The FDI slide

According to the State Bank of Pakistan (SBP) website, foreign direct investment (FDI) posted a decline of 2.8 percent during the first half of the current fiscal year (July-December 2017) in comparison to the comparable period of the year before; in total terms, the decline was 40 million dollars. Portfolio investment declined by 50 percent or three times the FDI amount estimated at 128.4 million dollars in total terms. The reason for this decline, according to economists, is political uncertainty, a rationale that has been repeatedly cited by former Prime Minister Nawaz Sharif during his frequent interactions with the public in rallies and the media after his disqualification by the Supreme Court on 28th July 2016.
Independent economists may only partially agree with this assessment. While the stock market is extremely sensitive to political dynamics, yet what is relevant to note is that the budget for 2017-18 announced by the then functional Finance Minister Ishaq Dar in May 2016 levied a fixed capital gains tax on stock trading - 15 percent tax to be levied on filers and 20 percent on non-filers. Previously, the applicable rate was 15 percent for filers and 18 percent for non-filers on securities held for less than 12 months, 12.5 percent for filers and 16 percent for non-filers on securities held for a period between 12 months and 24 months. Additionally, income tax on cash dividends was raised from the then applicable rate of 12.5 percent to 15 percent. These measures effectively forestalled a boom in the stock market widely expected after Pakistan Stock Exchange was upgraded, after a gap of 9 years, to the MSCI (a leading provider of international investment decision support tool) Emerging Market status. Thus the 50 percent decline in portfolio investment is attributable to government taxation decisions which effectively led to Pakistan no longer being the most profitable Asian market. It is relevant to note that the stock market slumped after the application of these tax measures on 1st July 2016 - only 28 days before the disqualification of Nawaz Sharif, strengthening Business Recorder's contention that the current year's tax measures may take precedence over political uncertainty as the primary reason for the decline in portfolio investment.
FDI rise last year in comparison to the year before mainly attributable not to investment inflows under the China Pakistan Economic Corridor (CPEC) but to the issuance of debt securities for example the Eurobonds and sukuk. Thus what is defined as foreign public investment, consisting exclusively of debt securities, rose in 2017 (July-December) from 998 million dollars to 2450 million dollars in the current fiscal year. Foreign private investment July-December 2017 was 1067 million dollars while the comparable figure for the current year is 1253.3 million dollars with Chinese investment rising from 393.1 million dollars to 969 million dollars during July-December 2018 in comparison to the comparable period the year before.
To conclude, for former Prime Minister Nawaz Sharif to declare that his disqualification had a negative impact on key economic indicators (given that the PML-N government remains in power and the policy measures continue into the fifth and final year of the current PML-N government is perhaps not as relevant as the fact that tax measures as well as heavy reliance on debt equity through issuing sukuk and Eurobonds at extremely attractive rates continue to act as impediments to an improvement in the country's economic environment. It is about time Dar's policies were revisited.