Foreign Direct Investment in Pakistan: Policy Issues and Operational Implications

Given its fragile balance of payments position and urgent need to boost industrial production, Pakistan needs to significantly increase its mobilization of foreign resources. However, long-term official assistance will become increasingly scarce, while promoting large portfolio investments is not a proper policy option due to Pakistan's underdeveloped and narrow capital market. Significant increases in commercial borrowings are also not desirable. It is therefore crucial to accord high priority to foreign direct investment (FDI).

Previous inflows of FDI in Pakistan were meager, accounting for only 0.2% of the world total and less than one percent of the Asian subtotal each year in the 1990s. Among the major impediments are urban violence, inconsistent economic policies, and government bureaucracy. Remedial policy actions are essential. Another major problem is the concentration of FDI on the power sector, a domestic-oriented sector, which results in large foreign exchange costs and remittances. This has serious balance of payments implications.

Lessons learned from the Pakistan experience are: developing economies should attach short-term priority to attracting FDI to the foreign exchange earning sector, or, at least, both the foreign exchange earning sector and other sectors simultaneously. Multilateral development organizations, including the Asian Development Bank, should also take this into account in their private sector operations, particularly the build-own-transfer type, to develop economic infrastructures in developing economies.