- By: Aziz ullah khan
- The writer is the MS Economics scholar at the institute of management sciences Peshawar:
Foreign direct investment plays a very important role in the economic development of any nation. It’s a crucial source of capital for investment in developing countries.
Foreign investment enhances economic development, fosters prosperity, and creates employment opportunities. Unfortunately, the inflow of foreign investment into Pakistan has not been satisfactory. Foreign direct investment inflow was approximately $2.6 billion in the fiscal year 2022, which reduced to $2.5 billion dollars in fiscal year 2023 (State bank of Pakistan).
In an effort to enhance foreign direct investment and create peaceful and investor- friendly environment, the government of Pakistan established the Special Investment Facilitation Council (SIFC). The primary aim of SIFC is to increase the FDI inflow in five key sectors: defense, minerals, information technology, energy, and agriculture. The overarching objective of SIFC is to increase the FDI level to US $100 billion dollars.
There are several factors which effect the FDI.
- Political instability:
Political stability is the most important factor to attract foreign direct investment to a country. However, since its independent, Pakistan has grappled with the challenge of political instability. Political chaos has led to over 30 years of military rule, with no civilian government complete its full tenure.
The frequent change in governments and unstable government policies have discourage foreign investors from considering Pakistan as an investment destination. Furthermore, the unfair election system in Pakistan exacerbates political instability. Therefore, it is imperative to maintain political stability in the country to attract foreign investors.
- Terrorism:
Terrorism has adversely affected the Pakistani economy. After the 9/11 attacks, terrorism became a global issue. The 9/11 attacks threatened the global economy and had adverse effects worldwide. The intensity of terrorism and its negative effects on developing countries are larger than those on developed countries. Pakistan’s economy also suffered after 9/11. Involvement in the war against terrorism has led Pakistan to pay a great price in terms of economic, social, and human losses, and it has lost the confidence of foreign investors. Several terrorist attacks on foreign workers in Pakistan have created trouble for foreign investors. Due to the rapid growth in terrorist activities, both local and foreign investors feel insecure. The insecure environment has changed the behavior of foreign investors, leading them to decide to withdraw their capital from Pakistan.
- Bureaucracy Red Tape:
The domestic administrative structure plays a crucial role in attracting foreign direct investment. Bureaucratic quality stands out as one of the key indicators of the domestic administrative structure, which provides collective goods such as a suitable business environment, assistance, regulations, obstacles to entering industries, and adequate infrastructure.
Unfortunately, Pakistan’s bureaucratic system creates numerous hurdles for investors. Excessive regulations, permits, and licenses can significantly delay and complicate the investment process, thereby discouraging foreign investors. Bureaucratic corruption can further exacerbate the situation by leading to demands for bribes, favors, and other forms of corruption, thus increasing the cost and risk of investment. Moreover, slow and ineffective decision-making processes can further delay investments, causing opportunities to be missed for foreign investors.
To attract foreign investment, it’s essential to streamline bureaucracy, promote transparency, and implement efficient and consistent regulations that facilitate investment and foster economic growth.
- Infrastructure Deficiencies:
Infrastructure is a fundamental requirement for the functioning of any nation. It encompasses communications, highways, roads, ports, transportation, and other essential components. In today’s modern era, we rely on roads to transport goods, electricity to power our homes and industries, and ports and airports to export our industrial products to foreign trade partners. The lack of proper infrastructure leads to chaos and disorder in our lives.
Pakistan’s infrastructure situation is relatively poor by international standards, and this has a significant impact on the lives of every Pakistani in the country. According to the Global Competitive Index, Pakistan ranks 110 out of 140 countries in terms of the quality of overall infrastructure. Due to the weak infrastructure system, foreign investors face high costs of doing business, including high transportation costs and electricity bills.
To attract foreign direct investment, Pakistan should prioritize providing proper infrastructure to facilitate investors and reduce the cost of doing business.
- Macroeconomic instability:
Macroeconomic instability in Pakistan can significantly impact foreign direct investment inflows into the country. Several factors contribute to macroeconomic instability Fluctuations, including high inflation rates, volatile exchange rates, and fiscal deficits.
- Inflation: A high inflation rate erodes the purchasing power of consumers and increases uncertainty for businesses. Foreign investors may hesitate to invest in an economy with unpredictable inflation as it affects their returns and operational costs.
- Volatile exchange rates: in the exchange rate can create uncertainty for foreign investors. A depreciating currency can increase the cost of imports and debt servicing for foreign firms, while an appreciating currency can reduce the competitiveness of exports.
- Fiscal deficit: A fiscal deficit occurs when a government’s total expenditure exceeds its total revenue, resulting in increased borrowing and debt. A high fiscal deficit can lead to macroeconomic instability, inflation, and currency devaluation, making it less attractive for foreign investors.
- Conclusion:
Policies of host countries have an important influence on foreign investment decisions. Host countries can adopt policies of stimulating foreign investment or the can restrict foreign participation in their economies in various ways. It is evident that Pakistan faces multifaceted challenges in attracting foreign direct investment (FDI). From macroeconomic instability to political instability, terrorism, bureaucratic hurdles, and infrastructure deficiencies, each factor presents formidable barriers to investment.
However, recognizing these challenges is the first step towards addressing them. Efforts to maintain political stability, combat terrorism, streamline bureaucracy, and improve infrastructure are essential for creating an environment conducive to foreign investment.
The establishment of initiatives such as the Special Investment Facilitation Council (SIFC) is a positive step in this direction. By prioritizing these reforms and fostering a business-friendly environment, Pakistan can unlock its potential for economic growth and attract the foreign investment needed to drive development and prosperity for its people.