Think out-of-box FDI (II)

While there is a need to rethink FDI policy and invigorate and charge up IPAs’ role – as highlighted last in this section (read: Think out-of-box FDI), it is also time to evolve and diversify as well as adapt the FDI policy accordingly - something that remains a challenge here in Pakistan. A key reason for the weak FDI landscape has been seeking refuge in CPEC projects only, as well as sticking to what’s been working historically. This ‘all-eggs-in-one-basket” approach as well as lack of innovation and diversification has resulted in stagnation in FDI inflows. A latest dampener – and a huge one – has been Covid-19 pandemic that has affected global FDI flows immensely.

Talking of Asia and the Pacific, the region’s share in global FDI has slipped from 45 percent in 2018 to 35 percent in 2019 and COVID-19 pandemic has accelerated the downward trend. ESCAP’s (the United Nations development arm) latest Foreign Direct Investment Trends and Outlook in Asia and the Pacific 2021 says, “FDI is expected to remain low and below pre-crisis levels throughout 2021, while the outlook beyond 2021 is highly uncertain and dependent on the duration of the crisis, the effectiveness of policy interventions to stimulate investment and navigate the economic effects of the pandemic, as well as geo-economic tensions”. The report further states that inward FDI flows to South and South-West Asia (which includes India, Pakistan, Bangladesh, Nepal, Bhutan, Maldives, Afghanistan, Turkey etc.) decreased slightly by 2 percent from $76 billion in 2018 to $66 billion in 2019.

However, it also mentions that growth was mainly driven by India that saw its FDI inflows going up by 20 percent year-on-year in 2019 and its share in regions FDI up to 77 percent. Other countries that saw growth were Turkey and Sri Lanka, while Pakistan was among countries that have been facing a decline in FDI inward flows for two consecutive years. The report highlights that this downward trend in Pakistan’s FDI is likely to continue as CPEC projects end, which is a clear sign that there is a dire need for diversification sector wise as well as country-wise if Pakistan wants to get out of this rut.

Pakistan’s regional peers as well as countries with similar demographics have been able to maximize investor interest with revamped and much more liberalized FDI policies followed by opening up of an array of sectors as well as seeking investor interest in non-traditional sectors. The report includes examples from 2019 and 2020 of Mongolia opening a one-stop service center for FDI; China further liberalizing inward FDI to expand and diversify flows, while continuing tight controls on outflows; Azerbaijan extending a tax exemption period in industrial and hi-tech parks; Uzbekistan implementing several new policies in 2019 and 2020 including SEZ laws to liberalize investment; Indonesia introducing new income tax incentives; Thailand introducing new tax incentives during pandemic to attract FDI into higher tech medical industries; Vietnam amending its FDI law; Turkey revising its investment incentive regime aiming to encourage inflows in high technology sectors; and India taking a number of measures such as relaxation of limits to FDI in the insurance sector, liberalizing FDI rules for sectors such as coal and lignite mining, contract manufacturing and single brand retail trading, increasing ceiling for FDI into the defense sector, etc.

Thus, what is required at home to invigorate foreign investor interest also includes FDI policy revamp, opening to FDI in terms of incentives in sustainable sectors and removing hurdles. Countries can bounce back from the Covid-struct downturn as UN’s development arm proposes some key policy measures such as introduction of sunset clauses into any new restrictive measures implemented due to the pandemic; or revising and reviewing current FDI policies to ensure they complement sustainable development goals support digital transformation, back green growth, as well as the improve healthcare systems to make FDI an opportunity in the crisis.