Foreign direct investments in Pakistan declined by 54.6%, past seven months of the fiscal year with investments falling to only $1.18 billion, State Bank of Pakistan confirmed today.

According to State Bank Of Pakistan the FDI flow into the state during July to November period of this fiscal year fell by 54% but when combined with portfolio investment reported a decline was 25.6%.

State Bank in an email stated, “investments have fallen to $1.18 billion from $2.59 billion a year earlier. Global funds bought $290.7 million more Pakistani stocks than they sold in the seven months, compared with net sales of $355.8 million a year ago.”

In Geneva on 19 January 2009 , Global foreign direct investment (FDI) inflows were estimated to fall by 21% in 2008 to an estimated $1.4 trillion, and were estimated to further decline in 2009.

Political instability, terrorist attacks, power, gas and water shortage and weak law order control has led to falling trend in FDI. These are the major reasons due to which the foreign investors are not interested in investing their capital in Pakistan.

Pakistani firms are unable to sign agreement with foreign investors due to the prevailing abysmal law and order situation.

According to economists, “although the global economic meltdown was also a reason of slow growth in FDI, the domestic shocks were major contributors in the declining trend of FDI. November was the third consecutive month in which the country posted decline in foreign direct investment. We were expecting some increase in the FDI during the current fiscal year ahead of positive economic indicators. The ongoing war in the northern areas and suicide attacks in different cities had restricted the foreign buyers from new investment in Pakistan.”

The State Bank of Pakistan (SBP) on has said, “FDI had posted a decline of 52.2 percent during July-November period of current fiscal year. Although, some increase was registered in portfolio investment in the first five months of current fiscal year, FDI still remained on decline.”

FDI reduced to $774 million during July-November of current fiscal year in last fiscal year it was $1.62 billion, depicting a decrease of 846.7 million dollars. Portfolio investment have reached to $311.3 million in July-November of fiscal year 2010. In 2009 it was 162.9 million dollars. The government expects gross domestic product will grow 3.3 percent this fiscal year.

Current global economic recession, and falling profits have caused many companies to cut capital expenditures and reduce FDI. This economic crisis has affected every region with varying geographical impacts. This crisis originated in developed countries and their major effects on the developing world have been indirect up till now which has affected FDI flow.

The share of foreign direct investment, flowing into Pakistan, is negligible when compared to the opportunities and economic fundamentals of the country. The FDI inflow into the country is less than one per cent of its total, made globally. Since 1996, when received highest amount, FDI in Pakistan has been experiencing a declining trend.

According to UNCTAD, “all experienced sharp foreign direct investment declines, except for the Netherlands and China. The overall environment for international investment is slowly improving. As a consequence, it expects global FDI flows will rebound modestly in 2010. The economists say improving conditions will ultimately encourage companies to invest more in foreign countries this year, prompting a stronger recovery in 2011.”

To emerge as a promising nation Pakistan has to provide conductive environment for external economic flows.

Foreign direct investment (FDI) in Pakistan is a major external source to meet obligations of resource gap, human resource development and goal achievement. The FDI has played a vital role in the economic growth of Pakistan.

Due slowing remittences from overseas and weakening of rupee, Pakistan foreign exchange reserves declined to $14.48 billion in the week ending on Feb. 6 from $14.52 billion the previous week, State Bank of Pakistan official was quoted saying today.

Earlier this week State Bank had reported remittances were declining every month since October 2009 and the overseas Pakistanis sent $758.2 million in October, $742 million in November, $698.4 million in December and $667.9 million in Jan, 2010.

Reserves held by the State Bank of Pakistan fell to $10.70 billion from $10.72 billion a week earlier, while those held by commercial banks eased to $3.78 billion from $3.80 billion the previous week.

Pakistan’s foreign reserves hit a record high of $16.5 billion in October 2007 but fell steadily to $6.6 billion by November 2008, largely because of a soaring import bill.

An International Monetary Fund emergency loan package of $7.6 billion agreed in November 2008 helped avert a balance of payments crisis and shore up reserves.

The IMF increased the loan to $11.3 billion in July and the central bank received a fourth tranche of $1.2 billion on Dec. 28.

According to an article in Dollars Magazine, gap in the price of dollar between open market and the inter-bank has widened during this period and is still expanding despite the efforts made by the State Bank to control it.

Reminding the world that Pakistan is facing serious economic challenges, a senior International Monetary Fund official urged enhanced support for the country, a critical anti-terrorism partner in the region.

“Pakistan’s efforts need a much greater financial support from the international community,” Adnan Mazarei, the Fund’s Mission Chief to Pakistan, said.

He spoke to reporters following IMF’s approval last week’of a $1.2 billion tranche of $ 11.3 billion stand-by arrangement for Pakistan. The approval came as the Fund completed a review of the economic performance of Pakistan, marked by encouraging macro economic stabilization signs and structural tax reforms.

But IMF official claimed that Pakistan needs to cut some development and non-development spending and boost revenue collection. Mazarei said that uncertainties about the government’s financing needs are limiting the central bank’s ability to lower interest rates.

Pakistan, the second biggest South Asian economy, made some difficult decisions on tax reforms and considerably reduced inflation this year, while also continuing a high-stakes fight against Taliban and al Qaeda militants along the 1600-mile long porous Afghan border.

According to Finance Minister Shaukat Tarin, Pakistan’s ongoing fight against militancy is costing the country around $ 8.5 billion a year.

In the conference call, Mazarei particularly reminded the major economic powers of the need to step up realization of more than $ 5 billion pledges they made at Tokyo conference earlier this year.

“International donors need to disburse pledges they made to Pakistan in the April Tokyo Conference. They need to do so promptly because these disbursements are meant to finance much-needed investments in infrastructure, health, education (fields),” he stated.

Mazarei, who is Assistant Director in the Middle East and Central Asia Department at the Fund, noted while Pakistan still faces significant economic challenges, it has done pretty well by keeping things on track in various sectors of the economy – bolstering foreign exchange reserves and curbing inflation down to 10 percent from a high of 25 percent.

Mazarei said  “as inflation continues to decline, monetary policy could become more flexible and allow interest rates to come down further.”

IMF loan requires Pakistan to lower its budget deficit for the fiscal year ending June 2010 to 4.9% of GDP.

The government has to cut spending on some development projects that were meant to be financed by donor assistance, Mazarei said.