Bearing the brunt: Effect of terrorism on FDI in Pakistan

Falling investment due to security can be salvaged by better terms for investors.

ISLAMABAD: Foreign Direct Investment (FDI) was proven to be a significant source of investment for developing countries which helps to bridge saving-investment gap, creates employment opportunities, benefits from transfer of technology, and ultimately gives economic growth of host countries the much-needed fillip.

FDI not only provides developing countries with the much needed capital for investment, it also enhances job creation, managerial skills as well as transfer of technology. All of these ultimately contribute to the economic growth and development.

Developing countries are motivated enough to compete in attracting the foreign investment in order to foster and regulate their industrial sector. FDI has proven to be a key factor in buttressing the third world countries’ national markets.

Therefore, most of the developing countries are very keen to attract more inflows of FDI.

FDI is very crucial for the economic growth of Pakistan as well since its economy faces the dilemma of saving-investment gap. Pakistan does not have sufficient internally generated sources to maintain the tempo of economic activities; therefore, FDI is very important to complement the domestic investment in order to achieve economic objectives. FDI is crucial for Pakistan in order to finance development projects, strengthening industrial sectors, increasing employment opportunities, attaining improved technology, enhancing domestic managerial skills, enhancing productivity and output, improving balance of payments, foreign exchange reserves, physical infrastructure and human resources and ultimately achieving higher rate of economic growth. Economy of Pakistan has been under severe economic pressure because of War against Terrorism. Terrorist activities not only affect that particular region or country’s infrastructure, but it also affects the financial wellbeing of that country, because terror creates instability and uncertainty in the country. This results in loss of foreign investors’ confidence in that economy, thus decreasing the level of foreign investments. Small wonder, Pakistan is also facing this bitter reality of decreased foreign direct investment because of the rising tide of terrorism. Due to the uncertainty and instability in the economy investors feel insecure about their investment and their returns. Global media has played a significant role in spreading awareness about the pitfalls of investing in a country wracked by violence. So, investors do critical analysis of all these situations before pouring their money in international markets. Terrorism has both political and economic implications. They manifest themselves in dwindling FDI inflows, damage to infrastructure, extra cost incurred on security, loss of trade, disturbed balance of payments, and increased insurance premiums, etc.



Beside all these issues, terrorism directly creates risk and anxiety in the prevailing economy that makes individuals more conscious about their expected returns linked with any transaction. Investors think it as a harmful investment. So this increased ambiguity decreases the demand patterns and compels investors to look to some other markets.

Moreover, if governments take steps against these terrorist activities it increases the cost for governance. Pakistan being in a state of war has been bearing its brunt in the shape of an economy down in the dumps.

It’s not one sector alone which takes the fall. The terrorism affects almost every sector of Pakistani economy, be it agriculture, business, industry, services, or tourism.

Investors have chosen to cold-shoulder Pakistan over the years in view of the risks spawned by terror.



The level of foreign direct investment is broadly commensurate to the level of terrorism. The regulatory authorities and policymakers should take some concrete measures in order to reduce the cost of war against terrorism and improve the security conditions in the country. Secondly, the government should strengthen political institutions and adopt democratic principles for ensuring stability of political environment which may lead to increased FDI inflows. Thirdly, Pakistan should take some effective measures to increase electricity generation on an urgent basis. The government should immediately formulate policies aimed at increasing electricity generation and implement these policies effectively to restore investors’ confidence. It will assist in improving economic and financial conditions and also attract domestic and foreign investors. Fourthly, the market size is also a very important variable for increasing inflows of FDI in Pakistan. Finally, the exchange rate of Pakistani rupee should be strengthened in order to lure foreign investors. More fiscal incentives should be offered if the country is to stem the fall in overall investment.

The writer is a researcher at the Sustainable Development Policy Institute

Published in The Express Tribune, November 4^th, 2013.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.