ANALYSIS OF PAKISTANI INDUSTRIES-

FOREIGN INFLOWS

REMITTANCES
AN OVERVIEW:

Remittances are a source of economic wellbeing for a large number of families of expatriates
living in home countries and also lead to economic growth through consumption and
development, where the state and banking sector play a key role in channelizing the
remittances for productive economic activity.

Remittances are a global phenomenon and their impact is more pronounced in South America,
the Middle East and South Asia. Some economists consider remittances as a development
resource at par with domestic savings and foreign investment. On the contrary, a few IMF
economists after carefully analysing their effect on economic growth and development,
particularly in the long term perspective did not find any significant impact. This is because
many countries, including Pakistan have not developed the required expertise and financial
institutions to directly channelize the remittances towards increasing economic growth and
development. The IMF study further revealed that, a negative relationship between
remittances and growth was found. This observation is quite pertinent with reference to the
recent boom in remittances and economic growth in Pakistan.
Despite such diametrically opposite views, remittances are a source of economic wellbeing for a
large number of families of the expatriates living in home countries and also lead to economic
growth through consumption and development, where the state and banking sector play a key
role in channelizing the remittances for productive economic activity. Remittances are not risk
free; they create excess liquidity unless it is mopped up in the banking system and concerted
efforts are also made by the government to tone down fiscal deficit. Otherwise, they are likely
to lead to higher inflationary pressures and create other fiscal and monetary distortions.

The government of Pakistan (GoP) conscious of the positive effects of remittances on an

economy and poverty alleviation, a few months earlier launched PRI (Pakistan Remittances
Initiative) to streamline flow of remittances through commercial banks and official channels,
against illegal transactions through hawala system, with a focus on doubling the remittances
within five years.

THE 2008 CRISIS AND ITS IMPACT ON REMITTANCES:

The global financial crisis, which triggered in late 2008, certainly did negatively affect the flow
of remittances. Recently added element was the fallout of the Dubai World. With particular
reference to Pakistan and other South Asian countries, according to a World Bank (WB) report
titled, Global economic prospects 2010; crisis, finance and growth in developing countries,
remittances inflows- a cushion for the region could fail to recover in the event of a prolonged
global recession or a jobless economic recovery potentially coupled with tighter immigration
controls. Contrary to fears expressed in the report, inflow of remittances to Pakistan has been
on the increase during past two years. The remittances increased to a record high level of
$7.811 billion during FY09, compared to their inflow of $6.451 billion a year earlier. According
to the SBP, the monthly average remittances for the July-December 2009 period came out to
be $755.17 million as compared to $606.67 million during the corresponding period of last
financial year registering an increase of 24.48 per cent. This is being attributed to a number of
factors that include return of some of the expatriates, diversion of remittances partially from
informal to formal channels, increased outreach of the banking sector because of the Pakistan
Remittance Initiative (PRI) under which transfer of remittances is facilitated within 24 hours,
and posting savings in the homeland country considered to be more secure than elsewhere.

THE TREND IN REMITTANCES:

Worker remittances to Pakistan have increased sharply since the launch of the Pakistan
Remittance Initiative (PRI) in 2009. Thirty-three years after the first remittances began to trickle
in from the Gulf, their volume had reached $6 billion.

In the six years since then-finance minister Shaukat Tarin launched the PRI with the State Bank
of Pakistan and other stakeholders, worker remittances have increased by 150pc and are
expected to comfortably cross $15bn this year, adding a precious extra $9bn to the countrys
foreign exchange reserves.

The importance of PRI in anchoring Pakistans balance of payments during this period can be
gauged by the fact that inflows from remittances now fully cover the countrys petroleum
imports.

By comparison, the countrys exports recorded a lower increase, rising from $18bn to $25bn,
for an increase of $7bn. Without the upsurge in remittances during this period, Pakistans
balance of payments would have been in dire straits.

Given that this policy initiative has been so crucial in stabilising the countrys external account,
it is surprising that even informed observers appear to know little of its working and how this
lifeline initiative has changed the face of remittances or who initiated it.

The importance of PRI in anchoring Pakistans balance of payments during this period can be
gauged by the fact that inflows from remittances now fully cover the countrys petroleum
imports.

By comparison, the countrys exports recorded a lower increase, rising from $18bn to $25bn,
for an increase of $7bn. Without the upsurge in remittances during this period, Pakistans
balance of payments would have been in dire straits.

Given that this policy initiative has been so crucial in stabilising the countrys external account,
it is surprising that even informed observers appear to know little of its working and how this
lifeline initiative has changed the face of remittances or who initiated it.
COUNTRY-WISE BREAKDOWN OF REMITTANCES COMING IN PAKISTAN:

Overseas Pakistanis sent remittances amounting to $18.4 billion in 2014-15, which translates
into a year-on-year increase of 16.5%, according to data released by the State Bank of
Pakistan (SBP) on Monday.

Remittances amounted to $15.8 billion in the preceding fiscal year. Pakistanis based in
foreign countries sent home $1.8 billion in June, which is 9.5% higher than the
remittances received in the preceding month of May.
Inflows from Saudi Arabia were the largest source of remittances in 2014-15. They
amounted to over $5.6 billion in July-June, up 19% from the preceding 12 months.
Remittances received in July-June from the United Arab Emirates (UAE) increased
35.3% to $4.2 billion on a year-on-year basis. Inflows from the UAE registered the
largest increase from any major remittance-sending country during 2014-15, SBP data
shows.
Remittances from the United States and the United Kingdom remained $2.6 billion
and $2.3 billion, respectively, in July-June. The year-on-year increase in remittances
from the US and the UK has been 4.8% and 4.9%, respectively.
 Remittances from Gulf Cooperation Council (GCC) countries, excluding Saudi Arabia
and the UAE, clocked up at $2.1 billion in July-June, which is 15.6% higher than the
remittances received from these countries in the preceding fiscal year. Remittances
from Kuwait in 2014-15 equalled $748.1 million while those from Oman, Bahrain and
Qatar amounted to $666.8 million, $389 million and $347.5 million, respectively.

This means the overall share of the oil-rich GCC countries in Pakistan is almost 65%. Many
analysts fear remittances from these countries may dwindle going forward as their
governments begin to scale back infrastructure spending in the wake of a sharp fall in global
oil prices.

