Decline in FDI a reflection of world’s faith in Army?

Corps CommandersForeign Direct Investment (FDI) appears to be in free fall, down over 14 pc. Even inflows from China, supposedly our great hope, are dragging.This is serious economic crisis as the FDI has been falling for years. During the previous cycle, FDI declined by 58 pc. That this negative trend is continuing even after the $46 billion CPEC agreement was signed is extremely worrying, especially since Chinese investments are also declining. All signs point to global investors seeing Pakistan as a risk not worth taking. The question we must be asking is why?

Sticking to his script, Imran Khan has blamed corruption, particularly referring to the Sharifs involvement in the Panama Papers scandal. However, the PTI chief may be half-right. Fears of corruption may be a factor, but it is not likely to be because of the Sharifs simply because they have faced corruption charges since long before coming to power in 2013. Any investors would have been able to factor the costs of doing business with the Sharifs. What is it then? It could be the Army.

Earlier this year, Gen Raheel removed six Army officers including 2 generals for corruption. This was actually not a surprise. Recently, Auditor General of Pakistan discovered billions being lost to corruption in the defence sector. Last year, 81 officers were found guilty of stealing billions more. Former COAS Gen Musharraf is well known to have billions in unaccounted for funds, and now his replacement former COAS Gen Kayani is finding his family embroiled in another corruption scandal along with other former senior military officers.

A corruption investigation has looked into senior retired officers, including relatives of the army’s former chief Ashfaq Parvez Kayani, who for many years was the most powerful figure in the country.

Also under examination are three former managers of the Defence Housing Authority (DHA), a wing of the army that builds developments to house senior retired officers and also makes enormous profits selling homes to civilians.

Army has usurped more and more power in the country. While carefully avoiding a coup, the military has been placing its own men in civilian positions, and working to seize control of CPEC, the most important economic project the country has even seen. Admitting this, how can we ignore the frightening possibility that growing unwillingness of global investors to do business in Pakistan is a direct reflection of their lack of faith in a state that is being controlled behind the scenes by the military establishment?

Army has expanded its reach into every corner of the state, and is now the single most powerful institution not only in national security but the economy also. As the saying goes, “with great power comes great responsibility”. If the Army wants the power to dictate the country’s terms, it has to take responsibility for the country’s failures.

Economic Consequences

In its editorial of Wednesday, ‘Change of tone‘, Daily Times makes an important point that is not getting enough attention in the latest round of anti-American fist-waving. What is the economic impact of this behaviour?

The cost of the downward spiral in US-Pakistan relations has already sent shock waves through the economy. The stock exchange plunged amidst fears of a breakdown in relations, the rupee floated to around 90 to the dollar, partly because of the ‘dollarisation’ currently underway amidst fears for the future. These negative signals should give pause to all stakeholders to reconsider their fiercest belligerence against the US. We may not like much of what Washington does or even how it does it. But it is not only the US that has constraints so long as it is engaged in Afghanistan. We too have considerations to weigh, first and foremost the struggling economy and the future of a rescue sans US aid and goodwill.

Leaving aside for the moment the unquestionable foolishness of thinking we can defeat an American attack*, we need to consider what impact this anti-American drum beat is already having on our nation.

Yes, Hamid Gul and Ansar Abbasi are crowing about ‘national unity’ behind hating America; and Imran Khan calls for officials to refuse US aid from his sprawling Bani Gala mansion; and self-appointed patriots blog from their AC apartments in Dubai about how cutting ties with the Americans will magically revive the Mughal Empire.

But let’s set aside fantasy fiction and for a moment. Even if Pakistan refuses the billions in aid provided by the US, what about the $5 billion in trade between the US and Pakistan? Are we ready to give that up as well? What about the $1.8 billion in remittances that were received from Pakistanis working in America? Do we expect American companies to look kindly on Pakistani job applicants if we declare war on them? American aid might be ‘peanuts’, but a billion here, a billion there – pretty soon you’re talking about real money!

I know, I know. The cost of war greatly outweighs the meager sum we receive from the Americans. The security situation in Pakistan now is scaring away investors. Who is going to invest in Pakistan once the Americans are gone? Oh, yes, China. But actually, China only accounted for 4.4 per cent of exports last year compared to America’s 15.9 per cent. And even though American aid to Pakistan is ‘peanuts’, Chinese aid amounts to only 3 per cent of those peanuts. Just shells, really.

