Investment: Smooth election likely to result in foreign capital inflows

FDI one of the strongest predictors of economic growth in Pakistan.

According to SBP, the first eight months of fiscal 2013 saw net foreign investment reach $688 million, up more than 63% compared to the same period last year.


Having abandoned Pakistan in droves after the financial crisis of 2008, foreign investors appear to be making some tentative steps back to the country. While current capital flows are still minimal, investor interest appears to be growing, a fact that any incoming administration would be able to utilise to their advantage.

The fiscal year ending June 30, 2012 was one of the worst on record when it comes to foreign investment into Pakistan, with a net amount of just $708 million coming into the country that year. Any number for fiscal 2013 is likely to look substantially better by comparison.

According to data released by the State Bank of Pakistan (SBP), the first eight months of fiscal 2013 saw net foreign investment reach $688 million, up more than 63% compared to the same period last year.  An analysis by The Express Tribune projects that number will improve somewhat and close out the year around the $1.2-billion mark.

Yet what is absolutely essential about foreign investment is that it is one of the principal drivers of economic growth in the country. According to a working paper published last month by the SBP, the single biggest predictor of a change in Pakistan’s economic growth rate is the rate of foreign investment coming into the country.

The authors Ali Choudhary and Farooq Pasha, who work at the central bank’s research department, also found that Pakistan’s per capita income growth rate, measured in US dollars, has been stuck at 2.5% per year, which they dub the “Pakistani rate of growth”, named after the pejorative “Hindu rate of growth” which was used by international macroeconomists to describe India’s anaemic growth rates before the liberalisation reforms of 1991.

If foreign investment is indeed a big driver of change – positive or negative – in GDP growth rates, then an uptick in net foreign investment inflows, even from last year’s abnormally low base, should be good news for overall economic growth.

More important than the current inflows of foreign investment, however, is the potential pool of foreign investment that appears to be looking for a way into the country. Sources inside Pakistan’s capital markets suggests that many foreign investors have been intrigued by the stunning returns on display at the Karachi Stock Exchange in 2012, and are keenly observing the run-up to the elections.

If the elections result in a relatively smooth transfer of power, then many analysts predict that Pakistan’s capital markets will undergo a “re-rating”, meaning that investors will be willing to pay higher prices for the same level of earnings at Pakistani companies compared to what they would have paid before the election.

Political stability attracts money, and new-found political stability attracts still more money. Yes, Pakistan still has an extremism problem, but if the next administration is seen as committed to eradicating the menace, and if it is seen as welcoming of foreign investors, then it can reap what might be called the “political stability dividend”, which is there for the taking.

Published in The Express Tribune, April 8th, 2013.

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