IMPACT OF A DECREASE IN OIL PRICES:

Any major fallout of the oil price slump on the remittance inflows will be detrimental for the
Pakistani economy. Absent remittances, a perennial balance of payment crisis would be
inescapable, as they cover up usually around 90% of the countrys trade deficit.

The good news is that despite the oil slump, the GCC is still spending on infrastructure
there are no short-term concerns for remittances inflows into Pakistan from this region, the
SBP said in its second quarterly report.

Saying that the GCC governments spending plans have not been affected by declining oil
prices due to the large sovereign funds, the SBP noted the status quo may not continue
much longer.

A continuous depletion of these reserves would eventually start biting into their fiscal
spending if oil prices fail to recover. The pace of Pakistans remittance growth cannot remain
immune to the oil slump indefinitely, the SBP said.
Remittances received from Norway, Switzerland, Australia, Canada, Japan and other
countries during June amounted to $110.53 million, up 7.7% from the remittances received
from these countries in the same month of 2013-14. The monthly average of remittances
during 2014-15 remained $1.5 billion, up from the monthly average of remittances amounting
to $1.3 billion received in July-June of 2013-14.

Remittances in the first six months of the current fiscal year increased regardless of the
strong wave of political instability that began in August with sit-ins by opposition parties and
fizzled out after the attack on Army Public School in December. Overseas Pakistanis sent
remittances amounting to $8.98 billion in the first half of 2014-15, showing a year-on-year
increase of 15.26%. Remittances had grown 13.7% in 2013-14, which means the year-on-year
increase of 16.5% in 2014-15 was notably higher than preceding year.

MILITARY AID
OVERVIEW

Military aid is dominant component of foreign aid which is used to assist a country or its people
in its defense efforts or helps that recipient country in maintaining control over its own
territory. Many countries receive military aid to help with counter-insurgency efforts. Military
aid can also be given to a rebellion to help fight another country. This aid may be given in the
form of money for foreign militaries to buy weapons and equipment from the donor country.
However, amidst the global happenings the use of military aid has often being questions and
garnered with controversies.

Pakistan since its inception has held great strategic importance; hence, adopting a position
of being a Frontline Ally of many strong countries such as United States of America, China
and Kingdom of Saudi Arabia. Being the frontline ally of these dominantly strong countries,
Pakistan has received billions of Military aid be it due to Afghan War, Indo China War, Soviet-US
Conflict or the ongoing War on Terrorism. Well analyze the structure of military aid to Pakistan
since its inception till date by covering each decade chronologically.
During the initial years of Pakistan, the country had the options of building allegiance with
Soviet Union or United States, however, Pakistan opted for the latter. This marked the
beginning of the Pakistans ever increasing national importance and the inflow of Military Aid
from USA.

ECONOMIC OVERVIEW:
There have been a positive relationship between the rise in military aid and economic
development. A large amount of military aid results in a smaller proportion of budget allocated
to defence hence increasing government spending in subsidies and investments in major
industries such as textile and public sector spending. Furthermore the share of public sector
spending also rises, hence, increasing infrastructural spending and in turn boosting the
development of the cement industry.

19 TH CENTURY- FIRST 53 YEARS OF PAKI STAN

USA

1947-1970

After rejecting the request to let the CIA formulate a base in Pakistan, strictly to keep an eye on
the activities of Soviet Union during multiple visits to USA from 1950-1953, Pakistan
signed Mutual Defense Assistance Agreement with the United States in May. Under the
agreement, many Pakistani soldiers went to United States for training whereas US also
established a Military Assistance Advisory Group (Maag) in Rawalpindi. This agreement kick
started the flow of military aid to Pakistan from USA.

In 1956, President Dwight Eisenhower requested Prime Minister Suhrawardy to lease Peshawar
Air Station to the American Army for keeping an eye on Soviet Union and its ballistic missile
programme. The request was granted by the prime minister.

During the decade of 1960s, the pro-American sentiments in Western side of Pakistan were at
an all time high. However, the military and financial assistance was directed more towards
West Pakistan, which caused an uproar and feeling of distrust in East Pakistan. Moreover Ayyub
Khan allowed United States to fly spy mission to Soviet Union from Pakistans territory. The
MDAA and the deal of Air Station was a tradeoff due to which Pakistan received military aid
worth millions of dollars. However the 1965 Indo-Pak war and resulted rebel in Indian occupied
Kashmir led US to place economical and military embargoes on Pakistan, which resulted in an
economic collapse.

During 1965 war Pakistan was surprised by the lack of support from the United States, an ally
with whom the country had signed an Agreement of Cooperation. The US turned neutral in the
war when it cut off military supplies to Pakistan (and India); an action that the Pakistanis took
as a sign of betrayal; hence, resulting in Pakistan resorting to towards China for a major source
of military hardware and political support. 1965 war led to an economic slowdown in Pakistan
as the defence spending rose from 4.82% to 9.86% of GDP, putting a tremendous strain on
Pakistan's economy while the military aid from USA was deducted and Pakistan experienced an
economic and military embargo. This curbed the The Green Revolution during Ayyub Khans
era hence slowing down the massive industrialization and agriculture growth; since, the rise in
military expenditure led to a fall in government subsidies and investment in the economy.

1970-1978

Being an important ally for US during the cold war, United States supported Pakistan, despite
the arms embargo and the military aid started rising after the Indo-Pak war. During 1971s war,
US is speculated to have provided Pakistan with arms and military aid, in order to discourage
India from penetrating further into the cities of Pakistan because losing Pakistan meant losing
an important ally in the soviet war. However, after President Jimmy Carter, an anti-socialist,
won the presidential election of US and announced to seek a ban on nuclear weapons and
Bhutto lost the favors he enjoyed whilst Nixon was US president as Carter did not appreciate his
policies and tightened already placed embargoes on Pakistan. President Carter and his
administration allegedly threatened Bhutto to disrupt the process of atomic proliferation and
research to which the latter did not agree, leading to his differences with the Americans; hence,
this disagreement led to reduction in the military aid to Pakistan as this would result in a
massive boost in Pakistans defence capability while it enjoyed close relations with Saudi Arabia
and China.

