FDI into SAARC · SAARC · South Asia

Promoting FDI in SAARC countries

Promoting FDI in SAARC countries

Md. Joynal Abdin

The Financial Express on September 30, 2015

The South Asian Association for Regional Cooperation (SAARC) was established on December 08 of 1985 although its idea was floated earlier on May 02 of 1980 by former Bangladeshi President Ziaur Rahman. The organisation’s principal objective is to undertake a collective effort toward regional progress for South Asian countries – Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka. Since SAARC’s inception, leaders of the member-states met 18 times and signed a long list of agreements, conventions, understandings and declarations.

Actually, South Asian Free Trade Agreement (SAFTA) is considered the most vital achievement of SAARC as it has unlocked remarkable ideas – South Asian Customs Union, South Asian Economic Union, South Asian Investment Forum, South Asian Common Market, South Asian Single Currency, South Asian Common Security Force, South Asian Roads and Water Transport Movement, and South Asian Free Movement of People and Goods.

South Asia has the potential to be a powerful region in the near future if its leaders aspire and work accordingly. The SAARC countries cover 3 per cent of the world’s geographic territories with 9.12 per cent of global wealth and 21 per cent of the world’s population (1.7 billion). Collectively, the SAARC is the world’s third largest economy after the United States and China. Coverage and capacity of the SAARC can be further extended if two neighbouring observer-states Myanmar and China are upgraded into full members.

Despite the achievements, SAARC has various limitations – significant number of the world’s poor population, lack of human development initiatives, political rivalry between the member-states, emergence of insufficient trade agreements, poor infrastructure, lack of connectivity, complex visa procedures and mistrust among general people emanating from religious fanaticism.

In South Asia, more than a half billion people live below the poverty line. This causes  increase in criminal and terrorist occurrences. At this moment, development of human capacity should be the number one priority for SAARC countries. Perhaps, employment generation and entrepreneurial development are the best tools to eliminate poverty as it will increase the gross domestic product (GDP) and export earnings of SAARC member-states – ensuring faster and inclusive economic growth of the region.

A common initiative must be taken to increase investments in SAARC countries either by SAARC entrepreneurs or to attract foreign direct investment (FDI) into South Asia. In order to promote employment generation and poverty alleviation for each of the member-states, promotional packages should be offered to attract new investments.

FDI INFLOWS: During the last ten years, India got the highest amount of FDI inflows followed by Pakistan, Bangladesh and Sri Lanka. The land-locked countries of Nepal and Bhutan performed poorly in this regard. The performance of war-torn Afghanistan is extremely poor in the field of FDI.

Table -1. FDI Inflows into the SAARC Countries (USD in Million)

Country/ Years 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Afghanistan 186.9 271 238 188.69 94.38 75.73 211.25 83.41 93.8 69.29
Bangladesh 460.4 845.26 792.48 666.36 1086.31 700.16 913.32 1136.38 1292.56 1599.13
Bhutan 8.85 6.21 72.16 3.02 19.90 71.65 30.80 25.92 21.83 21.28
India 5777.80 7621.76 20327.76 25349.89 47138.73 35657.25 27431.23 36190.4 24195.77 28199.44
Maldives 52.93 73.23 95.22 132.43 181.25 157.96 216.46 256.46 283.97 325.25
Nepal -0.41 2.45 -6.64 5.89 1.01 38.55 86.73 95.48 91.97 73.63
Pakistan 1118 2201 4273 5590 5438 2338 2022 1326 859 1307
Sri Lanka 233 272 480 603.4 752.2 404 477.6 981.1 941.12 915.57

TOP 10 SECTORS FOR MORE FDI: SAARC countries comprise almost similar products in the ‘export-basket’ – textile, clothing and ready-made garment (RMG) is a common industrial sector for Bangladesh, India, Sri Lanka and Pakistan. These countries are trying to flourish their respective RMG sectors to get FDI in it.

Table – 2. Major FDI receiving sectors of SAARC region.

Sl. Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka
1 Agriculture and Related Industries Textiles, clothing and leather Hotels Unspecified secondary Tourism Hydro-electricity Petroleum Chemicals and chemical products
2 Construction Finance Agro & Food Hotels and restaurants Fisheries Tourism Finance Food, beverages and tobacco
3 Telecommunications Electricity, gas and water Financial Services Finance Transportation & shipping Health Chemicals and chemical products Metal and metal products
4 Transports and logistics Transport, storage and communications IT Electricity, gas and water Telecommunication & ICT Education Motor vehicles and other transport equipment Non-metallic mineral products
5 Mining Non-metallic mineral products Ferro Alloys Construction Power ICT Electricity, gas and water Other manufacturing
6 Power Chemicals and chemical products Power Business activities Carpets & Woolen products Construction Textiles, clothing and leather
7 Water Other manufacturing Metals Unspecified tertiary Readymade Garment Non-metallic mineral products Unspecified tertiary
8 Food, beverages and tobacco Pharmaceuticals Wholesale and retail trade Pashmina and Silk Products Business activities Wood and wood products
9 Unspecified tertiary Gases Transport, storage and communications Handicraft Coke, petroleum products and nuclear fuel
10 Metal and metal products Mineral Based Education Tea Textiles, clothing and leather

Similarly, economic sectors like telecom, information technology (IT), information and communications technology (ICT), and tourism are common for SAARC countries – Bangladesh, India and Afghanistan have achieved the highest amount of FDI in their respective telecom and ICT sectors. Nepal, Bhutan, India, Bangladesh, Sri Lanka, Maldives are competing to promote their respective tourism sectors and attract more tourists into their spots.

