Abstract:
The purpose of this paper is to analyse the decline in private
investment and formulate a comprehensive strategy to overcome this
problem, which is the main cause of deceleration in the growth momentum
of Pakistan’s economy. Due to lack of investor confidence, private
investment has reached its lowest point in the recent economic history of
the private sector led growth phase (1978 to 2002) in Pakistan. This paper
argues that economic as well as non-economic factors are responsible for
this declining investment. Economic policies are formulated in such a
manner that the short-term objectives of lowering the fiscal and trade
deficits were to some extent achieved but overall economic performance and
investment were ignored. In order to control external trade deficits, a
policy of devaluation increased the cost of production through an increase
in prices of imported raw material especially of plant and machinery.
Higher real interest rates due to excessive public borrowing that were due
to the failure in reducing fiscal deficits has resulted in financial crowding
out and has corroded the savings that might be used to finance private
investment. The unexplained part of private investment that is not
determined by economic factors can be attributed to non-economic factors,
which include internal and external shocks. These shocks start from the
sanctions which were imposed after the nuclear blast. Events following that
initial shock like the freezing of foreign currency accounts, the military
coup, the harassment of the partially successful accountability drive of the
military government, the 9/11 incident, the Afghan war and tensions on
the Pak-India border have complemented the shock. A comprehensive
programme is required to boost private investment and for the restoration
of investor confidence. Therefore, an economic package is recommended in
this paper that consists of incentives that relax the supply side constraints
by reducing cost of production as well as demand-enhancing efforts. It is
the best time to introduce a strategy to increase investment activities in the economy because of the high level of foreign exchange reserves, the
rescheduling of foreign debt and the drastic reduction in interest rates
which have reduced the debt servicing cost. Investor confidence can be
restored by accelerating economic activities through following policies that
can reduce the cost of imported raw material, bring down the real interest
rates in the economy, increase expenditures on infrastructural development
activities and that can also increase the availability of conditional
subsidised credit for the export oriented small scale industries so that there
is an improvement in the quality of th