1979-1988

During Zia ul Haqs regime, Pakistan and United States enjoyed a warm and congenial
relationship, which was primarily based on military ties and advancements. During the decade,
US, along with CIA and ISI, launched billions of dollars worth of operations to prevent Soviet
forces from further advancing into the region. It is during this period that United States granted
billions of dollars to Pakistan in the name of military and economical aid. By the year 1981,
Pakistan was discussing a $3.2-billion aid package with United States and in 1987 Pakistan
became the second largest recipient of aid after Israel. However, by the end of General Zias
regime, Congress adopted Pressler amendment. The amendment banned major military and
economical aid to Pakistan unless the state was able to justify and provide sufficient evidence
that the funds are not being used for nuclear proliferation. However it is alleged that although
Pakistan disclosed that it could enrich uranium and assemble a nuclear device in 1984 and 1987
respectively, the sanctions were not imposed till 1990.

1988-2000

During this period the relations between USA and Pakistan worsened and resulted in Military
aid reduction and suspension overtime. Under the Pressler amendment, Pakistan was still
under the imposed sanctions and by then had lost its strategic importance in soviet war, this
resulted in military aid from being reduced from 2334 billion US dollars in 1960s to 27 billion
dollars. Furthermore, in 1992 the relations between US and Pakistan plummeted further
when US ambassador Nicholas Platt, warned Pakistan of being included into state sponsors of
terrorism list. Then, in 1995 Benazir Bhutto visited United States and requested President Bill
Clinton to lift the embargoes on Pakistan and launch a joint operation to eradicate militancy
from the region. As a reaction to Bhuttos proposal, Brown amendment, which provided for the
delivery of $368 million of military equipment purchased but not received by Pakistan before
the imposition of Pressler amendment sanctions in 1990, was passed; however, the sanctions
on arms were not lifted. However again the relations worsened when Prime Minister Nawaz
Sharif conducted nuclear test in Baluchistan President Clinton imposed sanctions under Glenn
amendment on both India and Pakistan. This resulted in suspension of aid, including economic
development assistance, credits and credit guarantees by the US government, US bank loans to
the governments of India and Pakistan, loans from international financial institutions, such as
the IMF and World Bank, and exports of dual-use nuclear or missile items. After sanction then
in July 1998, US lifted the sanctions on both the countries.

There have been speculations and controversies surrounding the military aid allocation; during
General Zias regime the military aid was in such a large amount that Pakistan was not in a
satisfactory position to justify the aid and its allocation.

Post 9/11- 2001 Onwards

After the 9/11 attacks and USs invasion in various countries to eradicate militancy, Pakistan
became one of the most important strategic allies for United States. When Pakistans
negotiations failed with the Taliban and Al- Qaeda, Pakistan allowed American army to use its
military bases for launching attacks on Afghan soil. Since 9/11 Pakistan has received billions of
dollar worth military aid from the US due to the War on Terrorism.

In 2001, US officials introduced a bill to lift all the sanctions, previously imposed on Pakistan
and United States officially forgave $1 billion worth of loan it had granted to Pakistan in a
goodwill gesture and appreciation for Pakistans cooperation. President George Bush officially
declared Pakistan as a non-NATO ally granting it the authority to purchase strategic and
advanced military equipments. Moreover, since 2004, US army has launched various drone
strikes on the north-western side of the country to target Taliban. However, a report was issued
in which Pakistan was accused of using aid money provided by US to Pakistan for its
cooperation on war on terror, for strengthening its defence against India. The trust, on both
sides, has been missing since the war on terror started as US on several occasions has accused
Pakistan Army to tip the Taliban and pro-Taliban factions off on US operations. Since the war on
terror started in 2001, Pakistan has received an estimated amount of $20 billion from United
States; however, in the wake of OBLs raid US withheld $800 million of aid to Pakistan.

In the June of 2008, an air strike by the US Army killed 11 paramilitary soldiers of Pakistan Army
Frontier Corps, along with eight Taliban. The strike and deaths instigated a fierce reaction from
Pakistani command calling the act to have shaken the foundations of mutual trust and
cooperation. US-Pakistan relations plummeted again when 24 Pakistani soldiers died in an air
strike by the US Army. As a result of the attack, Pakistani government ordered US army to
evacuate Salala air base which was being used to launch offensive on Taliban and militants.
Moreover, the government also halted NATO supplies for United Sates. In a fresh warning to
Pakistan, a Senate panel on May 23 approved a foreign aid budget for next year that slashes US
assistance to Islamabad by more than half and threatens further reductions if it fails to open
supply routes to NATO forces in Afghanistan. Then after 7 months on NATO supply cut Pakistan
agreed to reopen key supply routes into Afghanistan ending a bitter stand-off after US
Secretary of State Hillary Clinton said she was sorry for the loss of life in a botched air raid and
as part of the deal Washington released about $1.1 billion to the Pakistani military from a US
coalition support fund designed to reimburse Pakistan for the cost of counter-insurgency
operations.

Last year in August, 2015; Pakistan feared that the US could withhold hundreds of millions of
dollars from Pakistans military over concerns that it is not doing enough to combat insurgent
groups that plan and coordinate attacks from its soil on neighboring Afghanistan. Though, since
2002, the US has reimbursed Pakistan about $13 billion for its support of the U.S.-led war in
Afghanistan. Although officials say that most of the 2015 payment is moving through the
pipeline, the Pentagon recently informed Pakistan that a final $300 million may be withheld if
the U.S. defense secretary cannot certify sufficient action against the Haqqanis. This move
could send U.S.-Pakistan relations, which have greatly improved in the past year, into another
period of tension.

Pakistans relation with the US has been irregular leading to fluctuating military aid and
resultantly fluctuating economic condition of the country.

CHINA
There are strong military ties between People's Republic of China and the Islamic Republic of
Pakistan. This alliance between two neighboring Asian nations is significant geo-politically. The
strong military ties primarily aim to counter regional Indian and American influence, and was
also to repel Soviet influence in the area. In recent years this relationship has strengthened
through ongoing military projects and agreements between Pakistan and China.

Since 1962, China has been a steady source of military equipment to the Pakistani Army,
helping establish ammunition factories, providing technological assistance and modernizing
existing facilities. Pakistan and Chinas military transactions have not been as transparent as
compared to that with the US; Pakistan has purchased large amount of military equipments and
sometimes have received them inform of military aid and grants. China has Pakistan's largest
defense supplier. China transferred equipment and technology and provided scientific expertise
to Pakistan's nuclear weapons and ballistic missile programs throughout the 1980s and 1990s,
enhancing Pakistan's strength in the South Asian strategic balance.

