Investment and Growth

In business, the purchase by a producer

of a physical good, such as durable
equipment or inventory, in the hope of
improving future business is called
investment. Similarly growth is the
economic expansion which is measured
by any economic indicator like GDP.
Both these terms are positively
correlated with each other. It means if
investment increases then definitely the
growth will increase but not necessarily
in the same proportions as does the
investment. To continue the discussion
process we may divide this article into
two
proportions:
Growth
and
investment.
1 Growth
As growth shows the economic
expansion of a country but, the past few
years have witnessed an overall decrease
in the investment and growth of the
world. As the world growth has been
contracted to 0.6 percent in 2008-09.
Despite of this decrease IMF has
projected that world economy has shown
some growth in this current year which
is about 4.2 percent, but this expansion
is not even in different countries and
regions.

With reference to the Pakistan, though it

has faced severe challenges, yet the
economy has also shown some recovery
in term of GDP growth for 200910 that
is about 4.1%. This compares with GDP
growth of 1.2% in the previous year.
With reference to other sectors, the
Agriculture sector has shown a growth
about 2%, against a target of 3.8%, and
previous years growth rate of 4%.
The Services sector has also shown
growth about 4.6%, as compared to
1.6% in 200809. Overall, all the sectors
have shown an expansion of 3.6%.
1.1 Contribution analysis
Different
sectors
show
different
proportions of their share in the growth
which is as follows: Services sector has
contributed 59% to overall growth in the
economy for the year, followed by
Industry (30%), and Agriculture (11%).
With reference to individual sectors,
Manufacturing shows 23% of the overall
growth, followed by Wholesale & Retail
Trade (21%), and Social & Community
Services (19%).
Following Table compares the structure
of contribution to overall GDP growth
for 200910, with the previous five
years.

Table 1.1: GDP growth: Sectoral contribution

2004
2005
2006
2007
Sector
05
06
07
08
Agriculture
17%
24%
13%
6%
Industry
34%
19%
34%
10%
Manufacturing
30%
28%
24%
24%
Services
49%
57%
53%
85%

(Percent)
2008 2009
09
10
71%
11%
41%
30%
58%
23%
70%
59%

Avg FY05
FY10
24%
14%
12%
62%

Real GDP (fc)

100%
100%
Source: Federal Bureau of Statistics

100%

100%

100%

100%

100%

1.2 Reasons of Growth

The stronger pace of economic growth in
200910 has occurred on the back of
several favorable developments, which
have included:
1. Government has given crop
support price policies to the
formers in the recent two years
which shows high amount of
annual remittances to the workers
which is about 75 hundred
million US$ thus the aggregate
demand in the economy has also
been increased.
2. Another reason is expansion in
the cotton output which is larger
than expected. This is shown in
the
below
table.

3. There is also an improvement in

external demand for Pakistans
exports, mainly textiles which is
about 4.9%. This is due to the
government restriction on the
import of yarn.
2- Investment
If we talk about the investment then the
previous year shows a 5.5% increase in
the investment but now there is a decline
of 0.6% in the year 2009-10. Private
sector has major proportion in the
decline of fixed investment with an
estimated contraction of 3.5% for the
year. However despite of private sectors,
the sector like Electricity & Gas, Large
Scale Manufacturing, Transport &
Communication, and Finance &
Insurance has also shown the portion of
decline which is shown in the below
table.

Table 2.1: Gross Fixed Capital Formation In Private, Public &General Government
Sectors By Economic Activity
(At Current Market Prices)
%Change
Sr #
Sectors
200809 R
200910 P
200708 F
200809 R
Total GFCF(A+B+C)
5.5
0.6
A.
Private Sector
5.3
3.5
Manufacturing
2.3
4.9
i. Large Scale
7.4
12.4
Electricity &Gas
4.3
18.8
Transport &Communication
3.9
14.2
B.
Public Sector
3.9
2.6
C.
General Government
7.7
9.8
Bureau
of
F: Final, R: Revised, P: Provisional
Source: Federal
Statistics

Foreign Direct Investment

Foreign direct investment is that
investment, which is made to serve the
business interests of the investor in a
company, which is in a different nation
distinct from the investor's country of
origin
Foreign direct investment always plays a
key role in the investment and growth of
a particular country. But due to the
economy crisis it is also hampered. The
record shows that global flows of
Foreign Direct Investment have been
declined up to 32 percent in 2009.
Pakistan has also suffered by this
decline. For the period July to April
200910, the amount of FDI in US$ was
1.8 billion as compared to US$ 3.2
billion in the same period of FY09. This
represents a decline of 45 percent.
Different sectors have received different
proportions of decline in FDI, like in
Telecommunications there is a net
decline of US$ 607 million, in Financial
Services there is a decline of US$ 548
million. Combined, the decline in these
two sectors, last year, amounted to 81
percent of the overall reduction in FDI in
200910.
Despite of this decline in FDI, some
sectors witnessed a healthy investment
levels including Oil and Gas exploration
(FDI
of
US$
605
million),
Communications (US$ 222 million),
Transport
(US$
104
million),

