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Pakistan FDI dips 21pc, inflation up to 9.5 pc PDF Print E-mail
Thursday, 24 April 2008

Foreign investment fell by 21 per cent in the last nine months, but the most important factor was the dominance of services sector which remained over 60 per cent of the total foreign direct investment (FDI), State Bank data showed on Monday, report agencies.

Analysts said that domination of services sector in foreign inflows means less-productive activities and higher outflows. Despite a troubled year, the country received Foreign Direct Investment (FDI) to the tune of $2.905 billion (without privatisation proceeds) during July-March 2008, which was 21 per cent less than the corresponding year of last year. The services sector contribution was about $1.743 billion.

In this sector, communications (especially telecommunications) and financial services remained a dominant force. The communications sector contributed $923 million during the period while financial sector made an investment of $685.5 million.

It gives a clear picture that the foreign inflows were not making contribution to the productivity of the country. “The services sector investment means investment would make more money and the outflows will continue to rise with accumulation of foreign investment in the services sector,” said a researcher, Abid Saleem.

Earlier, reports suggested that dividends and profit outflow from Pakistan have started soaring and could cross over 1.3 billion by the end of this fiscal. “At this time while the country is facing a huge trade deficit of over $14 billion in nine months, the rising outflow of dollars from the country will only add to the burden of the country,” said another analyst.

The trade deficit has gone beyond the total exports during this period. For the last five years, the country has been facing the same phenomenon and the production or industrial sector received very little foreign investment, almost ignorable. However, no effort was made to analyse the situation.

The previous government took credit of attracting foreign investment, but the continued inflows in this sector show that the inflows in the services sector were irrelevant to the government. “The investment in telecommunication and banking is highly profitable. It never stopped despite serious political turmoil in the country,” said the analyst.

The only sector, other than services sector, which attracted significant foreign inflows, was oil and gas exploration. The investment in this sector was $465 million, 10 per cent higher than the previous year’s nine months. During the last five years, the services sector contributed higher than any sector which contributed to Gross Domestic Product (GDP).

It shows the national economy is mostly dependent on services sector which does not provide a sound base for a long-term economic growth, said the analyst. Another report from Islamabad adds: Core inflation non-food and non-energy ballooned to 9.5 per cent in March, the highest in the past couple of years as against 5.3 per cent last year, finance ministry said on Monday.

This increase in the core inflation since February 2006 from 5.7 per cent was on account of rising house rent and medicare sub-indices despite tight monetary policy of the State Bank of Pakistan during the period under review. The core inflation also increased in the first nine months (July-March) of the current fiscal year (6.5 per cent), compared with the corresponding period of last year (5.8pc).

Analysts said that the persistent increase in the house rent and health-care are creating serious threats, intensifying housing and health problems. The non-food inflation is also ascending upward as second round of food inflation is building pressure on non-food inflation. In March 2008, non-food inflation spiked to 9.4 per cent as against 5.5 per cent of last year on the back of a two-time increase in the domestic petroleum prices.

The non-food inflation would easily cross the double digit mark due to recent third time increase in the local petroleum price. For July-March 2008, the non-food inflation remained more or less at last year’s level of 6.3pc. A report of the finance ministry showed the overall CPI-based inflation registered an increase in March 2008 as compared with previous month (February 2008) on year-on-year basis.

The headline inflation was 14.1 per cent in March 2008 as against 11.2 per cent in February 2008 and 7.6 per cent in the corresponding month of last year (March 2007). The increase in headline inflation in March 2008 as compared with last month is attributable to a global rise in food inflation which moved upward to 20.6 per cent from 16 per cent in February 2008 and 10.7 per cent in the corresponding month of last year (March 2007).

It is a well-known fact that food inflation has emerged as a major source of concern for policy-makers around the world, including Pakistan. The global food price index is up by 54.1 per cent. Food inflation in Pakistan has been fuelled by a combination of domestic demand driven factors (rising per capita income), local supply shortage and global trends in prices of several commodities.

Higher prices of edible oil (palm oil and soybean) and dependency on their imports transmitted higher international prices to domestic prices. The new government’s decisions on prices and availability of essential food items are expected to bring inflation within a tolerable range.

Pakistan has witnessed sharp increase in wheat and flour prices (despite bumper wheat crop of 23.3 million tons), totally driven by “extra-market forces.” Seven essential food items (wheat and flour; rice, pulses, meat, milk, ghee , cooking oil and vegetables accounting for almost 70 per cent of total weight of food group, are responsible for a sharp increase in food inflation in Pakistan.

Like last year, this year’s inflation is also fuelled by food inflation. During the first nine months (July- March) of the FY08, the average CPI-based inflation stood at 9.5 per cent as compared to eight per cent last year. Food inflation increased to 13.8 per cent in the first nine months of the current fiscal year as against 10.3 per cent in the same period last year.

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