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FOREIGN INVESTMENT (FDI) IN

EMERGING ECONOMIES
CHALLENGES AND FUTURE WITH
REFERENCE TO PAKISTAN
Syed Ahmad
GM Operations Foundation Securities (Pvt) Ltd
And
Visiting Faculty at IOBM and SZABIST

Venue: Karachi University


September 26, 2013

A FOOD FOR THOUGHT..

Is FDI really important?

What History tells us ? Rather recent history ?

East India Company was

Can we align our interests with foreign investors ?

Importance of FDI

Investors Perspective.
The decision to invest in a foreign country is based on
cost and benefit analysis. If perceived benefits outweigh
perceived costs, foreign investment will be made. As a
principle, foreign investment is made in those countries
where risks are low and returns are high. However,
speaking in specific terms, there are many factors in the
host country which restrict or promote foreign
investment. These factors can be categorized into:
political;
economic and ;
regulatory.

Importance of FDI

Host Countrys Perspective.


While the initial impact of foreign investment on the
host countrys balance of payments is positive, the
medium-term impact is often negative, as the investors
increase imports of intermediate goods and services
and begin to repatriate profit (Yousaf et al., 2008).
FDI is an important source of job creation and economic
growth.
Foreign investment is expected to positively affect
export of the host country since it is often undertaken
by (foreign) companies that are already significant
exporters.

If Perspectives are not safeguarded


through Regulations and Policies

Lets see what recent history tells us.


May 1997 and, foreign investor traded heavily Thai and
Malaysian currencies. It was open and free market. These
positions as some allege, were speculative and put strain on
emerging market currencies.
Thailand spent through Singapore Market billions to stabilize
bhat.
July 2, 1997 bhat gone down by 20% setting in snowball effect.
Malaysian Central bank tried to defend ringgit.
July 11, 1997, Philippines Peso is devalued.
July 24, 1997 Singapore Dollar starts sliding.
August 1997, Thailand agreed to take tough economic measure
dictated by IMF.
August 1997, Indonesia banned currency trading of its Rupiah.

Contd

October 1997, Indonesian Rupiah fell by 30% and sought IMF help.
October 1997, Hong Kong's stock index falls 10.4% after it raises
bank lending rates to 300% to fend off attacks on the Hong Kong
dollar. The plunge on the Hong Kong Stock Exchange wipes $29.3
billion off the value of stock shares.
Oct. 27, 1997
Rattled by Asia's currency crisis, the Dow Jones Industrial Average
plummets 554 points for its biggest point loss ever. Trading on US
stock markets is suspended.
Nov. 3, 1997
Sanyo Securities Co. Ltd., one of Japan's top 10 brokerage firms,
gone bankrupt with liabilities of more than $3 billion.
December 1997, The Thai government announced that it will close
56 insolvent finance companies as part of the IMF's economic
restructuring plan. 30,000 white-collar workers lost their jobs

Contd ..

March 23, 1998


Russian President Boris Yeltsin abruptly
dismisses his entire cabinet, including Prime
Minister.
May 12, 1998
In Indonesia, troops fired on protestor at a
Jakarta university, killing six students and
sparking a week of riots.
June 1, 1998
Russia's stock market crashed and Moscow's
cash reserves dwindled to $14 billion.

Lesson from History

Host country to protect own interest


first.
Make a distinction between good money
and bad money. ( Curb speculative
inflows)
Liberal is a good word, but set
economic boundaries.
Encourage long term industrial
investment.
Build infrastructure.

Global Crisis and Pakistan

Given the size of FDI and relatively close


market , Pakistan was not much affected
by emerging market crisis of 1997- 98.

