FDI growth overplayed and waning

Foreign direct investment in Pakistan as per the latest official data has increased by 75 percent year-on-year in 8MFY20. The growth numbers at such precarious times are even more crucial. However, it wouldn’t take more than a couple of minutes for those celebrating the mammoth 75 percent growth in FDI in 8MFY20 to do a little math.

Growth in 8MFY20 FDI is largley driven by the decline in outflows (57% YoY) and no substantial gorwth in FDI inflows (5% YoY). Moreover, the decline in outflows comes from high base in FY19 on account of repayment of an intercompany loan by a Chinese power company to its parent company that resulted in over $370 million FDI outflow in October 2018. So there is little in FDI performance in 8MFY20 to be joyful about.

FDI by sector and countries further shows that inflows from China dipped by 10 percent, year-on-year in 8MFY20 showing little activity during the period versus last year. However, due to nominal outflows in 8MFY20, the net FDI from China grew by more than 100 percent, particularly in the power sector.  On the other hand, inflows from countries sans China (and Hong Kong) registered a growth of 17 perent year-on-year.

Foreign direct investment in February 2020 was also not among the best monthly perfromances. Nonetheless, the growth of over 150 percent year-on-year in net FDI was driven by growth in inflows, primarily in the power sector and China.

FY19 was a weak year for the economy internally and FY20 was being projected as a year of recovery followed by growth. Net FDI for 8MFY20 stands higher than FY19 annual FDI figure. But it could be downhill from here. With Coronavirus COVID-19 global outbreak, the threat could last for at least several months and the economic impact could last much longer. This space warned about putting all eggs in China’s basket several times. But the threat has escalated worldwide, which will negatively affect foreign direct investment (FDI) flows from other countries as well.

UNCTAD has warned that global foreign direct investment (FDI) could shrink by 5 to 15 percent against its previous forecast of 5 percent growth. Economies most severely affected by the pandemic, which include China and Italy, are expected to be the hardest hit. However, consumer demand and supply chain disruptions will affect investment prospects in other countries as per the investment monitor. It also highlights that COVID-19’s negative impact on investments are to be felt strongest in the automotive, airlines and energy industries.  “The ripple effect could cause a major setback to efforts of governments around the globe to attract the private investment needed to achieve sustainable development objectives,” pointed out UNCTAD Secretary-General. Expect a slowdown in FDI in Pakistan for at least the rest of the fiscal year.