Foreign Direct Investment (FDI) has almost reached next to nothing in Pakistan. The reasons for this are many – from a bad law and order situation to an economy that is down in the dumps. On the other hand, capital is also ‘flying’ away from Pakistan. In fact, this ‘flight’ is nothing new and has gone on for decades. Had that not been the case the Finance Minister would not have admitted, some time back, that Pakistanis have accumulated over $200 billion in banks abroad. Even then, there were periods when the country had political stability and flight of capital slowed substantially while direct foreign investment (DFI) inflows were huge.
The prolonged protests over rigging of the 2013 elections (admitted by all political parties except PML-N and the Election Commission), long-awaited verdicts on a petition questioning the Prime Minister’s integrity and corruption by his government, escalating fiscal mess, and the likelihood of a regime change, have again created instability, which is triggering flight of capital.
Fuel and power shortages and crippling hikes in their price hurt the economy for years, but while incapacities caused by these deficits damaged the country’s risk perception globally and sapped entrepreneurial confidence, the chances of emergence of a regime tough on accountability is now frightening those who have been availing the benefits of weaknesses in the accountability systems.
This scared lot includes politicians, bureaucrats, and businessmen, who worry not just about accountability for sidelining their obligations, but also about securing the wealth they have accumulated illegally. This setting suits those elements who promote flight of capital to safe havens.
According to the Pakistan Bureau of Statistics, during July-September 2014 Pakistan’s trade deficit amounted to $6.5 billion - an increase of 45 percent over its $4.48 billion level in the corresponding period last year - because, while imports jumped up to $12.5 billion compared to their $11.17 billion level last year, exports dropped to $6 billion compared to $6.7 billion last year.
This negative trend hasn’t yet been seen as a warning signal by the Finance Ministry that had forecast exports to rise to $27 billion over their 2013-14 level of $25 billion, and the rupee to stay below Rs. 98 to one US dollar level. More so, in September 2014 alone, trade deficit increased by 102.7 percent - to $2.38 billion compared to its $1.17 billion level in September last year.
Expanding trade deficit isn’t the only worry; the other is the higher load of external debt servicing, courtesy increased external borrowing. Despite increase in inward remittances by Pakistanis abroad, the bludgeoning trade deficit will inflate the current account deficit, which holds out the prospect of defaulting on external debt servicing - something Pakistan cannot afford.
If this trend is not contained, Pakistan could end up with the largest-ever trade deficit - around $26 billion - with grave consequences; large capital outflows for investing abroad could make them worse. Yet, while the fiscal scenario is worsening, amazingly, neither the financial markets’ regulator, nor the ministries of Finance and Information reacted to this campaign.
The political scenario is forcing troubled government ministers to focus excessively on politicking, though government’s prudent reaction to campaigns inducing flight of capital could have manifested good governance, though belatedly, and could have slowed the slide in the government’s reputation for governance; not doing so adds new dimensions to its apathetic profile.
To date, the State Bank of Pakistan (SBP) hasn’t relaxed any of its regulations governing outward foreign remittances. As such, outflow of wealth for investing in ventures abroad can take place only via the “hawala” channel, but by keeping quite on this advertising campaign, the government may end up boosting capital flight via this illegal channel.
For the Finance Ministry, the prudent course was to discuss this issue with the SBP and the Ministries of Information and Economic Affairs, and together prepare a strategy (not be questionable legally) to stop such economy-damaging campaigns, and thereafter ask these ministries to issue appropriate directives to the media based on that strategy.
However, nothing of the sort happened, and the Ministry of Information didn’t issue any directive making it mandatory for the media to obtain its clearance before displaying the advertisement-types in question, though the media now often compromises on its ‘self-proclaimed’ patriotism to earn revenue from advertisements. This is inactivity manifests bad governance yet again.
The route to economic salvation is building an environment wherein people feel secure and so don’t strive for stashing away their wealth abroad. Although ‘safe havens’ will soon become history (even Switzerland is now preparing to give up dealing in black wealth), this shouldn’t lure politicians into believing that their bad governance will now be funded by domestic higher resources.