I know that we are all frustrated. We’re sick of the bloody war and would like an easy solution with a clear villain to blame. But the situation is much more complex than that, and we need to be realistic about the consequences of our actions. The Daily Times is spot on:

Emotion may be cathartic, but it is rarely a good substitute for calm, considered policy, especially in the delicate position Pakistan is placed in, and the fact that the country the gung-ho amongst us want to take on is the sole superpower in today’s world. Not only should the current furore be cooled, diplomatic efforts must find ways to continue to enjoy, if not the goodwill and friendship, at least the tolerance of the US. Any other path will damage Pakistan immeasurably.

If you want to know the alternative, just look at how Afghanistan ended up.

*Spare me the comparisons of an American-Pakistani stand-off to Battle of Badr, please. I know my history, and I also know that the kafirs in 7th century Arabia did not have F-117A Nighthawk stealth aircraft armed with GBU-27 laser guided bunker buster bombs and submarine launched inter-continental ballistic missiles.

How anti-Americanism hurts the economy

Pakistan RupeesOn Saturday, Business Recorder noted that Securities and Exchange Commission of Pakistan (SECP) has registered 21 companies having foreign investment during May.

These companies have investment by foreign nationals from the U.K.,China, Canada, Denmark, South Korea, Romania, Russia, Turkey, Jordan, Norway, the Netherlands, Singapore and Afghanistan.

Notice anything missing from the list? How about the largest economy in the world – the United States of America?

That’s not to say Americans are not investing in Pakistan. BBC recently spoke to Muzaffar Khakwani, who grows mangoes in the southern part of Punjab, about how American investment is helping his business.

“The US assistance in this area has gone primarily into education of mango farmers like me,” Mr Khakwani says. “How to grow better mangoes in terms of quality and yield, how to market our mangoes better, and also into trying to create the conditions to increase exports of our mangoes.”

He says the Americans have contributed to the building of a processing facility on his farm.

“I guess the idea is that because southern Punjab has had problems with militancy, if they invest here it will become prosperous and the money will trickle down to the poor so they won’t become militants,” says Mr Khakwani.

This is not private investment, though – it is US aid. Actually, the US government continues to invest heavily in Pakistan despite anti-American sentiments. Obviously part of this must be because the US wants to show that it is also an ‘all-weather friend’ and will continue to invest in Pakistan even when times are tense between the two countries. But this shows exactly the type of economic self-sufficiency that can grow in Pakistan if it is watered with a little investment. So, why are we seeing so much government aid and so little private investment?

One issue that is keeping private investment away is the security situation. This was stated clearly by Ambassador of Belgium to Pakistan Hans Christian.

He stressed the need that Pakistani High Commission in Brussels should take measures for the promotion of Pakistani products. He pointed out that although the Pakistan is a business-conducive country unfortunately due to the terrorist activities the foreign investors in general and Belgian Investors in particular are reluctant to invest in Pakistan. He further pointed out that not even a single Belgian company is in operation in Pakistan.

Unlike Belgium, American companies are investing in Pakistan, but not as much as they could be. An article from USA Today notes that US companies were holding on to $837 billion in cash. That’s larger than the GDP of Saudi Arabia.

But why would American companies use any more of their capital to invest in a country where news reports regularly show images of crowds burning their flag and blaming them for every single one of the world’s ills?

President Zardari has repeatedly called for ‘trade not aid’ to solve Pakistan’s economic crisis. This is one part of a correct approach to breaking the cycle of dependency on foreign aid. Another part is convincing foreign investors to place their capital in Pakistan’s own companies. Finance Minister Dr Hafeez Shaikh invited the American private sector to invest in Pakistan’s energy sector earlier this year. If this invitation is to prevail, we need to show the Americans that they will be dealt with fairly. This does not mean playing a subservient role or selling the nation for aid or investment. But it does mean being able to act without being pressurised by media or political personalities who sing a tune of anti-Americanism to raise their own profiles. Anti-Americanism doesn’t hurt America. It is only hurting ourselves.