Table 2.2: Estimated Loss

2004/0
Rs billion
5
Direct Costs
67
Indirect Costs
192
Total
259
In US$ bn
4.4

Construction (US$ 86 million), and

Paper and Pulp (US$ 81 million).
Overall, out of the major industry
categories, 12 show higher FDI for the
period, while 24 industries witnessed a
net reduction in FDI inflow.
International Competitiveness
The ability of firms to strive with rivals
in the production and sale of
commodities in worldwide markets is
called as international competitiveness.
International competitiveness remains a
key issue for the economy, and it shows
the share of a country in worlds export.
Unfortunately Pakistan has been ranked
at 101 in the Global Competitiveness
Index (GCI).
This issue has witnessed an overall
decrease in Pakistans share of world
exports, which has declined over the past
decade (from 0.16% in 2002, to 0.13%
in 2008) while the share of South Asia as
a whole has increased from 0.27% to
0.34% over the same period.

Constraints
Investment

to

Growth

and

Law and order situation in Pakistan

The major constraint in the growth and
investment is the law and order situation
in Pakistan which has been witnessing
since 9/11. Due to this situation the FDI
has been contracted to 45 percent.

To Economy 20052009
2005/0 2006/0 2007/0
6
7
8
78
83
109
223
278
376
301
361
484
5.0
6.0
7.7

2008/0
9
114
564
678
8.6

2009/1
0*
262
707
969
11.5

Cumulativ
e 200510
712
2,340
3,052
43.0

*: JulyApril

Source: Finance Division, Government of Pakistan

Apart from the human causalities and

problems of IDPs, Pakistan has also
faced negative impact in the areas of
GDP growth, reduction in the
investment, damaging of physical
infrastructure,
increase
in
unemployment, inflation, exchange rate
depreciation, and increase in the military
consumption and decrease in the
investment in public sector plans.

allocated Rs 129 billion for fiscal years

2010-2013 for the Ministry of Water and
Power under the Medium Term
Budgetary Framework (MTBF),
According to the breakdown of the
money reserved for the Power Ministry,
Rs 27.701 billion, Rs 43.603 billion and
Rs 58.398 billion have been allocated for
fiscal years 2010-11, 2011-12 and 201213 respectively

Due to the indulgence of Pakistan on this

war on terror and poor law and order
situation, Pakistan has spent almost US$
4 billion (2.4 percent of average GDP)
on security related and civil relief
operations since July 2007.

Longer Term Constraints

Cost of Energy Crisis

The present data of electricity
consumption of year 2008-09 shows that
there is a gap of 5000 MW between
demand and supply of electricity which
needs to be fulfilled.
In efforts to overcome the severe power
shortage being faced by citizens across
the country, the Finance Division has

Apart from the above stated constraints

there are following constraints which are
operated in the economy continuously.
These are as follows:
Manufacturing sector is continuously
showing its stagnant and declining share
in the economy which is about -4.9
percent.
There is an expansion of the informal
sector, relative to the formal part of the
economy. The data of the previous year
shows that the share of informal labor in
the economy has increased, from 72.8%
in 200708, to 73.3% in 200809.

Recommendation
With respect to the overall situation in
the country and comparing it with the
recent years following recommendations
can be made:
Efficient import substitution of furnace
oil by domestically produced natural gas
in thermal power generation and
enhanced refinery capacity will lower
the import bill for petroleum products
and improve the current account deficit
which is in favor of balancing the BOP.
Thus new investment in gas exploration,
transmission pipeline and distribution
systems will have a large pay off both to
the macro economy as well as the
investors.
Foreign Direct Investment is preferred to
debt creating flows as it not only brings
capital but also technology and
managerial
skills.
Multinational
Corporations help promote competition
in the sector by their improved corporate
governance standards and practices
which have to be emulated by the
domestic companies to stay afloat. But,
increase in FDI happens only in case
when there is better law and order
condition in the country. So different
measures should be taken to improve
this very situation in country.
If FDI flows to Pakistan are doubled and
payments on account of dividends,
profits etc., rise in the same proportion
we will have no difficulty in servicing
them.
Pakistan is open for foreign investors
and as you can see the measures being
taken by the government will further
strengthen the balance of payments
situation in the future. This should
provide comfort to the potential
investors about the security, return and
transferability of their investment.

Over the course of the next three fiscal

years, the government has planned to
construct
embankments,
excavate
irrigation canals, excavate and reexcavate drainage outlets, construct and
repair irrigation structures, construct and
repair the flood-control infrastructure,
take measures to protect river banks,
carry out river dredging and construct
rubber dams, bridges and culverts. Along
with Government should take some steps
to construct Kalabagh dam to minimize
the crisis in energy sector.
Pakistan has tremendous potential as it
has vast natural resources and good
capable minds, but there is a need to
steer them in the right direction with the
help of good governance and positive
approach. In this way we can go along
the smooth way of success.