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

BOI lists several reasons behind slowdown in foreign investment.


Shahbaz Rana July 22, 2012

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 22nd, 2012.

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COMMENTS (7)

Raj Singh | 8 years ago | Reply

I am glad your esteemed paper had the courage to report on the investment malaise that afflicts Pakistan which still dreams of attracting investments into the country. Being an Indian businessman who works with Pakistani textile manufacturers (all decent and wonderful chaps with a high degree of professionalism), I must tell you that I -- like thousands of other foreign businesspeople from other countries -- feel very uncomfortable at the thought of investing in Pakistan. The reasons are varied: from inadequate infrastructure through lack of raw materials and unavailability of qualified workers (some candidates even had the nerve to tell us during interviews that they were educated in madrassahs !) to personal safety and overall security. My buyers in America and Europe are refusing to fly to Pakistan to source from my contracted mills there because they fear their personal safety, even though some had visited Pakistan in the 1980s and 1990s. The Pakistani Govt. could work to mitigate the hardships faced by foreign investors/buyers listed above. It is also imperative that the governent work fast to create a better business environment that will be conducive to greater investment. I have even asked many Indian industrialists to invest in Pakistan. Though they are very reluctant now, they may change their mind at some point in the future. But Pakistani Govt. needs to work to allaying the doubts and fears of foreign investors -- one would expect a more pragmatic approach to business and a less dogmatic one. Keep religion and hate mongering out of the picture, if you want business to take a look at your otherwise lovely country.

basharat ali | 8 years ago | Reply pakistan has been always discouraging the investors in country and from abroad.always flickring and unpridictable policies, even destroying the whole business of indegenous businessmen and industrial tycoons, who were establishing their business there from pre-independence, fist at the time of dismemberment of east pakistan, 2ndly by nationalising the industry.since then, local industrilists have exhausted and not ready to even dream about having bisiness in pakistan.so are the current situation,which shows no interest in encouraging investment
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