Official figures released on March 22 show that private foreign investment in Pakistan rose by 98 per cent in the first eight months of fiscal 2006-07 over the same period of the previous fiscal year

Total private foreign investment rose to $3.952 billion, up from $1.234 billion during the first eight months of fiscal 2005-6. The government says that this is a record for any 8-month period and expects private foreign investment to exceed $4.5 billion in the current fiscal year.

This suggests that Pakistan’s economic climate is improving, which is helping to attract record levels of private foreign investment. What needs to be remembered, however, is that much of this investment is going into things like cell phone companies and real estate which do not create additional industrial capacity or new jobs in the manufacturing sector.

The cell phone sector received private foreign investment of $1.234 billion in the first eight months of the current fiscal year, three times the figure for the same period in the previous fiscal year.

This sharp increase is indicative of how fast the country’s cell phone market is growing. In fact, it is one of the fastest growing cell phone markets in the world. Over the last three years, the number of cell phones in Pakistan has tripled to reach an estimated 40 million today.

While this has certainly vastly expanded the country’s telecommunications network and given people in even the remotest villages access to the system, it has only created a few thousand new jobs in the services sector and hardly any in the manufacturing sector, since all the cell phones and nearly all the equipment in the network is imported.

By contrast, a similar level of investment in, say, textile manufacturing would create anything up to 500,000 new jobs. Increased textile production would also help Pakistan to boost export earnings - which, again, is something that investment in cell phone companies cannot do.

Foreign investment in large-scale real estate ventures helps Pakistani building materials manufacturers to boost sales and improve profitability, thus contributing to GDP growth as a whole. But the increased demand for their products that is generated by such real estate projects is usually not large enough to prompt manufacturers to add to their production capacity and increase the size of their workforce.

Another factor that has to be taken into account when looking at private foreign investment flows is that the government’s figures include the proceeds of state-owned enterprises sold to foreign buyers.

But the sale of state-owned enterprises to foreign buyers does not create new factories or new jobs; it only transfers existing industrial assets to foreign investors.

Over the years, many large state-owned enterprises in the industrial and services sectors have been sold to foreign buyers. In hardly any of these cases, however, have the foreign buyers expanded the capacity of the enterprises, or even invested in modernization programmes.

Foreign buyers tend to see these enterprises as cash-cows to be milked for every rupee of profit, which is then converted into foreign currency and repatriated back to their home countries. Thus, selling state-owned enterprises to foreign buyers tends, over the long-term, to result in net foreign exchange outflows and has a negative effect on the country’s balance of payments.

All this suggests that official figures of private foreign investment need to be taken with a pinch of salt. Yes, foreign investment can help to boost GDP growth and drive the economy forward, but it is not quite the panacea for all economic ills that over-optimistic government officials sometimes make it out to be.