FeaturedNationalVOLUME 19 ISSUE # 3

SIFC and the inflow of FDI

According to media reports, caretaker Prime Minister Anwarul Haq Kakakar used the opportunity of his attendance at the COP global summit hosted by the UAE to sign multi-billion dollar memoranda of understanding (MoUs).

A post by the Prime Minister’s office noted that “the MoUs will unlock billions of dollars of investment in several sectors, including energy, information technology, manpower, mineral exploration, food security and defence, from the UAE and Kuwait to Pakistan and will help realise various initiatives envisioned under SIFC.”

There is little doubt that FDI plays a vital role in accelerating economic growth and job creation in the host country, and the efforts being made by the incumbent government are commendable. FDI is acknowledged as a crucial catalyst for economic development, especially in emerging economies. With FDI come badly needed funds, new technologies and business knowhow and entrepreneurship.

In the past FDI, although in small quantities, has played a critical role in driving Pakistan’s economic development. According to the State Bank of Pakistan, FDI inflows saw a significant increase of 137% in the fiscal year 2020-21, amounting to $2.78 billion, impacting key sectors like energy, telecommunications, and construction. Our study aims to provide empirical evidence of the relationship between FDI and economic growth in Pakistan. We analyzed data spanning two decades, from 1996 to 2022, and examined the impact of FDI on Gross Domestic Product (GDP), while also considering various other factors such as political stability, terrorism, and trade openness. A recent study shows that FDI had a favorable influence on economic growth in Pakistan, particularly when coupled with liberalized trade policies.

But the problem is not in the approach or concept. The basic issue is the actual realization of the objective and translating MOUs and agreements into reality. Unfortunately, our past experience in this regard is not very happy. We signed scores of memos and accords but, with a few exceptions, few of them saw the light of day

Many times in the past we signed non-binding MoUs which were not translated into binding contracts with international partners which resulted in our discomfiture in the international arbitration court as in the case of Reko Diq. Another example is our failure to correctly evaluate the impact of the signed contract on the general public as in the case of energy contracts which has led to the unaffordable electricity tariffs we are suffering from today.

Let us be honest and admit that investors do not find Pakistan an attractive destination for many reasons, including lack of political and economic stability. That is why actual inflows have remained far below the figures mentioned in the MOUs. In contrast, India with stable macroeconomic indicators has done much better. Even Bangladesh and other Asian countries.

According to experts, Pakistan does not offer a very conducive environment for investors. The security situation has improved but remains volatile. Dispute resolution processes are lengthy, enforcement of intellectual property rights (IPR) is weak, taxation is vague and inconsistent, and regulations vary from province to province.

It is also reported that foreign investors have reservations about Pakistani law of arbitration in Pakistan and some Gulf Cooperation Council (GCC) states have expressed their lack of trust in domestic dispute resolution mechanism in recent negotiations on Bilateral Investment Treaties (BIT) and indicated that they will not sign on the dotted line without the clause to allow for international arbitration.

It is no secret that the legal system in Pakistan is cumbersome and inefficient. The heavy backlog of cases causes contract disputes to linger in the courts for years, resulting in substantial financial losses and discouraging potential investors. The sluggish pace of justice discourages businesses from investing here. Needless to say, failure to enforce contracts erodes investors’ confidence and makes Pakistan a less appealing destination for potential investors.

All these issues must be addressed quickly and comprehensively if we are looking to attract more FDI. It is important to note here that as part of its efforts to smoothen the way for FDI, the Pakistani government updated its National Climate Change Policy and National Wildlife Policy in 2021, which address issues in water, agriculture, forestry, coastal areas, biodiversity, and vulnerable ecosystems. Pakistan also introduced the 2020-2023 National Energy Efficiency Strategic Plan, the 2020-2025 National Electric Vehicle Policy for 2-3 Wheelers and Commercial Vehicles, and the Alternative and Renewable Energy Policy in 2019.

There are many other factors affecting the inflow of FDI. One cannot emphasise too much the importance of creating a supportive environment for foreign investment, including open trade policies, political stability, and effective measures to combat terrorism. No doubt, the SIFC provides an ideal platform for foreign inflows but unless the existing red tape and bureaucratic impediments are removed, the initiative may not yield the desired results.