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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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.
Shahbaz,
If an entity/sector takes out more than it is investing, that is not "capital flight" which is a technical term. It is a "net-outflow".
Negative net-outflows also happen with aid, both bilateral and multilateral.
Outward investment from Pakistan is not bad. As an economy grows, it is natural that business expands overseas to capture global market opportunities with exports and also through outward foreign direct investment. When a Pakistani businessman migrates to Bangladesh, his enterprise there is considered as outward Pakistani investment as long as he retains his nationality, and although his output, jobs and exports benefit the economy of Bangladesh, the profits may be remitted back to Pakistan or reinvested in Bangladesh. That’s the key: improve the domestic investment climate so investors opt to reinvest rather than remit their earnings aboard. As long as our existing domestic and foreign investors are holding back in Pakistan, new investors will not come in.
With such favourable business environment the local business are not willing to expand or reinvest since no one knows the fate of the country for the next 4 years. In Punjab we dont have electricity how can anyone think of operating from here Sindh ,KPK and Balochistan have some serious security issues.Is the BOI blind. Why would there be FDI if the locals are not even sure if the could continue here or not.
Shahbaz - Good summary. It would be good to see your thoughts on why this red tape exists as such? Is it because Govt. wants to discourage foreign investors in general (as happens in specific sectors in other emerging markets) or is it more just lazy / under-staffed bureacracy that is acting as bottleneck or it is some unexpected outcome of any internal security clearance procedures. Lastly, regarding the FDI outflows calculation for Bangladesh, will these numbers also reflect capital outflow where a business man has migrated to Bangladesh altogether?
BOI is dreaming?. Just look at the "export" of textile machinery and it's destination. Close to 40% of the garment manufacturers have moved out of Pakistan. Just go to Zainab market in Karachi and ask the shop keepers from where have to goods come from: 70% would be from Bangladesh