THE New Year beginning tomorrow does not promise to be much different from the outgoing year as far as revival of private investment is concerned.

Analysts agree that investment outlook for 2013 remains negative, and the medium- to long-term prospect of private investment picking
pace depends largely on the government’s ability to tackle security, energy and policy issues.

“I don’t see the overall investment environment undergoing any major change next year. With the new election just round the corner, a lot will depend on the next government as to how seriously it tackles the issues hindering revival of private investment,” says Shahid Zia, a Lahore-based financial analyst.

“The factors — energy shortages, terrorism, volatile exchange rate, etc. — responsible for scaring away the local and foreign investors since 2007 very much remain there as the government has chosen not to address them,” he argued.

Private investment contracted to 7.9 per cent of GDP last financial year from 15.4 per cent in 2006/07, according to the Economic Survey of Pakistan for the last fiscal. Public investment too declined to three per cent of GDP last fiscal from 5.6 per cent in the same period. Thus, the total investment in the economy has dropped to 12.5 per cent from its peak of 22.5 per cent during the period under review. Gross fixed investment also fell sharply to 10.8 per cent from 20.8 per cent.

Additionally, the contribution of investment to GDP growth has become negative since 2008/09, says the survey. Total investment contributed negatively 1.4 per cent to economic growth last fiscal year from 1.3 per cent in 2008/09. No wonder then the economy’s ability to grow and create jobs has adversely been undermined and affected.

“An economy’s ability to expand and create jobs largely hinges on the pace of private investment. If rapid economic growth has to be sustained and new jobs created, focused efforts will have to be made to attract higher level of private investment,” insists Shahid.

Leading economist Hafiz Pasha burst into laughter when asked if he saw chances of revival of private investment in 2013 before saying it depended upon so many things. “It is difficult to say anything. The government will have to surmount the balance of payment crisis, which is likely to become a huge problem in the second half of next year, and stabilise currency. Then, it will need to tackle security issues and energy shortages. If the government coming into power after the new election starts tackling these three issues seriously, we may see the
revival of private investment in next two years,” he says.

He says private investment is at its lowest in years and FDI (foreign direct investment) has collapsed. “Repatriation of profits on (old) foreign investment is more than the inflow of new FDI. We have become net exporter of capital now,” Pasha asserts.

Net FDI has dropped to just $305.6 million in the first five months of the current financial year to November from $419.3 million a year earlier, say economic data of the State Bank of Pakistan. It also shows that repatriation of profit of $326.5 million on FDI has surpassed the net FDI inflow in the first five months of the current fiscal year.

While FDI has dried up and no new large-scale greenfield project has come up in years, there is “silent investment” going in the country that keeps the economy moving forward in spite of very difficult conditions.”

“There is enormous business potential because of massive investment gap. Although the conditions and policy environment is not very investment-friendly, people are still expanding their businesses and setting up new projects,” says Syed Nabeel Hashmi, a leading auto vendor and exporter. He points out that at least 150 new industrial units had become operative in the Sundar Industrial Estate near Lahore alone in the last couple of years. “Both local and foreign companies (like Nestlé ) have invested money in the new projects. I myself have set up another unit. If I have invested Rs200-250 million, it is because I know I will make money by expanding production,” Nabeel says.

He says this silent investment has kept economy moving forward through all these years, adding the government could help revival of private investment at a greater pace by making its policies and the country investor-friendly. “I have friends whose efforts to bring foreign investment to Pakistan were thwarted by strange rules invented by the bureaucracy like seeking security clearance of foreign businessmen from the interior ministry. If you want to attract investment, you will have to become an investor-friendly country. Such rules give the contrary image about Pakistan as a investor-unfriendly country,” he argues.

But the argument of ‘silent investment’ fails to impress Naved Hamid, leading development economist teaching at the Lahore School of Economics. “There are always investment opportunities (even in the worst of times), as well as people willing to try their luck. But you cannot generalise them. If, for example, Packages has successfully roped in a foreign investor willing to invest in its paper mill (in Kasur) it doesn’t mean that the entire sector has suddenly generated new investment opportunities. It is a one-off deal and you cannot generalise it to the entire sector or the economy,” he argues. “If you look at the aggregate, he says, you wouldn’t see a change (in the investment climate)”.
Like Pasha, he too doesn’t see revival of private investment in the near term.

“With the large-scale industry — textiles, cars, cement, etc. — having idle capacity due to electricity and gas shortages, who will want to invest in the manufacturing? But if the government returning to power after election is capable of overcoming energy shortages, sorting out terrorism problem and providing cheaper credit to investors, we may see the revival of investment by the end of 2014,” Naved says.