FeaturedNationalVOLUME 19 ISSUE # 29

Revitalizing investment

Despite recent efforts to attract foreign investments and improve the ease of doing business in Pakistan, significant challenges persist. Prime Minister Shehbaz Sharif’s successful negotiations with the UAE and Saudi Arabia have resulted in substantial pledges, yet the translation of these commitments into actionable investments remains elusive. To address this issue, a comprehensive review at the highest policy making levels is essential. This review should identify the underlying causes of the stagnation and explore effective solutions to stimulate economic growth, employment, and sustainable development.

Despite efforts to revitalize Pakistan’s investment climate, the reality remains grim. Prime Minister Shehbaz Sharif’s recent visit to the UAE resulted in a significant pledge of $10 billion in investments from the Gulf state, following Saudi Arabia’s $5 billion commitment. These developments, although promising, starkly contrast with the current investment landscape.

Recent data from the National Accounts Committee indicates that Pakistan’s investment ratio has plunged to a 50-year low of 13.1 percent of GDP for the outgoing fiscal year, failing to meet the 15.1 percent target. Both public and private sector investment-to-GDP ratios have also seen substantial declines, with private sector investment hitting a 25-year low.

The State Bank of Pakistan (SBP) reported a 17.1 percent drop in net Foreign Direct Investment (FDI) in the first eight months (July-Feb) of the fiscal year 2024, amounting to $820.6 million. This is down from $990.2 million during the same period in the previous fiscal year, with a significant outflow of $750.3 million reported. Notably, February 2024 saw a 16 percent increase in net FDI to $131.2 million compared to February 2023, although January experienced a substantial outflow of $173.2 million.

Chinese investment notably plummeted by nearly 83 percent to $80.4 million from $472.4 million the previous year, while Hong Kong’s investment surged by 56 percent to $234.6 million, making up 29 percent of the total FDI. The power sector led with 30 percent of total investment, amounting to $249 million, followed by the oil and gas exploration and financial business sectors.

These trends come amid efforts to bolster foreign exchange reserves in response to a dollar shortage. Despite the establishment of the Special Investment Facilitation Council (SIFC) in June 2023, aimed at creating an enabling environment for both foreign and domestic investments, the desired impact has yet to materialize. The SIFC, comprising high-level civilian and military leaders, was expected to significantly boost investment by identifying opportunities and removing obstacles, but economic growth remains sluggish.

In summary, while there are significant pledges from the UAE and Saudi Arabia, Pakistan’s overall investment scenario remains challenging. The decline in FDI, particularly from key sources like China, underscores the need for more effective measures to attract and retain investment, crucial for sustainable economic growth.

While efforts to improve the ease of doing business in Pakistan have seen some success, significant challenges remain. Despite numerous Memoranda of Understanding (MoUs) and Declarations of Intent from investors in friendly countries, tangible progress has been limited. This underscores the need for an in-depth review at the highest levels of policymaking to identify and address the factors contributing to this stagnation.

The urgency for substantial investments from both domestic and foreign sources is amplified by Pakistan’s stagnant economic growth and rapid population increase. These investments are crucial for stimulating economic activity, creating employment opportunities, and achieving sustainable development.

Several factors contribute to the dismal investment figures. A narrow industrial base, volatile security situation, decades of political instability, and inconsistent policies—often poorly executed—have collectively discouraged both Foreign Direct Investment (FDI) and domestic investment. Additionally, there is a pervasive distrust of modern technology among Pakistani officials, which further hampers progress. This resistance is evident in the clampdown on digital freedoms and the reluctance to adopt renewable energy sources like solar power. Such an approach is counterproductive and does not serve the country’s long-term interests.

While the Prime Minister emphasized plans to promote Information Technology (IT) and Artificial Intelligence (AI) during his UAE visit, the government’s recent actions to restrict the digital space contradict these intentions. To foster innovation and creativity, the government must create an environment conducive to technological advancements.

A favorable investment climate requires a stable political order grounded in the rule of law. Additionally, developing a broad industrial base focused on manufacturing value-added products and embracing future-shaping technologies are essential steps. Policymakers must recognize that embracing modern innovations and ensuring consistent, well-executed policies are crucial for attracting and retaining investments. This, in turn, will drive sustainable economic growth and development.

To foster a conducive investment climate, Pakistan must address the root causes of its current economic stagnation. This involves establishing a stable political order based on the rule of law, developing a broad industrial base for value-added manufacturing, and embracing modern technologies. Consistent and well-executed policies are crucial for attracting and retaining investments, both domestic and foreign. By tackling these issues head-on, Pakistan can create an environment that encourages innovation, supports sustainable economic growth, and secures a prosperous future.