While the U.S. has sanctioned Pakistan in the past--in 1965 and again in 1990--China has
consistently supported Pakistan's military modernization effort. Beijing also built a turnkey
ballistic-missile manufacturing facility near the city of Rawalpindi and helped Pakistan develop
the 750-km-range, solid-fueled Shaheen-1 ballistic missile. Furthermore, China has helped
Pakistan build two nuclear reactors at the Chasma site in the Punjab Province and continues to
support Pakistan's nuclear program, China still continues to maintain a robust defense
relationship with Pakistan, and to view a strong partnership with Pakistan as a useful way to
contain Indian power.
Though not always in large amount as compared to the US, China has consistently helped
Pakistan to develop its military strength throughout the region. Moreover, China has designed
tailor made advanced weapons for Pakistan, making it a strong military power in the Asian
region. The armies have a schedule for organizing joint military exercises and China has offered
Pakistan military aid in order to fight against terrorism in Pakistan.

When it comes to past, In the past, China has played a major role in the development of
Pakistan's nuclear infrastructure, especially when increasingly stringent export controls
in Western countries made it difficult for Pakistan to acquire plutonium and uranium enriching
equipment from elsewhere such as the Chinese help in building the Khushab reactor, which
plays a key role in Pakistan's production of plutonium. With the rising extremist threat in
Pakistan China has become increasing concerned about al-Qaeda linked terrorism originating in
Pakistan and sought help to set up military bases on Pakistani soil to deal with the problem.

The military relations between Pakistan and China have been consistent and China has played
the role of the last resort for Pakistan. When Pakistan was under trade and economic
embargo, China helped Pakistan in terms of economic aid and trade which helped Pakistani
Economy to sustain. Pak-China military relations have been restricted to the defense solely
since the military aid from China has dominantly been in form of military assets, equipments,
discounts and trainings.

KINGDOM OF SAUDI ARABIA:

Pakistan maintains close military ties with Saudi Arabia, providing extensive support, arms and
training for the Saudi Arabian military. In Pak-Saudi situation, Pakistan has been the one helping
Saudi Arabia develop its military; however, this has been a tradeoff with Saudi Arabia giving
Pakistan Financial Aid at the time of need and also remittances inform of employment.

It is also speculated that Saudi Arabia secretly funded Pakistan's atomic bomb programme and
seeks to purchase atomic weapons from Pakistan to enable it to counteract possible threats
from arsenals of the weapons of mass destruction possessed by Iran, Iraq and Israel. Saudi
Arabia being the biggest supporter of "Islamisation" programme of Gen. Zia-ul-Haq in the 1970s
gave financial aid worth billions of dollars to Pakistan. The relation with Saudi Arabia have
dominantly been cordial and friendly leading to strong military ally mainly due to religious and
culture affiliation. However, the only way military aid from KSA has impacted Pakistan and its
economic industry have been the supply of petroleum (oil) at discounted price to Pakistan,
mainly during Gen Zias regime.

ECONOMIC ANALYSIS
As discussed earlier that there have been a positive relationship between the rise in military aid
and economic development in Pakistan. While the allocation of military is not made public,
there have been multiple estimates and speculations about the allocation and sometimes they
are paired with a number of controversies. The Foreign Inflow of the military aid has largely
been restricted to the Defence of the country; since, Pakistan every time has been indulged in
territorial threats be it the Pak-Indo War of 1965, 1971 War, Afgah War, Kargil Conflict, Foreign
Conflicts or the ongoing War on Terrorism. Pakistan has always faced a constant rising need for
a rise military funds; hence, the military aid has always been restricted to the Defence sector.
Moreover, the foreign aid to Pakistan has always been dominated by the Military Aid with
precedence over economic or social aid.

One thing which is often ignored or not realized is the unclear boundary (limits) of the military
domain. Military aid has been used to establish hospitals (Cantonment Military Hospitals)
around the country, Housing facilities, Educational Institutes, Disaster Management Funds,
Infrastructural development and sometimes trade subsidies as well. The Establishment of
Defence Housing Authority City all over Pakistan has resulted in a rise in infrastructural
development; hence, boosting the cement and construction industries.

The funds from military aid has been used for establishment of educational institutes such as
Army Public Schools, DHA School, Universities, not for profit clubs and offices; hence, boosting
not only construction but other fields of the economy such as employment.
Pakistan Military has performed the duty of Disaster Management Team since inception. Be it
the horrific 2005 earthquakes, multiple floods or droughts and Famine. The military aid and
national defence budget allocation have been used to uphold the Nation at the time of need.

Lastly, Fauji Group being the largest business conglomerate in Pakistan has contributed
immensely in the textile, cereal, Gas and power generation industries. The surplus military aid
has been used to upgrade and develop Fauji Foundation at the time of inception and now it is
contributing dominantly in multiple industries.

The military aid has been a tradeoff of the proportion of defence sector in the national budger,
the larger the aid the lesser the defence allocation; hence, increasing the proportion of
economic and public sector investments, thus boosting the economy. However, the foreign aid
inflow to Pakistan has been largely dominated by the Military Aid thus has over shadowed
humanitarian and economic assistance to Pakistan

TABLE OF US INFLOW OF MILITARY AID TO PAKISTAN

Year Coalition Military Year Coalition Military
Support Assistance, Total Support Funds Assistance, Total
Funds

1948 0.77 0 1977 319.16 209.4

1949 0 0 1978 214.92 55.49

1950 0 0 1979 128.81 23.31

1951 2.89 0 1980 137.53 0

1952 74.25 73.55 1981 164.16 0

1953 748.29 286.23 1982 400.6 200.07

1954 156.95 152.24 1983 534.18 383.29

1955 733.15 477.18 1984 568.05 415.84

1956 1065.67 700.89 1985 607.26 447.53

1957 1079.65 619.9 1986 623.56 460.91

1958 968.22 589.59 1987 599.07 469.53

1959 1367.93 985.25 1988 769.14 635

1960 1689.84 1181.35 1989 559.72 421.27

1961 989.53 780.04 1990 548.07 422.37

1962 2334.65 1446.28 1991 149.59 141.78

1963 2066.77 1063.68 1992 27.14 0.57

1964 2222.66 1334.16 1993 74.19 7.98

1965 1928.9 1041.58 1994 68.43 0

1966 816.28 691.28 1995 23.13 10.1

1967 1213.36 719.38 1996 22.79 0

1968 1501.68 672.5 1997 57.17 0

1969 541.76 504.31 1998 36.32 0

1970 968.32 570.93 1999 102.14 6.72

1971 474.25 31.21 2000 45.72 0

1972 692.87 261.87 2001 228.02 0.54

1973 715.35 387.63 2002 937.34 744.74

1974 381.97 219.13 2003 377.93 284.81

1975 614.34 326.02 2004 406.12 316.56

1976 644.1 336.78 2005 490.42 374.04

2006 689.43 488.46

2007 688.62 498.91

2008 614.48 392.05

2009 1353.65 1076.25

2010 1867.13 1529.53

Note: All figures are in US$ (millions). Figures are adjusted for inflation and presented in 2009
constant dollars

