Merits of Foreign Investment
Foreign Investment into AfPak: Is it worth it?
January 7, 2016
Primary Article Contributor - Ushah Qazi
Team Leader - Nathaniel Sukhdeo
Keywords: Afghanistan, Pakistan, AfPak, foreign direct investment, economic development
The reality of terrorism, political conflict and natural disasters in the AfPak region continue to threaten foreign investments, but the reality isn’t anything new for most foreign actors. With constant instability in government and an exponential lack of support for infrastructure development, many worry about whether it’s worth their time to directly invest into the AfPak region. Terrorism continues to threaten investor interests in the region as economic turmoil surfaces as a result of an instable government.
Political unrest in the region is the growing cause for concern for stakeholders. Pakistan’s recent election saw one democratically elected government transfer power to another. But there have been growing tensions amongst political parties, which threaten to bring legislative functioning to a standstill. Mass demonstration held in unison by the clerical organization Pakistani Awami Tehreek (PAT) and the prominent opposition party the Pakistan Tehreek e Insaaf (PTI) in November last year demonstrated how fragile the democratic process in the country. These protests stagnate the judicial process, impact business interests and can quickly become violent. Across the border in Afghanistan, the government continues to struggle to reach some form of an agreement with the Taliban. Particularly after NATO revised its policy, the relationship between the Afghan government and Taliban or lack thereof will impact the country’s stability. There was some headway made in May this year when representatives from both parties met in Qatar. However, a few months later in September the Taliban recaptured Kunduz in Northern Afghanistan. The resurgence was brief, but it demonstrated how political developments in the country make it a risky investment opportunity.
The region’s vulnerability to natural disasters also leads to instability and impacts investor interests. The monsoon season in Pakistan has lead to seasonal flooding. In a report published by the World Bank in partnership with the Natural Disaster Management Authority, it was stated that flooding impacts the federal budget by 3 - 4% and significantly impacts the infrastructure of the country. Approximately three million people are affected by natural disasters annually. In Afghanistan, there have been nine major earthquakes since 2000, the most recent having occurred in October this year, killed more than 300 people. These natural catastrophes impact the already flailing infrastructure. They require post disaster management and construction efforts, which can be costly and time consuming. In effect, economic activity in the region can come to a standstill because of natural disasters.
The cost efficacy is going to be the main principle that foreign investors will have to look at when considering investing in the region. That analysis will include the exponential cost of domestic security for a firm. Security, coupled with the cost of trying to build on top of crippled infrastructure, will render significant losses for companies not looking to stick around for the long haul in the AfPak region.
