Capital flight: Law and order not the only factor impeding investment

BOI lists several reasons behind slowdown in foreign investment.

ISLAMABAD:

Foreign investors have shied away from investing in Pakistan because of almost a dozen factors including inconsistent government policies, regulatory impediments and red tape, according to official findings.

The Board of Investment (BOI) has presented its diagnosis of an alarming situation to Prime Minister Raja Pervez Ashraf, who had asked the BOI to investigate the causes of declining investment in the country.

Total investment has dipped to 12.5% of gross domestic product (GDP) in the fiscal year that ended in June 2012 from a peak of 22.5% in 2007, according to the Economic Survey of Pakistan. In 2007-08, the foreign direct investment stood at $5.4 billion that came down to only $812.6 million in 2011-12.

The findings show that contrary to the perception that only law and order situation was a hurdle in the way of attracting foreign investment, in reality, it was only one of many factors.

The document shows that inconsistent government policies were creating major obstacles for foreign investors. Despite claims of liberal investment policies, the new entrants face problems in coming to Pakistan. The government imposes different slabs of taxes and tariffs on different categories of businesses aimed at protecting sectors, like automobile.

The BOI found high cost of doing business as another factor impeding foreign investment. According to the World Bank’s ‘Doing Business 2012’ report, Pakistan was ranked 105 in ease of doing business, nine places below the 2011 grade. The country slipped further down the order due to difficulties in starting a business, dealing with permits, getting credit, paying taxes and delay in resolving insolvency.

The BOI said regulatory impediments were also discouraging the foreign investors coming to the country. In Pakistan, after four years a proposal by a foreign investor remains a proposal while in Myanmar and India it takes only one year to start a new project while in Bangladesh a new project begins in less than two years, showed the findings.

The BOI stated that due to delayed response from the ministries and the provinces to facilitating investments the foreign investors do not easily come to Pakistan despite lucrative incentives the country offers in shape of full repatriation of profits and dividends.

Global economic recession, energy crisis and inadequate infrastructure were some other important factors, causing a decline in investment.

There was a major decline in foreign direct investment from the United Kingdom and United Arab Emirates, plunging to $36.6 million from $284.2 million a year earlier and to $142 million from $207.1 million, respectively. Foreign direct investment from the US dropped to $233 million against $238.1 million a year ago. Norway took out $275 million in 2012 instead of making any new investment.

The communications and power sectors saw capital flight. An amount of $315.3 million was pulled out of the communications industry while $85 million worth of investment was withdrawn from the power sector, according to the document.

Investment flight to Bangladesh

The BOI told the premier that flight of investment to Bangladesh was more a myth rather than a reality. Citing figures, it said during the last 12 years total investment made abroad by the Pakistanis was $544.1 million. Out of that, $30.4 million or 5.7% of total investment was made in Bangladesh.

The BOI said investment in Bangladesh is linked to a single factor – market access to the European Union – which Bangladesh enjoys due to its status as a least developed country.

In 12 years, Pakistanis made $93.4 million of investment in Oman due to ease of doing business in the Gulf state. Similarly, $82.7 million and $25.1 million were invested in the United States and United Kingdom due to investment needs of the diaspora. A sum of $61.2 million was invested in UAE due to ease of doing businesses the Gulf country offers through one-window operation.

Published in The Express Tribune, July 22^nd, 2012.