FOREIGN DIRECT INVESTMENT

OVERVIEW OF 1950S, 1960S AND 1970S

In its early years Pakistans main focus was on the development of its industrial base which was
partly assisted by the foreign aid and partly by the local investment. Pakistan adopted strict
policies against liberalization in its first two decades. Any foreign direct investment was
discouraged by GoP. From 1957 to 1958, strict controls were maintained on FDI inflows.
Therefore, around only 41.4 million US dollars of foreign investment flew into Pakistan from
1947 to 1958. Pakistan was reluctant to open its service sectors of banking, insurance and
commerce for foreign investment by the end of 1960s. The sectors were closed for local
investors. Greater part of these investments were channeled into the manufacturing sector as
per the industrial policy. This facilitated growth in the overall FMCG industry. As the policies
gradually liberalized in Ayyubs khan era (1958-1968), Pakistan signed the worlds first official
bilateral treaty with Germany. Later in the decade, banking, insurance and commerce were
made open for FDI. The foreign banks were allowed to open banks in Pakistan. The foreign
investment went as high as 49.5 million dollars in 1960s which was greater than last decades
total.

In early 1970s, the FDI inflows declined due to the negative impact of nationalization. The FDI
fell to $0.5 million in 1973. Even though foreign enterprises were exempted from the
nationalization process, FDI still collapsed as the confidence of private investors shattered. This
made formal regulation of foreign investment necessary. Therefore, after mid-1970s GoP
brought forward the foreign private Investment Act 1976. This provided an adequate legal
framework for foreign investments. The act guaranteed remittance of profit and capital, and
relief from double taxation. However, any major changes in FDI still did not take place due to
high public sector control.

1980S AND 1990S

By the end of the 1970s decade, government started shifting ownership to the private sector as
per 1984 industrial policy statements. However, the public sector retained its role in the major
sectors. Due to slow implementation of privatization policy Pakistan lost one of the best
opportunities to attract foreign investment. Greater role of public sector discouraged FDI
inflows. Moreover, government permission was required for project involving foreign private
investment and such projects were to be filed with the IPB. FDI was encouraged in partnership
with local investors in areas where advanced technology, technical and managerial skills, and
marketing expertise were required. Foreign investment was also encouraged in industrial
projects with heavy capital requirements like engineering, petrochemicals, electronics etc.
Furthermore, Export Processing Zone (EPZ) was established in Karachi which offered tax
exemptions and duty free imports and exports.

Despite all the efforts, The FDI inflows were still limited in the 1980s due to too much public
sector ownership, government price controls, industrial licensing, non-competitive trade
regime, high tariffs, import licensing and bans, and inefficient financial sector. By the end of
1980s Pakistan liberalized its foreign investment policies and took measures to improve the
business environment to ensure the required FDI inflows. In 1989 a Board of Investment (BOI)
was also set up to generate FDI inflows. The BOI aimed at providing investment services and
overcome the difficulties in setting up new industrial units. One Window facility was established
to eliminate any difficulties in setting up businesses. Different deregulation, privatization, and
liberalization policies initiated were implemented in the end of 1980s.

In 1991 any compulsory registration for FDI were eliminated. Any government sanctions for
foreign investments were removed except for some important industries like arms and
ammunition, security printing, currency and mint, alcoholic beverages and high explosives,
radioactive substances. These industries were also closed for domestic investors. 100% foreign
investment was allowed in all industrial sectors except the ones mentioned above. On the other
hand, foreign investment was restricted in nonindustrial sectors including investments in
agricultural land, real estate, housing, irrigation, commercial activities, and forestry.

Permission from the provincial governments in form of No Objection Certificate (NOC) was
required. The provincial government had complete control over where the project will be
physically located. This was considered a major obstacle in fast paced industrial development.

Negotiations regarding the terms and conditions of the payment of royalty and technical fees
were allowed in interest of both the host country and foreign investors. The foreign exchange
regime was liberalized. Permission to hold, bring and transfer foreign currency was provided
and people were allowed to open accounts on foreign currency. Foreign investors were allowed
to issue shares on the Pakistani companies (except some). Loan procurement for foreign
investors was permitted with collaterals against foreign currency account balance and any
upper limits on loans were also removed. A visa policy was introduced. Fiscal and credit
incentives were provided to investors. A three year tax holiday, as part of the fiscal incentive,
was declared for industrial unit set up in the first half of the decade. A number of tariffs, quotas
and import bans were reduced to a great extent. Tariff rates were brought down from 225%
(1987) to 45% (1997). To create a better investment climate the least developed sectors and
areas were given tax holidays for 5 to 8 years along with sales tax and custom duty concessions.
Foreign managed Manufacturing companies that exported more than half of their output were
allowed to borrow up to no limit. Others were allowed to borrow Pak currency loans equal to
their equity without any permission from SBP.

Special industrial Zones (SIZs) were set up with proper infrastructure and utility services. Firms
investing in SIZs were not subject to any labor laws. Easy imports of capital goods and tax
exemptions were some features of the SIZs. The SIZs were open for investments for both
foreign investors and any Pakistanis working overseas. Any capital gains were also not taxed.

According to New Investment Policy 1997 the nonindustrial sectors were also opened for
investment. However, certain requirement were to be fulfilled. The investments were to on the
basis of joint ventures with a 60 to 40 ratio. The minimum amount foreign equity was limited by
$1 million. The registered foreign companies were allowed to invest. There were no limits on
foreign equity in case of infrastructure and social sector. The tariff policies varied for different
sectors with respect to priority. The imported capital equipment (not manufactured locally) for
value added, high tech and agriculture was free from tariffs. However, for prioritized industries
including social and agro-based sectors a 10% tariff was applied.

