The current strategy to seek foreign direct investment (FDI) seems to have been devised by people devoid of international commercial experience. Technocrats need to debate the pros and cons of the approach before investments are crystallised and become irreversible. As things stand, the strategy seems to be ill-timed and may deeply harm the national economy in the years ahead.

The financial crisis of today has its roots in the past that saw policies encouraging investment appetite both domestic and international in areas related to import substitution, infrastructure and low value added exports. Superficially viewed, import substitution to meet domestic demand reduces dependency on imports of finished goods, making it less taxing on foreign reserves. Besides, it creates domestic employment and transfer of technology. If all this were true, why are we struggling today? Mere corruption does not explain the disconnect. Corruption and nepotism are contributing factors, but are not the main drivers. One can look around. There are many countries with corruption that are not insolvent. In fact, they have a thriving economy. India and Indonesia are two such examples.

Then what? In a word, the answer is, ‘affordability’. No country can afford to borrow beyond its foreign currency earning capacity just to meet domestic demand. Foreign inward investment is the most expensive form of borrowing as investors logically expect returns in foreign currency at rates north of 20 per cent for ever. This is their only definition of a successful project. If these projects are domestically profitable, but do not generate foreign revenue or generate insufficient foreign revenue, profit repatriation causes increase in foreign exchange outflow. And that is what has happened that has brought Pakistan to where it is today.

The only way to avoid worsening our predicament is by putting a halt on further foreign-sourced investment into projects that do not directly generate enough foreign exchange revenue to service the profit-repatriation needs of any particular project.

Most recent ‘success’ stories in terms of attracting FDI investments, if analysed with this perspective in mind, happen to be parasitic in nature because they are either aimed at import substitution or are not expected to generate insufficient foreign exchange revenue to service the expected outflows. In both cases, our foreign exchange crisis will worsen just as it happened in the past.

The lay reader might feel puzzled, for, after all, we have grown up listening to the virtues of FDI and which has actually worked wonders for a number of countries. How come it is not suitable for Pakistan, one might ask. In a word, the answer is, ‘timing’. Countries that are generating surplus foreign exchange revenues already can afford FDI for import substitution, infrastructure and future exports. But Pakistan is at a different economic stage currently. It is already in a foreign currency deficit situation. Miscalculated FDI will make the situation worse. What we need is targeted FDI.

Pakistan needs to restrict FDI to export-oriented projects directly generating surplus foreign exchange revenue. Even FDIs currently being talked about in the mining sector should be renegotiated to ensure that instead of exporting raw ore, the projects are expanded to include downstream ventures that may optimise domestic value addition before any export takes place.

Greater wisdom and acumen have to prevail over our desperate pursuit of selling national resources short for immediate foreign exchange liquidity. The larger picture has to be kept in mind.

Amar Z. Khan

Kuala Lumpur, Malaysia