign Affairs, a plethora of paperwork that takes precious time away, can be
alternatively managed through transparent digitization for quick
implementation of the concept and set the machine rolling.

Furthermore, foreign investors in Pakistan regularly complain that both federal

and provincial tax regulations are difficult to navigate through, and tax
assessments are questionable and non-transparent. Since 2013, the government
has demanded advance tax payments from companies, which has further
complicated business operations.

FDI creates economies of scale and cascading effects to raise productivity. For
FDI, repayment is required only if investors make a profit, and when they do
make a profit, they tend to reinvest it rather than remit abroad.

Moreover, the confidence-building effects of FDI are far-reaching. While the local
economic environment determines the overall degree of investor confidence in
a country, inflows of FDI could reinforce confidence, contributing to the creation
of a virtuous cycle that affects not only local and foreign investment but also
foreign trade and production.

Otherwise, Pakistan may continue to struggle as a modestly important

destination for foreign investment. Current shifts in global supply chains are a
generational opportunity to grab large shares of investment in short order.

We, the Pakistanis, need to urgently address the issues that hamper the creation
of a stable framework of policies that can ensure an investor-friendly
environment, promising growth and prosperity.

Copyright Business Recorder, 2023