Economy’s woes

During the first quarter of the current financial year, the foreign direct investment (FDI) witnessed a sharp decline of 24% hitting the lowest FDI level in a decade. What is worrisome is that the FDI is on a steep decline since a couple of years and the trend shows further decline.

The main reason behind the woeful decline in FDI is that the strategic foreign investors no longer view Pakistan as an attractive market to be present in. Traditionally, the US, the UK and the EU countries have been the strategic investors in Pakistan who, over the last six decades, provided technology, training and investments in industry, energy sector, healthcare and infrastructure and contributed in generating over 65% of total tax receipts for the country. Although, the existing multinationals are, by and large, making good profits in Pakistan, there is a sizable segment which no longer views Pakistan as an attractive market on account of loss of level playing field, poor global perception of Pakistan on account of state governance and security concerns.

Siemens Pakistan, with a strong presence in Pakistan since the early 1950s, which helped build Pakistan’s industry, railways, healthcare facilities, telecom and energy sector, has de-invested its major production facilities in Karachi and is now more of a sales and marketing company. Phillips did the same some years back. With PML-N taking over the reins of the country some two & half years back, there was hope that there will be a substantial economic revival, attracting local and foreign investments to Pakistan – both being major contributors to boost the GDP of Pakistan. This did not happen. At best this government managed to encourage Turkish and Chinese contractors to execute infrastructure projects, largely in Punjab. Turkish and Chinese loans tied to their contractors did flow in, but, by no means the FDI. The FDI from Turkey is negligible while from China it continues to be quite low.

The role of Board of Investment (BoI) is passive and disappointing in attracting FDI. They are still stuck in the past rhetoric that Pakistan is the best country to invest in with “unlimited” opportunities. Investors do not buy these idle slogans as their homework is much advanced than what is presented by BoI. At best, BoI holds aimless investment conferences each of which invariably ends with misstatements that investors are queuing up to invest in Pakistan. None of these events helped attract FDI. The ground results, time and again, prove them to be wrong and their statements misleading.

Pakistan, on the other hand, has all the basic ingredients to go after FDI in a meaningful manner. It has a growing middle class and an admirable consumer base. Pakistan is just not able to put its act to gather to make it happen as other emerging markets have done it with similar issues like Pakistan. The current privatisation process in Pakistan of public-sector assets in the energy sector, transportation and industry is also an opportunity to get FDI. This process again requires transparency and professional governance to make it happen. How far the government will be able to achieve it is questionable.

On the other hand, the current government since taking over office has embarked on securing loans at a level which is alarming, disturbing and unprecedented. By 2007, the government then in power got rid of the IMF. The country’s debt has grown since 2007, with successive governments making unsubstantiated borrowings pushing the country towards a debt trap thereby subjecting the country’s sovereignty to severe risks and compromises. As of March 2015, the total debt liability of the country stood at Rs 19 trillion meaning every Pakistani now owes a debt of about Rs 100,000 as against only Rs 37,000 in 2008. The debt-to-GDP ratio stands at an alarming 66.4% in which foreign debt is Rs 6.4 trillion and domestic debt is Rs 12 trillion. For a healthy economy this ratio should be less than 30%.

The country paid $6.8 billion in debt servicing in FY15, including $5.9 billion as principal and $915 million in interest payments meaning a good 47% of country’s revenue is consumed in debt servicing. This is at the expense of social welfare for the public in terms of healthcare, education and other social benefits. Pakistan spends just 2% and 2.6% of its GDP on education and health, respectively, making it the lowest in South Asia. For Pakistan, where 60% of the population lives below poverty line and 58% faces food security, this level of debt burden will further accentuate their woes.

Pakistan’s economy is subjected to a lethal combination of Rs 19 trillion foreign and domestic debt, an accumulated loss of Rs 1 trillion incurred by the business entities in the public sector which is growing daily, a circular debt in the power sector standing at over Rs 600 million against a meagre FDI of a few million dollars. All these figures present a scary picture of our economy and more scary is the fact that we seem to have no viable roadmap to move out of it.