FDI for 11MFY20 is being celebrated for its 91 percent year-on-year growth, but the performance is not actually that extraordinary - everyone keeps missing that the growth in FY20 is mostly driven by a significant outflow in FY19, and hence a comparison with a low base FY19. Inflows in 11MFY20 are up by 17 percent year-on-year, while outflows are down by 51 percent year-on-year. And 11MFY20 FDI stats are not better than 11MFY18 either. Net foreign direct investment in May 2020 is also down by 3 perecnt year-on-year, while the month-on-month trend shows that May 2020 depicted a third-month consecutive decline.
Growth in 11MFY20 inflows came largely from China under CPEC power projects. The almost 8 times increase in net FDI from China was due to 45 percent increase in inflows and a sharp decline in outflows. The second largest contributor to FDI was the telecom sector where FDI inflows increased 3 times. The power and telecom sector together made up 4 percent of the total net FDI.
The full impact of the coronavirus pandemic is yet to be seen. Part of the decline in monthly flows could be due to COVID-19, though projects in pipeline might have continued to get their share of inflow during the ongoing COVID-19 crisis. FDI prospects are bleak. FDI to developing economies in Asia is projected to decrease between 30-45 percent in 2020 according to United Nations Annual World Investment Report. The reason the report cites is the region's status as the world's factory is vulnerable to disruptions from the coronavirus pandemic. It further highlights that Asia’s greenfield investment has already seen a 37 percent decline from January to March year-on-year.
The Budget 2020-21 targets an ambitious 25 percent increase in FDI in Pakistan. Ambitious not only because of the global economic slump due to COVID-19, but also because FDI policy making has not been aggressive enough pre-COVID times. Assuming full year FDI of $2.5 billion for FY20, government is eyeing FDI of over $3.1 billion – a level not seen in the last 10 years.
While inflows from China could continue to support FDI, the much needed diversification will become even more difficult for Pakistan in the coming months as the global economic slowdown continues. Sectors like health, telecom, pharma, construction and ecommerce can be expected to attract FDI in the post-COVID times. But the board of investment and the authorities really need to work on retaining the existing investors and conventional sectors. Dr Henry Loewendahi, a creator of FDi Intelligence Database has a word of advice for countries grappling with FDI pressures: Economic development organisations and investment promotion agencies must focus on their existing investors and do all they can to retain investments to weather the COVID storm in the short term.