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The Foreign Investment Dilemma | Ali Raza Mehdi

THE big drop in foreign direct investment into the country so far this fiscal year is likely to have rung alarm bells among economic policymakers and private stakeholders alike.

While remittance inflows and lower oil prices have helped prop up the current account, critics have been hounding the government for using external borrowings — as opposed to export earnings (which have also declined) and investment inflows — to shore up its forex reserves.

To put the situation into perspective, FDI dropped 24pc to $350.8m during the first four months of this fiscal year over the same period last year, according to central bank data. Meanwhile, overall foreign private investment fell 67pc to a negative $144m.

Similarly, foreign portfolio investment dived to a negative $279.7m from January 1 till last Tuesday, against an inflow of almost $430m in the same period in 2014. Equity analysts have primarily blamed this foreign outflow for the benchmark KSE-100 index’s negative return of 1.3pc this year (till last Tuesday).

Given such a scenario, virtually all stakeholders — the government, the financial sector and international lending and ratings agencies — have pinned their hopes of a rebound in foreign investment in the country on the $46bn worth of projects that are expected to come online over an extended period under the China-Pakistan Economic Corridor (CPEC).

There is some factual basis for pinning high hopes on China alone. Net FDI from China stood at $272m during July-October and formed 78pc of the total FDI received by Pakistan in the period

There is some factual basis for pinning such high hopes on China alone. Net FDI from China stood at $272m during July-October and formed 78pc of the total FDI received by Pakistan in the period. This was up from $178.2m that Pakistan received from China in the same period last year.

Nonetheless, it is necessary to look at the factors responsible for the overall slump in FDI inflows and see if they are specific to Pakistan or part of a wider phenomenon.

“The emerging markets have seen the highest investment outflows [this year] in the past 30 years.”

The comment was made by Marios Maratheftis, Managing Director and Chief Economist at Standard Chartered Bank, during a recent media briefing.

Along with the drying up of foreign flows, the emerging markets have also held their breath as the Chinese economy sputtered this year. Fears of a spreading of the contagion to other emerging markets then simply turned into a self-fulfilling prophecy when Western money started leaving the group en masse, owing to a variety of other factors as well.

However, “the slowdown in China’s economic growth shouldn’t come as a surprise for anyone. In fact, growth in the country has been slowing down since 2012. And more importantly, it was necessary for the world’s largest economy to get off from a growth trajectory of 9-10pc per annum and to stabilise,” said Maratheftis.

Maratheftis and Bilal Khan, senior economist for the Middle East North Africa region for the bank, also cautioned financial experts and economists, particularly those based in the West, to not totally write off the growth potential of the Asia region.

So, the evaporating FDI is not something unique to Pakistan.

Meanwhile, another big elephant in the room is the impending interest-rate hike by the US Federal Reserve. In the pipeline for months, the seeming uncertainty within the Fed about when to raise rates has drawn the ire of global investors and economists alike, who have roundly criticised the US central bank’s ambiguous stance.

However, Maratheftis suggested that financial markets had been basically working without a heading for the past few years, as the benchmark US rate was virtually zero. “Asset re-pricing will take place once the Fed raises rates.”

The foreign bank expects the Fed to raise rates twice — this month and then in next March — and then cut it again before the end of 2016. “We believe that there is no need for the Fed to overcorrect, as the US economy, credit, labour cycle and [corporate] profits have already peaked. And inflation is still very low,” remarked Maratheftis.

But international factors — like the impending rate hike by the Fed, the global oil price slump (which has depressed earnings of big oil firms and in turn curtailed their investment plans) and a slowdown in global economic growth — are not the only factors that have contributed to the drop in investment flows into Pakistan.

Khan said ‘supply side constraints’ were also a big reason, and referred to the disconnect between the demand and supply sides of the local economy. “Domestic demand is still strong, and wages (in real terms) are rising, even in the informal sector.”

He added that unlike during previous loan programmes, Pakistan, under the latest IMF facility, is also focusing on supply-side constraints in the economy after having stabilised its economy. These include areas like the ease of doing business, infrastructure (including energy) upgrades and the privatisation of state-owned enterprises.

But some experts point to a few other major issues that are also preventing the local private sector from playing its full role in boosting the national economy.

Farid Aliani, assistant vice-president for corporate finance and advisory at BMA Capital, believed that ‘regulatory uncertainty and inconsistency’ is one such chronic issue. “Regulatory inconsistency hampers businesses’ ability to plan their medium- and long-term strategy and therefore clouds their view about investment in the future,” he told Dawn.

He added that such a situation has virtually hamstrung every major sector of the economy, including textiles and manufacturing.

Aliani also cautioned against Pakistan’s over-reliance on China for investment and claimed that “the pace of implementation of CPEC projects could use some catalyst to ensure the satisfaction of both the neighbouring country and the investor community”.

Published in Dawn, Business & Finance weekly, December 7th, 2015

Source: http://www.dawn.com/news/1224595/the-foreign-investment-dilemma

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