Pakistan Economic Overview

Year (2002-2007) Year (2008-2013)


Economic growth
6 % 3 %
People living below the poverty line
30 % 40 %
Fiscal deficit
4% of GDP 7% of GDP
Public debt
Rs. 4.5 Trillion Rs. 15 Trillion
Rupee Value (against the US dollar)
Rs. 60 Rs. 100

FDI inflows in Pakistan


Foreign Investment inflows in Pakistan ($ million)
6,000

5,000

4,000

3,000

2,000

1,000

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Total FDI

Country Wise FDI Inflow


11%

14%

5%

13%

1%

32%

0%
0%

2%

1%

8%
12%
USA
Switzerland
China

UK
Saudi Arabia
Others

U.A.E
Germany

Japan
Korea (South)

Hong Kong
Norway

Current FDI Sector wise Position 2012


-2013
24%

38%

17%

0%
1%
2% 0%2%

14%

2%
Oil & Gas
Construction

Financial Business
Power

Textiles
Chemical

Trade
Transport

FDI in Pakistan Regulatory Framework,


Challenges and Future.

1.

2.

3.

Regulatory Steps Taken by GOP.


Foreign Private Investment (Promotion and Protection) Act, 1976
and the Furtherance and Protection of Economic Reforms Act, 1992
provide legal cover for protection of foreign investors/investment in
Pakistan.
Furthermore, since Pakistan has entered into Bilateral Agreements
on Promotion and Protection of Investment with more than 46
countries.
Over past one and half decade, Pakistan has opened its economy
through privatization and deregulation and presently it has a very
liberal FDI regulatory regime. There is freedom to bring, hold and
take out foreign currency from Pakistan in any form.
Fiscal incentives provided by the government cannot be altered to
the disadvantage of the investor. ( policy decision)
The privatization of an enterprise is fully protected.

Regulatory Steps Contd


1.

2.

3.

4.
5.

No foreign enterprise can be taken over by the


government. (Nationalization protection)
Original foreign investment as well as profits
earned on it can be repatriated to the country
of origin.
Equal treatment is provided to a foreign
investor and local investor in terms of import
and export of goods.
Foreign currency accounts are fully protected.
FDI is not subject to taxes in addition to those
levied on domestic investment

Challenges

Though the regulatory regime is as much


investment-friendly , the problem lies with the
political and economic environment. The political
environment includes political stability, law and
order situation, continuity of policies, and clean
administration. (Interestingly FDI is indifferent to two Ds
(democracy and dictatorship)
Political turmoil increase the cost of doing
business, precipitates erratic policy changes,
makes investors skeptical and reduces the level
of output. Hence, a country characterized by
political instability, bad law and order, poor
governance, policy adhocism, a negative political
image, and corruption in high places does not

Challenges Contd..

After a period of relative political stability for five years 2002 to


2007) during which FDI inflows registered a drastic increase
though the bulk of those were restricted to the telecommunication
and financial sub-sectorsthe country drifted into political
instability in March 2007 when the Chief Justice of Pakistan.

The bad law and order situation created mainly by the wave of
terrorism coupled with resurgence of ethnic violence in Karachi,
the country`s business capital, that more than any other factor
has increased the risk of doing business in Pakistan as well as
impaired the national image.

The security measures taken by the government have increased


the cost of doing business. The anti-terrorism campaign has
caused allocation inefficiency as increasingly resources have been
diverted to security matters at the expense of economic
development.

The country`s credit rating went down, which reduced its


attractiveness as an investment market.

Electricity shortage, which assumed dangerous proportions during

Survey Result Oversees Chamber of


Commerce 2011
Reasons for Low Business Confidence
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00

Inflation Energy Crisis

Policies

Terroism

Others

Future of FDI in Pakistan

The future of FDI is dependent on these factors mainly:


Law and Order situation.
Security and terrorism.
Good governance.
Continuity of Policies
Credit Rating B- long-term and B short-term sovereign credit
ratings on the Islamic Republic of Pakistan. A credit rating B
means an economy is more vulnerable to adverse business,
financial and economic conditions but currently has the capacity
to meet financial commitments. A credit rating between BB+ to
B- generally means the economy is very speculative .
Examples for discussion. Caltex, ABNAMRO, Barclays, Citi Bank, HSBC, Ricodik,
HUBCO (International Power)