In the years 1980 to 1994 Mining and quarrying (18%), manufacturing (22%) and commerce
(30%) sectors benefitted most from FDI inflows. On the other hand, foreign investments were
also injected into other sectors (30%) including transport and communication, agriculture,
forestry, utilities etc. From 1994 onwards the FDI share of food, oil and gas exploration, textiles,
pharmaceuticals, fertilizer, cement, transport, power, construction, trade, communication,
financial business and personal services was significant. However, the overall investment was
still lesser than the first half of the decade. Over the two decades (1980s and 1990s), the FDI
inflow in Pakistan was majorly contributed by USA, UK and UAE. Other countries with relatively
smaller investments included Germany, France, Hong Kong, Italy, Japan, Saudi Arabia, Canada,
Netherlands and Korea. During 1990s specifically, USA, UK, UAE, Germany and Japan
contributed 77 % of the total FDI inflow.

Throughout the years Pakistan experienced a gradual in FDI from 1990 to 1995 and a boost in
1996 due to the investment friendly policies. However, in the next half of the decade (1996
onwards) the country experienced a decline in FDI. This decline can be attributed to relative
performance of Pakistan. Pakistan lost its share of FDI to other developing countries that
became more attractive to Pakistans foreign investors. Better alternative investment
opportunities for foreign investors emerged and Pakistan faced great competition. Pakistans
rising borrowing pushed it into a debt trap. Bad law and order situation, continuous changes in
government policies, withdrawals from tax concessions and exemptions disturbed the flow of
foreign investment after 1996. The investor confidence declined (both foreign and domestic),
crisis deepened and Pakistan was downgraded by foreign credit rating agencies.
2000 ONWARDS

The years 2000-2007 (Pervez Musharrafs era) are considered most successful in attracting
foreign investment in Pakistan. This was as a result of the economic and political stability and
the friendly investment policies that prevailed in Musharrafs regime. The increase in FDI
volume is also attributed to the restoration of democracy. All of this brought back investor
confidence into the economy. Pervez Musharraf introduced the Economic Regulation Program
(ERP) which opened the economy for foreign direct investment. Trade was liberalized to great
extents. There was rapid reduction in any anti export and import policies. Quotas, import
surcharges and import duties were abolished by the GoP. Tariffs were brought down from 85%
to 25%. Public sector monopolies and licensing requirement were eliminated. Tax free
industrialization was implemented and cost of doing business was also reduced. As a result, the
investment climate flourished and attracted Foreign Direct Investments into the economy. A
regional trade agreement named South Asian Free Trade Agreement (SAFTA) was also signed.
The country opened itself for international trade therefore foreign investments flew into the
economy. The foreign direct investment (FDI) hit a record level of $5.4 billion in 2007-8.

Major Infrastructural investments were made into Pakistan by US multinationals. UK stood on

the second position, injecting around 860 million dollars of FDI. The third place was taken by
UAE, which also made major investment in the 2000s decade. In 2000-2006, USA, UK, the UAE,
the Saudi Arabia and the Netherlands contributed 68 % of the total FDI. Major amounts of
these foreign investments flew into Oil and gas exploration, Textile, Financial Business and
Communication sectors.

With the end Musharrafs regime in2008 Pakistans economic and political situation worsened
bringing the FDI inflows to low levels again. The FDI fell sharply from FY2008 to FY 2009.
Economic slowdown and poor law and order situation lead to this decline. This fall can also be
associated with the Global financial crisis that hit the world economy in 2009. Pakistan fell into
macroeconomic imbalances, Pakistani rupee value fell due to unprecedented rates of inflation.
Investments declined further due the 2010 floods which had significant impacts on Pakistans
Agricultural industry. A large part of the decline in FDI for the period was recorded under
Telecommunications (a net decline of US$ 607 million), and Financial Services (a fall of US$ 548
million). However, FDI patterns in some sectors remained positive, including in Oil and Gas
exploration, Communications, Transport, Construction, and Paper and Pulp. Despite a steep
decline, inflow of FDI into Financial Services was recorded at US$ 133 million for the
period. Generally, Pakistan faced a declining trend of FDI in fiscal years 2008 to 2012. The
macroeconomic instability lead to an 85% reduction in FDI in these four years. Chronic energy
shortages, high debt burdens, poor security environment have been the drivers of this problem.

In order to bring the investment back on track the GoP brought forward the Investment Policy
of 2013 (FDI strategy for 2013-2017). This again introduced a various set of incentives for
foreign investors. The Policy offered equal treatment to both foreign and domestic investors.
Same conditions and rules were applied on all enterprises operating in Pakistans market.
Supplier, subcontractor and joint venture programs were initiated to strengthen links between
local and foreign investors. Several Special Economic Zones (SEZs) were created and facilitated.
Efforts to enhance the image of Pakistan (Image enhancement program) as a good investment
location were made. Foreign investors were to be offered services at different levels of the
investment cycle. The country further offered tax incentives and higher investment returns.
Moreover, the requirement of NOC (imposed in 1990s by BOI) from provincial governments
was also removed. The BOI approval for foreign companies to open a bank account was also not
required. One window facility was provided. The policy aimed at taking the FDI stock up to 20%
of the GDP by attracting US$2 billion, $ 2.5 billion, $2.75 billion, $3.25 billion and $4 billion in
the years 2013, 2014, 2015, 2016 and 2017 respectively. This policy lead to positive outcomes.
However, the government was not able to achieve its targets in FY 2013- 2014, but the
economic position was better off than the preceding years. The country fetched US $1.7 billion
FDI in FY 2013-2014. The investments were focused on the oil, gas and energy sectors due to
acute energy shortages. In early 2014 Pakistan FDI friendly ranking increased from 106 th to 97th
(up by 9 points). Moreover, huge amounts of investments flew into the telecom sector in FY
2013-2014 due to the 3G/4G licenses. Other sectors with major FDI inflows included transport,
tobacco and cigarettes, textiles and financial business. However, in 2014-2015 a 58.2%
decrease in foreign investments was recorded. In the latter half of 2014 the largest outflow of
investments from the pharmaceuticals and over the counter products was recorded. The
outflow in 2014-2015 period also affected cement, IT, food and metal category. Good
investments flew into oil and gas, telecommunications and financial business sector, however,
these inflows were significantly lower than the preceding year. The major contributors were
USA, China and UAE. Low investments resulted from poor domestic security situation,
infrastructure obstacles and continuing electricity problems which adversely affected all sectors
and their investments. After the 2014-2015 fiscal years, a large increase in FDI was witnessed in
FY 2015-2016. Foreign investment went up by 307.6% (from $18.4 million in 2014-15 to $56.6
million in 2015-16) in 2015-2016 compared to 2014-2015. This positive investment flow
resulted from change in the credit rating of Pakistan from stable to positive. This upgrade in
Pakistans credit rating took place for the first time after 2006. This rating was based on the
stabilizing liquidity position and steps towards fiscal consolidation. The lower energy price also
lead to economic optimism and hence greater foreign investments. The GoP efforts to control
inflation rates, better availability of Water, power and gas and near zero interest rates, political
stability, upgrades in infrastructure, control on terrorism, all of this lead to an increase in the
volume of FDI. Major FDI contributors in July 2015 are China, Switzerland and UAE.
Conclusively, the period after 2013 has recorded significant year by year ups and downs in FDI
inflows.

