May FDI inspires hope

Finally, there is some silver lining on the FDI horizon. As per SBPs latest data, net FDI (derived as gross FDI inflows less outflows) now stands at $1.361 billion in 11M FY14, up 2.5 percent or $34 million over the same period of last year. Critics would be right to point out that this improvement is marginal. But, the government would be happy if it closes its maiden financial year with some growth on this barometer.
Still, this much FDI pales in comparison to the needed investments. Net FDI has failed to cross even percent of GDP in recent years--and this year seems to be no different. Again, critics would be just in lamenting that gross FDI inflows have dropped by 7.3 percent year on year to $2.29 billion in the Jul-May period.
That is a disappointing trend, because the incumbent government is being seen making many efforts--and claims--for fresh FDI mobilisation. However, the situation is a bit nuanced. The government has been more successful at FDI retention than it has been at FDI attraction. The central bank data show that FDI outflows have gone down by 18.7 percent to close at $934 million in the 11-month period.
Arguably, in these times, when maintenance of law and order is on a downward slope, foreign investment not leaving the shores is at least as important as fresh investment.
The improvement in the FDI profile for the period, review is brought about by strong inflows in May. During the month, net FDI recorded a terrific 31 percent yearly increase to reach $611 million, thus accounting for nearly 45 percent of the year-to-date tally.
Compared to recent monthly inflows this fiscal year, May seems like a miraculous month. Gross inflows grew 21 percent year on year to reach $692 million, even as outflows declined by 24 percent to a mere $81 million for the month. This column had highlighted last month that there would be significant FDI improvement in May; thanks to the telecom spectrum auction which took place on April 23.
Detailed data show that 80.4 percent of gross FDI inflows in May were meant for the telecommunications sector. About 79 percent of gross FDI inflows were received from China. That makes it clear that Zong (China Mobiles Pakistani affiliate) paid up for its one 3G license and one 4G license in full through its sponsor equity, which made its way from China to Pakistan last month.
Spectrum auction was one heavyweight transaction, which will not be repeated every year. However, the capital investments in the rollout of 3G/4G network technologies will continue to pour in over the next few years. Beyond that, there is a need to mobilise foreign investment in critical sectors like oil and gas exploration, power production, and transportation infrastructure.
With the launch of military operation in North Waziristan, FDI figures will likely remain range-bound--no great boost, but no significant downsides either, due to already-low numbers--in the near future. But a cleanup operation has been deemed necessary to improve overall law-and-order situation--and by extension, business environment. So, an effective military campaign and post-operation security paradigm will hopefully positively impact future investments. Till then, uncertainty will hold sway.