Foreign direct investment has been constantly falling over the past half decade and the trend, as witnessed at this point of time, is unlikely to be reversed in the near-term.

In the past five months of the current fiscal, outflow of profits and remittances by foreign companies exceeded the capital inflow on account of DFI despite the continuing depreciation of the exchange rate.

While many blame the government for failure to provide enabling environment for domestic and foreign investment, and there is some truth in it, the causes for FDI decline are more deep-seated. It is quite often forgotten that FDI flows into fast growing economies which generate significant business opportunities.

As seen during Mushsrraf’s tenure, FDI did not come when Pakistan was under an IMF programme, nor when the economic growth was sluggish. The FDI inflows hit the peak when the economy was on a high growth trajectory and basically in two areas only: banking and telecommunication.

Much of the foreign direct investment, when financial markets were awash with money, went into major developing economies like China, India and Brazil with a huge middle class.

It is also forgotten that foreign investors watch the trend in domestic private investment to be convinced that it is time to have a fresh look at an economy. Both domestic investment and growth are currently sluggish.

On the international front now, there is a credit crunch with risk-shy banks and financial institutions sitting on hoards of cash. Some foreign banks operating in Pakistan have closed down their subsidiaries and branches, not so much for the lack of business but because of the crisis they faced at home.

An over-stretched international banking system is in for correction and shrinking rapidly. So, foreign banks do not have much appetite to fund investors in ‘alien’ territories. In Pakistan, investment in telecommunications, which expanded rapidly during the previous regime, is also drying up.

With the globalisation under temporary retreat, domestic markets are also undergoing a structural change not dictated as much by state policies as ground realities. Developing countries are building economic muscle through self-reliance to face global challenges on a better footing with the Anglo-Saxon financial model becoming virtually irrelevant, at least for the time being.

In Pakistan, domestic investment trends are changing with the informal sector more vibrant than the formal sector.

While jobs in the formal sector are shrinking, self-employment in the informal sector is rising. According to anecdotal evidence, equity finance is generally preferred by public corporations to bank loans particularly for financing needs of sister firms. Inter-corporate financing is picking on the back of tax incentives for projects funded without bank loans.

While investments in the informal sector are difficult to trace, capital spending in formal sector is surely understated to avoid tax liabilities. Taxation policies, devoid of equity, are losing social sanction.

Those who are looking at traditional investors all the time in sectors like textiles, cement and sugarcane,(sectors whose capacities are under-utilised), they are in for disappointment. After all if jewellery exports have hit a billion dollar market from a mere few millions over past four to five years, it would not happen without some investment.

The share of traditional items in export is falling while that of foreign sales of non-traditional items is rising. Food processing industry is expanding fast and rural incomes are absorbing an increased production of durable goods particularly motorcycles. Better returns on farming have improved and sales of agricultural inputs like tractors, farm implements, fertiliser.

Long-neglected agriculture is gradually moving towards the centre of the national development strategy. What is needed is to accelerate what some people describe as ‘agricultural manufacturing’.

It cannot be denied that many businesses and corporates have excess money which is not being ploughed into productive investment. Instead banks, non-financial institutions , public corporations and individuals prefer to invest in government papers or in a rising stock market.

But this is an international trend and a gift of financial globalisation driven by speculative activity. Financial markets are losing their hitherto hegemonic position in the economy and the transformation is creating a new equilibrium between banking, manufacturing and agriculture.

Banks are shedding their traditional role of intermediation while prospering under state patronage, a position that cannot last long.