FOREIGN PORTFOLIO INVESTMENT

Foreign portfolio investment (FPI) is the entry of funds into a country where foreigners deposit
money in a country's bank or make purchases in the countrys stock and bond markets,
sometimes for speculation.

Portfolio investments typically involve transactions in securities that are highly liquid, i.e. they
can be bought and sold very quickly. A portfolio investment is an investment made by an
investor who is not involved in the management of a company. This is in contrast to direct
investment, which allows an investor to exercise a certain degree of managerial control over a
company. Equity investments where the owner holds less than 10% of a company's shares are
classified as portfolio investment. These transactions are also referred to as "portfolio flows"
and are recorded in the financial account of a country's balance of payments. According to the
Institute of International Finance, portfolio flows arise through the transfer of ownership of
securities from one country to another.

Foreign portfolio investment is positively influenced by high rates of return and reduction of
risk through geographic diversification. The return on foreign portfolio investment is normally
in the form of interest payments or non-voting dividends.

The share of FDI in foreign equity flows is greater than FPI in developing countries compared to
developed countries, but net FDI inflows tend to be more volatile in developing countries
because it is more difficult to sell a directly-owned firm than a passively owned security.

The financial liberalization programs adopted by developing countries from the early 1980s
onward have played a key role in attracting a huge amount of FPI inflows. These liberalization
policies followed the creation of new financial markets and institutions, and the emergence of
new financial instruments and regulation. These policy measures helped in attracting a huge
influx of FPI and the emerging stock market capitalization grew more than tenfold between
1986-1995, which is claimed to be mainly due to the trend of institutionalization of savings and
investments in developed countries and liberalization of financial markets in developing
countries.

FPI may also entail negative consequences for the developing countries. First, FPI inflows are
usually more unstable and volatile than FDI because the former does not involve long-term
commitment by foreign investors and investors can easily pull out of the developing countries
when their animal spirits are low.

FPI TRENDS IN PAKISTAN

FPI improves liquidity position of an economy that helps to improve foreign reserves which
ultimately result in stabilized exchange rate. The inflow of portfolio investment affects the
credit side and outflow affect the debit side of Balance of Payment account of a country. So FPI
can be helpful to reduce deficit Balance of Payment. The countries where poor governance
environment exist there tend to be less FPI inflows, because that countries lack mutual trust,
reliable public information and less transparent operations of companies.

Like other developing countries, FPI is a relatively recent phenomenon in Pakistan. Initially
Pakistan participated in external financial markets by offering instruments like foreign exchange
bearer certificates issued by the Federal Government, Sovereign Bonds, and dollar bearer
certificates.

Later on, the government started opening up the domestic financial market to attract foreign
investors. FPI increased significantly after the government opened the entry as well as the exit
(expatriation) for foreign investment in the financial market in the early 1990s. The
development of the securities market in the 1990s includes the establishment of the Central
Depository Company, credit rating agencies, corporate brokerage houses, some of which were
partially funded by the International Financial Corporation (IFC), coupled with the updated
Company Law and Securities and Exchange Law.
Foreign portfolio investment inflows have jumped to a peak level of more than US$1000 million
in 1994, more than double the inflow of FDI in the same year. This flow of capital however has
proved to be highly volatile, especially after the Asian financial crisis. Some studies suggest that
FPI is highly volatile in Pakistan since portfolio investment in Pakistan is directed mainly
toward short-term and some medium-term public debt instruments and the stock exchanges,
while access to capital markets through the use of external instruments has been limited.
According to the mid-year review of the Ministry of Finance, FPI has witnessed an outflow of
US$57.1 million during 2001 (Jul-Dec) as against an outflow of US$67.4 million in the same
period of the preceding year.
 FPI in 1997 and 1998 was $47.3 and $28.6 million respectively. FPI witnessed an outflow
of $57.1 million in 2001 as compared to an outflow of $67.4 million in 2000.

FPI DURING AND AFTER THE WORLD FINANCIAL CRISIS OF 2008

2008

The portfolio investment in the stock markets had wiped out as the foreign investors have
gradually pulled out their stake from Pakistani stock markets amid economic crisis and political
chaos in the country.
On May, 20, 2008 the State Bank of Pakistan had reported that the net flow of the portfolio
investment had landed into negative by US$50 million dollar from July07 to date, which reflects
elimination of foreign investment from the stock markets. In the period of May foreign
investors ejected $309.5 million dollars from equity markets.

A major outflow of portfolio investment had been recorded from the USA, United Kingdom,
Switzerland, Singapore, Hong Kong and Australia.
The data of portfolio investment reflects net outflow of US$4.1 billion dollars and inflow of
US$4 billion dollars during the above mentioned period.

According to the State Bank of Pakistan (SBP) data, the UK investors withdrew $1.
4 billion, USA$2 billion, Singapore$64 million, Hong Kong $328 million, B.V Island $51 million
and Australia $67 during the period under review.

It may be noted here that the in 2006-07 the portfolio investment at stock market hit the
record high level of around one billion dollars, but from the outset of this financial year the
foreign investment at stock market appeared in the reverse gear, showing outflow of huge
investment.
Foreign investors have been gradually pulling out their stake from Pakistani stock markets from
July 2007. In less than two months, from July to August 17, 2007, the stock market reflected a
net outflow of 156 million dollars worth foreign investment.
On January 03, 2008 the net flow at stock market was recorded at $37 million dollars after
taking dip of $30 million.

