Pak business confidence
up despite investment fall

Filed on January 9, 2012

Foreign and domestic investment in Pakistan is seeing a downtrend but business confidence is improving for operations to expand during the current fiscal 2012.

Foreign Direct Investment (FDI) in fy-2011 was $ 1.6 billion down from $ 2.2 billion in fiscal year-2010, State Bank of Pakistan (SBP), the central bank, reported this week. The downtrend is attributed to three international factors including the slowdown in the global economy including low business in Western-US region, EU currency crisis and the trouble in Middle

East North Africa (Mena) region. The domestic problems that afflicted investment were bad governance, the energy crunch, reduction in the public sector development spending due to large defence and administrative expenses, expensive credit, high rate of inflation, poor Law and order and the effects of the war on terror. The decline in investment has been fairly of a broad range, encompassing a number of sectors. The country’s biggest industrial producer job provider, and exporter — textile industry — recorded a steep decline in manufacturing, spinning, ready-to-wear garments and other finished products, primarily owing to acute electricity and natural gas short -age.

Oil and gas sector was hit by limited profits and weak motivation to expand capacity and production at a time when the demand for all of its products is huge. Import of finished and refined products also hit it hard. Investment in construction declined by Rs2 billion n in fiscal year-2011— a reduction for the fourth year running. A continued decline in the real estate market , along with rising bank default by construction sector borrowers has over shadowed the positive impact of post-flood construction activities” of fiscal year-2011, SBP points out.

Except for the financial services and power sectors, a number of other sectors saw a drop in investment. In energy sector oil and natural gas received the largest amount of FDI amounting to $512 million in 2011. Financial services got $ 247 million. Telecoms saw the biggest decline. Its profit repatriation abroad was higher than investment by Rs34 million, down from positive investment of Rs 291 million in 2010.

SBP notes that US was the biggest investor with $239 million. United Arab Emirates was the runner up with $284.2 million, and Britain was the third with $208 million.But, at the same time, a just-conducted survey by Overseas Investors Chamber of Commerce & Industry (OICC&I) cites inflation as “the biggest single reason for decline in business confidence in the last six months, eclipsing all other negative factors including law and order.”

But OICC&I’s survey, called Business Confidence Index (BCI) notes “ a slight stability and improvement in confidence , with inflation being the foremost concern of the business community for the poor business environment.” But there is a plus point. The latest results indicate “ BCI stands at negative 25 per cent—a marginal drop from negative 24 per cent in February 2011. Despite these concerns, BCI is “showing signs of stability and some confidence.”

There is a genuine feel good and confidence-plus sentiment according to BCI. “As many as 69 per cent of all the respondents plan to make capital investment, 64 per cent expect sales to increase, 54 per cent expect profits to rise and 47 per cent are of the opinion that return on investment will go up,” it confirms. The hope is pinned on a growth in the output of the Large Scale Manufacturing (LSM), farming, and oil and gas which are looking up, coupled with a likely reduction in the severity of the energy outages, will help push GDP growth to 3.9 per cent in fiscal year-2012, from 2.4 per cent in fiscal year-2011.

What are the bourses indicating? Karachi Stock Market, the country’s biggest bourse, will move up “once things become clear on the political front. Market is trading at a price to earning ratio of six much attractive than the regional average of 11. It is yielding around 8.5 per cent which stands as one of the highest in the region,” says Ashraf Bava, CFA and CEO of Noel Capital.

What does the future hold? If the current tense relations between US and Pakistan, and domestic political troubles are overcome, it will help attract the domestic and foreign investors. If dynamic policies can be put in place, Pakistan can attract large amounts of foreign investment. “The onus of Pakistan investment environment in the coming year is solely on the shoulders of its economic managers that can formulate a dynamic and progressive policy to overcome the domestic issues that have marred Pakistan’s economic growth,” said Nauman Khan, of Topline Securities.

Views expressed by the author are his own and do not reflect the newspaper’s policy

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