Why US investors are shy of Pakistan?
In October last year the American Business Council – the representative body of US investors in Pakistan - released its biennial survey. The survey reported that 95 percent of its respondents were optimistic about long term economic and operating climate in Pakistan. The optimism doesn’t sound too surprising considering that 2017 saw US investors in Pakistan making a return of 31 percent on their investments, the highest return since 1990. One’s got to be optimistic after such a return.
That return - crudely measured as annual income divided by investment on historical cost basis – was not only highest in recent memory; it was also the highest in South Asia region. The data released by the US Bureau of Economic Analysis (BEA) show that US FDI investors in Pakistan have been enjoying a phenomenal return between 2001-2017, averaging about 21 percent per year as against as against 13 percent and 16 percent in India and China respectively.
Despite such lucrative returns, however, US FDI in Pakistan has been consistently falling over the last ten years, and that gap, as BR Research has highlighted earlier, is being increasingly filled by Chinese investors thanks to the CPEC. In relative terms, US FDI in Pakistan (measured by BEA data for consistency sake) during 2010-2017 was about 0.09 percent of the GDP, whereas that in India and China was 0.87 percent and 0.44 percent of their respective national outputs. This begs the question why are US investors shy of Pakistan, when in fact they were once key players in the country?
Most people interviewed for this piece provide three main explanations for the falling US FDI. ‘The cost of doing business in Pakistan is very high’; ‘this country has political instability and inconsistency of economic policies’; ‘taxation system is fraught with problems’. But these answers are difficult to agree with.
India for instance didn’t boast great Doing Business scores until recently when it has seen some improvement; yet it had continued to attract FDI from the US and elsewhere. Political instability and inconsistency of economic policies is also not stranger to Pakistan. The decade of the 90s – also known as Pakistan’s lost decade - is famous for musical chairs in the parliament, and ensuing uncertainty over economic policies. Even though the 90s yielded lowest returns to US investors in roughly the last four decades, US FDI in Pakistan during the period had grown compared to the previous decade.
A more plausible answer is that the conventional sectors that US companies had invested in Pakistan are not lucrative anymore for a variety of reasons. Banking, for instance, had become saturated, especially in the aftermath of 2008 financial crisis that led to contraction in US banking investments from Pakistan and many other countries. Or the easing of oil prices that lopped off the incentives to invest in Pakistan’s oil and gas sector. Likewise, the pharma sector, where drug pricing control irked many players.
Be that as it may, one would imagine that nothing prevents the US from tapping many other lucrative sectors that offer an upside potential. Apparently, that is a misplaced notion. After sitting on the fence for so long, US players now complain that ‘they are not being given a fair chance’ in so far as their ‘role’ in the CPEC is concerned.
On the face of it they might not have any role; after the entire lesson from the west itself is that ‘he who has the money calls the shots’. But industry sources say that some American firms are getting increasing number of contracts mainly in construction, IT and power industries. They don’t have the biggest portion of the pie; but they are getting some business on the periphery mostly through indenting rather than FDI, although it’s difficult to put a number to it.
Pakistan needs Chinese investments and given the geo-political affairs it should continue to give incentives to Chinese players. But at the same time, it should not entirely shelve the idea of diversification. To that end, boosting the country’s image critical. Unlike CPEC, which is a state-pushed outlay agenda, investments in the Anglo-Saxon world are led by the private sector, whose boards are influenced by the kind of headlines a country makes. Unfortunately, Pakistan is not even the second headline in global affairs unless it’s for some law and order concern. About time to put soft image promotions high on the agenda!