On January 10, 2008 the State Bank of Pakistan has reported that the net flow of the portfolio
investment has landed into negative by $0.35 million dollar that indicates the elimination of
foreign investment from the equity market.
During the month of January 2008 the portfolio investment was recorded negative by around
US$90 million dollars.
2009-2010

Regaining the confidence of foreign investors on Pakistans economy, the inflow of portfolio
investment from the developed countries at local equity market has recorded a massive growth
of 235.9 per cent during the first quarter (July-August) of current financial year, 2009-10.
Pakistans local bourses attracted $230.
9 million from advanced economies of Western Europe, European Union, North America and US
during July-September FY10.

However, such inflows during the same period of last fiscal year witnessed a sharp decline and
fell to $169.9 million.

This trend showed that the confidence of international investors about Pakistans economy was
reviving day-by-day, despite facing bad law and order situation in the country. Stock market
players attribute this development with the improvement in the macroeconomic indicators,
strong liquidity position and witnessing a reversal trend in flight of capital from the country.
In addition to that, the domestic financial market was performing well in terms of offering
better profits and dividends to local and foreign companies (shareholders) on their reported
earnings and profitability among emerging markets of Asia, Europe, Middle East, Africa and
Latin America.

It is important to mention here that portfolio investment inflows remained cheering during the
analytical period of current fiscal year on account of enhanced security conditions in the
country and improving dollar inflows from advanced economies of Western Europe, America,
UK and global factors such as financial recovery in western states. However, investment inflows
from UAE to Pakistan were down to a great extent during July-September this year.

From the United States, Pakistan received significant 162 million dollars worth portfolio
investment as against $-110.2 million of last quarter, showing noteworthy surge of 247 per
cent. From Western Europe, the total portfolio investment amounted to $71.5 million, showing
growth of 234.7 per cent during the said period against $-53.1 million in the July-September
FY09.
2011

Foreign inflows to equity market (foreign portfolio investment) recorded a significant

improvement and the amount under this investment rose to by 182 per cent to $242.1 million
during July-Feb FY11 from $-295.3 million in the corresponding period of the previous year, the
SBP reported.

According to the foreign investment statistics released by the SBP, country received $1.301
billion worth of private investment against $1.608 billion previously.

2012-2014

A survey conducted by the Overseas Investors Chamber found that business confidence, both
local and foreign, had improved to a score of 1% positive in 2014.

During fiscal year 2013-2014, foreign portfolio investment in the country's capital market
reached US $2,300 million, which was a 2 times increase from the previous year.
2015-2016

The handsome inflows of portfolio investment in the country has improved the level of net
foreign investment with the growth of 18.5 percent in the period of July to October compared
with the corresponding period of last year.

According to statistics of State Bank of Pakistan (SBP), the net foreign investment in the country
increased to $711 million in the first four months of financial year 2015-16 as compared with
$600 million of the previous year.

Foreign Portfolio Investment (FPI) inflows recorded at $505 million in July to October as against
an outflow of $29 million reported last year. The investment was received in debt securities
under FPI, the central bank stated.

The foreign investment in real sector reported reaching $350 million in the four months as
compared with Rs 462 million in the same period of last year.

The investment was seen in sectors such as power, communications and financial business
categories with inflows recorded at $168 million, $67 million and $25 million respectively.

Investment inflows from China stood at $272 million alone, whereas from UK and Switzerland it
stood at $74 million and $40 million respectively.

REFERENCES

REMITTANCES

http://tribune.com.pk/story/920286/pakistan-pockets-remittances-amounting-to-18-
4b/

http://www.dawn.com/news/1176411

http://en.dailypakistan.com.pk/business/india-top-3rd-country-to-send-remittances-to-
pakistan/

http://www.theglobaleconomy.com/Pakistan/Remittances/
 http://www.tradingeconomics.com/pakistan/remittances

http://www.thenews.com.pk/print/80985-Pakistan-receives-81bln-remittances

MILITARY AID
https://www.washingtonpost.com/world/in-pakistan-worries-that-us-could-cut-
military-aid-over-counterterror-efforts/2015/08/20/67b66b18-4735-11e5-9f53-
d1e3ddfd0cda_story.html

https://en.wikipedia.org/wiki/Foreign_aid_to_Pakistan#Military_and_economic_aid

https://en.wikipedia.org/wiki/United_States_military_aid

http://carnegieendowment.org/files/pakistan_aid2011.pdf

http://www.dailytimes.com.pk/national/14-Apr-2015/pak-saudi-relations-an-alliance-
needed-not-a-test

https://en.wikipedia.org/wiki/Pakistan%E2%80%93Saudi_Arabia_relations#Military_coo
peration

http://www.dawn.com/news/731670/timeline-history-of-us-pakistan-relations

http://www.theguardian.com/global-development/poverty-matters/2011/jul/11/us-
aid-to-pakistan

http://www.pide.org.pk/pdf/PDR/2007/Volume3/215-240.pdf

FOREIGN DIRECT INVESTMENT

http://www.ipripak.org/foreign-direct-investment-fdi-and-trade-liberalization-policies-

in-pakistan/#sthash.w2TOhdZc.dpbs

http://boi.gov.pk/UploadedDocs/Downloads/InvestmentStrategy.pdf

http://eccsf.ulbsibiu.ro/articole/vol101/1011akbar&akbar.pdf
 http://prr.hec.gov.pk/Chapters/1797S-2.pdf

http://www.adb.org/sites/default/files/publication/28178/er066.pdf

http://tribune.com.pk/story/939830/fdi-up-a-whopping-307-6-year-on-year/

FOREIGN PRIVATE INVESTMENT

https://en.wikipedia.org/wiki/Foreign_portfolio_investment
http://www.investopedia.com/terms/f/foreign-portfolio-investment-fpi.asp
http://www.slideshare.net/neelamasad1/fdifpi-patterns-in-paksitan
http://www.lahoreschoolofeconomics.edu.pk/JOURNAL/vol7-
No1/01%20Minh%20Hang%20Le%20and%20Ali%20Ataullah.pdf
http://nation.com.pk/business/13-Jun-2015/renewable-energy-investment-portfolio-
increases-to-1b
http://www.dailytimes.com.pk/business/18-Nov-2015/fpi-witnesses-handsome-inflows