KSE100 34350.42  ▲ Increased By 231.03 (0.68%)
KSE30 15000.89  ▲ Increased By 85.48 (0.57%)
BR100 3516.22  ▲ Increased By 11.22 (0.32%)
BR30 18244.64  ▲ Increased By 13.27 (0.07%)

Business Recorder Logo

Jun 06, 2020 PRINT EDITION
BR Research

Post-covid FDI outlook

The headlines still make believe that foreign direct investment (FDI) in Pakistan rose 127 percent in the ten months

May 21, 2020

The headlines still make believe that foreign direct investment (FDI) in Pakistan rose 127 percent in the ten months ending April 2020. Adjusted for low base affect due to a heavy one-off outflow in power sector last year, FDI is actually up just 11 percent. Yet some myths are sticky!

In 10MFY19, both power and telecommunication sectors had witnessed substantial outflows, which led to a lower base effect for this year. Adjusting for both power and telecom, net FDI is actually down 32 percent in 10MFY20, and this is after accounting for the one-off inflow of $478 million fetched by telecom operators in 10MFY20 for renewal of their operating licenses in Pakistan. (Read BR Research’s ‘Oct FDI: Don’t be fooled by Chinese exception’, Nov 20, 2019 & ‘FDI growth: looking behind the headlines’, Jan 20, 2020)

But this was all pre-Covid. Even though April 2020 saw 33 percent dip in net FDI, due mainly to lower gross outflows, the real impact of Covid-19 on FDI in Pakistan will start reflecting May or perhaps even June onward as projects already in the pipeline can be expected to bring in the dollars in the ensuing months.

The long-term impact of Covid, however, does not look pretty. Although, e-commerce, construction, and perhaps even pharmaceutical industries can be expected to attract FDI in post-Covid Pakistan, many other market seeking sectors might not. These include banks and conventional FIs, airline, tourism, auto, food and beverage. If poor economic outlook for the country translating into poor growth in per capita income isn’t a great incentive for these sectors, falling energy and commodity prices is a disincentive for investments in Pakistan’s oil and gas exploration and mining sectors.

One could always pin hopes to export seeking FDI especially as the developed world seeks to diversify its supply chain risks. But both changing trends in technology and waves of nationalism point towards reshoring or near shoring, which in the face of poor productivity at home casts doubt over Pakistan’s ability to attract a lot of export-seeking manufacturing FDI in the global value chain.

That Pakistan was able to attract only about $190 million in textile sector FY16 to-date, despite all the talk of the Chinese looking to rebase their production, is a tell-tale sign of Pakistan’s attractiveness as an investment destination.  (Read also: BR Research’s The future of Make in Pakistan, Jul 17, 2019)

In any case, global FDI outlook doesn’t look pretty either. Soon after Covid-19 announced its presence in the world, the UN Conference on Trade and Development estimated that global FDI flows would fall at least by 5 percent in FY20 and 15 percent in FY21. About a month later, it revised those estimates downward to 30 and 40 percent respectively on account of falling earnings of the MNCs among other factors.

One silver lining from Covid-19 perhaps is that growing video-conferencing culture and social-distancing awareness may finally force federal and provincial investment promotion agencies as well as other government departments to arrive at the 21st century and fast track processes to truly become one-window operators. The same optimism holds truth for increasing digital inclusion and fin-tech to expand financial inclusion. If the government gives the right signals, these sectors might be an exception to an otherwise gloomy FDI outlook.