WHY PRIVATE INVESTMENT IN PAKISTAN HAS COLLAPSED AND HOW CAN IT BE RESTORED

The purpose of this paper is to analyze the decline in private investment and sort out 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 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 eaten up the savings that might be used to finance private investment. The unexplained part of the private investment that is not determined by economic factors can be attributed to the 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 hav