Therefore, SAARC countries should classify their industries based in respective competitive advantages. A specialised sector for SAARC countries must be allocated so that member-states can promote and complement each other’s industries and not supplement. Bangladesh, India, Nepal, Pakistan and Sri Lanka have hill-stations as tourist spots but the same environment does not exist – Pakistan, India and Nepal have snow-covered hill-stations but hill-stations in Bangladesh and Sri Lanka are evergreen. Bangladesh, India, Sri Lanka, and Maldives have sea-beaches but Nepal, Bhutan and Afghanistan do not. So, countries can promote the beauty of sea-beaches to the tourists who are familiar to hill-stations, although tourists familiar to sea-beaches can visit countries which promote hill-stations.

Most of the SAARC countries receive FDI from United States and European Union (EU) as well as investments from Singapore, China and Japan.

Table – 3. Major Sources of FDI into the SAARC Countries

Sl. Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka
1  India United Arab Emirates  India Mauritius  Italy India USA China
2  USA Kingdom of Saudi Arabia (KSA)  Singapore Singapore  UK  China UK Hong Kong
3  China United Kingdom  Japan USA  Germany  EU member states UAE Singapore
4  UAE United States  USA UK  France  USA Japan Netherlands
5 The Netherlands  EU member states Netherlands  Japan  South Korea Hong Kong Malaysia
6 Egypt Japan  China Switzerland UK
7 Malaysia Cyprus  India KSA India
8 South Korea Germany  Switzerland Germany
9 India France  Russia South Korea
10 China UAE Norway

CHALLENGES AND CONSTRAINTS

There is an enormous opportunity to increase FDIs into SAARC countries. Intra-regional flow of FDI should be increased gradually. However, there are few challenges hindering the economic integration among SAARC countries.

  1. Political instability: India and Pakistan are SAARC’s two biggest member-states who fought twice in the last century. Besides, intra-SAARC level of confidence or trust is not satisfactory. Almost every SAARC country other than India is suffering from political instability and Afghanistan has faced a series of wars since the previous century. Therefore, it is difficult to implement a regional commitment with a ‘simple’ change in power.
  1. Restriction on investing abroad: The FDI inflow is inspiring in most SAARC countries, but the FDI outflow (investing abroad) is restricted. As a result, intra-SAARC FDI inflow is insignificant. SAARC countries should overcome this challenge to enhance deeper integration in the near future.
  1. Complex Visa Regime: Nowadays, it is tougher to get an Indian visa for Bangladeshi and Pakistani citizens than that of getting a US visa. So, Bangladeshi and Pakistani governments are bound to follow the same policy in case of Indian citizens. India’s visa regime must be easier to make SAARC more effective in terms of investment, trade and commerce while a ‘visa-free SAARC regime’ should be considered. At least, the port-entry of SAARC citizens would promote intra-regional trade and investment.
  1. Connectivity and Transportation: The SAARC countries are not fully connected for daily business needs. Most SAARC states are disconnected in land, sea and even air connectivity. Therefore, an effective intra-regional trade is not occurring among the member countries. Transit and trans-shipment facilities exist insufficiently. In order to make SAARC an economically-integrated regional block, free movement of people and goods should be ensured.
  1. Increasing number of non-tariff measures: Till now, SAARC countries are applying non-tariff measures – this is highly discouraging the intra-regional trade. Special attention must be given to identify and remove non-tariff barriers existing or upcoming in SAARC region.
  1. Emergence of a new regional or bilateral FTA: A new set of bilateral or regional free trade agreements (FTAs) is being signed-off to avoid existing political conflicts affecting the relationship among SAARC countries. These agreements are decreasing the importance of SAFTA or SAARC. Therefore, it is the time to promote new economic initiatives under the umbrella of SAARC instead of bypassing it.

Finally, SAARC has spent plenty of time without any use. It has taken comparatively longer period than that of EU, ASEAN or even NAFTA to be effective in terms of trade and investment cooperation. Currently, a significant amount of the world’s poor population belongs to this region. Conversely, SAARC countries have potentials to grow faster and alleviate poverty within the shortest possible time. Thus, it is time for governments to take the decision whether they would like to drive ‘impoverished SAARC’ into a developed and integrated regional block with an effective fiscal union, or gradually let the SAARC to be further ineffective.

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