Pakistan FDI and Portfolio Investment

Pakistan FDI and Portfolio Investment

Without a doubt, the tone of foreign investment in Pakistan's economy has been reset by President Pervez Musharraf's willingness to act as an ally to America in that country's "war on terror." American President Bush and Musharraf have reaffirmed the obligation to strengthen financial bonds between the two countries as their political bonds have been twined together after the terrorist attacks of September 11, 2001.

When President George W. Bush and President Pervez Musharraf met in New York on September 22, 2004 they reaffirmed their commitment to widening and strengthening the American-Pakistan economic relationship in staying in line with the concepts and goals agreed to in their meeting at Camp David in June last year.

According to the Weekly Compilation of Presidential Documents, "The two Presidents reviewed progress in the global war on terror, and pledged to continue working together, ensuring that the appropriate resources are available. President Bush expressed appreciation for Pakistan's efforts in this area. They also welcomed the progress of the Joint Working Group on Terrorism and law Enforcement and agreed to further strengthen bilateral cooperation in this regard.

President Musharraf highlighted the need for addressing the underlying causes that have given rise to disaffection and frustration in the Islamic world. In this connection, he recalled his concept of Enlightened Moderation which envisages cooperation of the United States and other leading world powers in finding solutions to long standing issues that affect the Muslim world." (Weekly Compilation, 2004)

To a large degree, this means opening up the Muslim world to foreign investment, starting with America's newest ally in the region, Pakistan. The consensus of the presidents was that economic inequity breeds hatred and violence, so one of the critical manners in which to slow the spread of terror is through economic cooperation and, from America's end, assistance to Pakistan.

Musharraf and Bush also reiterated their cooperation to stop the spread of weapons of mass destruction, and committed to sustain full efforts towards this end.

Most importantly, the two leaders discussed the importance of building security and prosperity in the region. They noted the urgency of maintaining a safe environment for fair elections in Afghanistan and President Bush thanked President Musharraf for his efforts in support of out-of-country voting in Pakistan.

On a direct economic agenda, "President Bush noted the significant economic progress that Pakistan has made in recent years, and reaffirmed U.S. support for Pakistan's efforts to sustain reform and growth. He reiterated the U.S. Administration pledge of $3 billion over five years to help in important areas such as security and the social sector. President Musharraf expressed appreciation for U.S. support to Pakistan's social sector, economic development and poverty reduction programs." (Weekly Compilation, 2004)

The two presidents reiterated their commitment to further expand bilateral trade and investment, which essentially forms the topic of this paper.

Finally, President Musharraf repeated his focus on democracy and his intent to strengthen the country's democratic institutions and bring sustainable democracy to Pakistan.

In return for Pakistan's march towards democracy and help in the war against terror, President Bush once again emphasized the long-term U, S. commitment to Pakistan and to the region. President Musharraf expressed appreciation for the close collaboration between the two countries. Both Presidents agreed to further expand and deepen bilateral relations to the mutual benefit of the two countries.

This accord creates much of the background of and fertile fields for FDI and portfolio investment in Pakistan in the years to come. This accord comes after literally decades of disappointment with regard to the manner in which Pakistan has progressed economically on a global scale.

The future was a lot brighter, for instance, in 1990, when experts were urging further investment in Pakistan from foreign private sectors. McQueen's research in 1990 demonstrates just how little progress has been made.

McQueen noted in 1990 that, "Pakistan has had consistent growth averaging 6.7% over the last decade, placing it among the fast-growing third-world economies. Some apprehension exists regarding deterioration in the law and order situation in Sindh Province, where in recent months ethnic and politically motivated violence has claimed a number of lives and slowed industrial activity. Regionalism, ethnic violence, and political uncertainty cloud the economic outlook, but many analysts are sanguine.

Pakistan's economy continues to be dominated by agriculture and agro-based industries. Agriculture employs 50% of the labor force in Pakistan, earns (directly or indirectly) approximately 70% to GDP. Industry contributes apporximately 20% to GDP and has become increasingly important to the country's development and export potential. The public sector share in Pakistani industry has diminished over recent years, and in fiscal year 1986, accounted for less than 20% of total fixed capital formation. Pakistan's industrial growth is supported by substantial imports of raw materials, intermediate inputs, and machinery." (McQueen, 1990)

When McQueen did her research, principal U.S. exports to Pakistan were soybean oil, wheat, tallow, machinery, transportation equipment (including aircraft and parts), chemicals, and phosphatic fertilizers. (McQueen, 1990)

According to Pakistani sources, aid disbursements increased some 40% in fiscal year 1988-89 to $2,551 million. (McQueen, 199) The World Bank, IDA, Asian Development Bank, Japan, and the United States were the chief donors, as expected given the history of the era.

In fact, at the time, the United States planned to authorize several billion dollars to Pakistan in military and economic aid over the next several years. The military aid made its way to Pakistan, but very little economic aid did. This was catastrophic for Pakistan since many USAID-funded projects provide opportunities for the sale of American goods and services, while the commodity import program may be used to finance many imports from the United States. USAID projects are concentrated in the energy, agriculture, and social services sectors, reflecting the Government of Pakistan's development priorities.

McQueen wrote, "High tariffs and taxes, limits on technical assistance fees, and royalty payments can diminish the competitiveness of certain U.S. products, but American embassy analysts say good opportunities exist now for increased sales in the following fields: electric power generation, computers and related equipment, textile and leather machinery, scientific instruments, security and safety equipment, food processing and packaging equipment, medical machinery, oil and gas field machinery, transport equipment and pumps, valves, and compressors. There also are opportunities for service companies in project feasibility studies, energy, communications, transportation, and engineering and design services." (McQueen, 1990)