111 510 510 libonline@riphah.edu.pk Contact

Political turbulence has affected FDI inflows

Given its brittle balance of payments position and urgent need to boost industrial production, Pakistan must progressively increase its mobilization of foreign resources; and that is not just an argument! Foreign Direct Investment (FDI) has become increasingly scarce, and while promoting large portfolio investments is not a proper policy option due to Pakistan’s underdeveloped capital market, significant increases in commercial borrowings are also not desirable. It is, therefore, crucial to accord high priority to FDI. This brings us to the worrisome fact that Pakistan’s performance in attracting FDI, especially in the past 2 decades, has been lackluster. While countries in the region, like Bangladesh, Malaysia, and Indonesia, got in the race with the South Asian Tigers, Pakistan regressed. Why could Pakistan not succeed in attracting sufficiently large FDI despite liberalizing its economy, exchange rate, and FDI regime, is the question that needs pondering and reflection, but also resolutions on an immediate basis!

Among all these factors, political instability takes priority as the most powerful factor impacting the growth of FDI, or rather lack of it. Any incoming investor needs guarantees, in addition to a long-term policy framework to strategize and plan the feasibility of the business for seamless execution. Unpredictable and continuously changing policies, turnover of authorized personnel, and invested interests of third parties, go down hard on nascent businesses and discourage investors from venturing into projects, or even taking leaps of faith, eventually further clamping FDI inflows. Political instability can be a deal-breaker for Multinational Corporations (MNCs) attempting to establish a presence in a new country. So, it is a no-brainer to assume that investors will be more comfortable investing in a location that has a favorable environment in terms of investment, financial implications, economic development, and social progress.

Out of 190 countries, Pakistan is ranked 108th in the World Bank’s Doing Business 2020 rankings, a silver lining as we moved 28 places up from 2019, yet FDI declined by 8.9% in FY 2021 compared to FY 2020.

A strong discouragement is the tedious and time-consuming approval process. If the turnaround time is making the investor miss the train, he would rather catch it for another destination. A cumbersome and time-consuming approval process, involving multiple entities including the SBP (State Bank of Pakistan), SECP (Securities and Exchange Commission of Pakistan), and the Ministries of Finance, Economic Affairs, and Foreign Affairs, a plethora of paperwork that takes precious time away, can be alternatively managed through transparent digitization for quick implementation of the concept and set the machine rolling.

Furthermore, foreign investors in Pakistan regularly complain that both federal and provincial tax regulations are difficult to navigate through, and tax assessments are questionable and non-transparent. Since 2013, the government has demanded advance tax payments from companies, which has further complicated business operations.

FDI creates economies of scale and cascading effects to raise productivity. For FDI, repayment is required only if investors make a profit, and when they do make a profit, they tend to reinvest it rather than remit abroad. Moreover, the confidence-building effects of FDI are far-reaching. While the local economic environment determines the overall degree of investor confidence in a country, inflows of FDI could reinforce confidence, contributing to the creation of a virtuous cycle that affects not only local and foreign investment but also foreign trade and production. Otherwise, Pakistan may continue to struggle as a modestly important destination for foreign investment. Current shifts in global supply chains are a generational opportunity to grab large shares of investment in short order. We, the Pakistanis, need to urgently address the issues that hamper the creation of a stable framework of policies that can ensure an investor-friendly environment, promising growth and prosperity.

Zia Ul Islam Zuberi, "Political turbulence has affected FDI inflows," Business recorder. 2023-01-21.
Keywords: Economics , World Bank , State Bank , Economic affairs , Pakistan , Bangladesh , Malaysia , South Asian , FDI , SECP

Leave a Reply

Your email address will not be published. Required fields are marked *