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EDITORIAL: Recent data uploaded by the State Bank of Pakistan (SBP) indicates that foreign direct investment has plunged by 30 percent – from 1.85 billion dollars in July-February 2019-20 to 1.3 billion dollars in the comparable period of 2020-21. July-February inflows last year were of 2.36 billion dollars against this year’s 1.98 billion dollars (a decline of 16 percent) while outflows last year were 507.4 million dollars against 683.6 million dollars in the comparable period of this year (a rise of 34 percent). This data reflects two disturbing trends; notably, that not only have inflows declined (which may be attributed to the pandemic) but outflows too have risen which would indicate that the comfort level with the government’s policies has been shaken. This confidence may be partially restored as the staff-level agreement with the International Monetary Fund programme has been reached though the government is clearly struggling domestically to implement the “prior” conditions which envisage higher taxes, higher utility prices and lower subsidies.

Recent FDI data contrasts poorly with the foreign direct investment of 2.4 billion dollars in fiscal year 2017, 2.78 billion dollars in fiscal year 2018, which plummeted to 1.36 billion dollars in the first year of the Khan administration as it struggled to meet the challenges it inherited with a historically high current account deficit and a grossly overvalued rupee. China has emerged as the largest FDI source for Pakistan since 2017 when projects signed under the umbrella of the China Pakistan Economic Corridor began to be implemented: in July-June 2017, total net inflow from China was 763.2 million dollars, in 2018 the net inflow was 1.3 billion dollars and July-February 2020 the net inflows had declined to 654.8 million dollars which declined further to 493.9 million dollars in the comparable period of 2021. While the West accuses China of giving loans rather than investing in infrastructure under the One Belt One Road initiative, Pakistani administrations (PML-N and the incumbent government) deny this vehemently by pointing out that it is FDI. It is relevant to note that China retains its status as the highest source of FDI for Pakistan followed by the Netherlands with 117.8 million dollars net inflows in July February 2021, a one-off, and Hong Kong with 106 million dollars, again a one-off.

In marked contrast, however, both the UK and the US registered negative inflows in July-February 2021 - negative 85.1 million dollars and negative 59.4 million dollars, respectively; however in the comparable period of 2020 the UK registered positive 80.9 million in 2020 and the US stood at 60.5 million dollars. Thus the argument by Pakistan officialdom that China is at present the only source of foreign investment and therefore must be wooed has considerable merit.

Two possible reasons for the decline in the Chinese FDI in 2020 and 2021 to Pakistan are: (i) as the more expensive infrastructure projects under the CPEC are completed or nearing completion (the largest FDI is in electricity, gas, steam) the net inflows have declined; and (ii) the failure of the Pakistani government to provide counterpart funds for the CPEC projects may well account for the decline in Chinese investment inflows.

In marked contrast, portfolio investment is mainly sourced to Saudi Arabia equity at 16.3 billion dollars (end June 2020) followed by the UAE (mainly in long-term debt securities) with Qatar and Oman a distant third and fourth with 4.59 billion dollars and 4.576 billion dollars end June 2020, respectively, (long-term debt security). The UK portfolio investment amounted to 1.2 billion dollars and the US’ at 1.6 billion dollars up till June 2020.

Pakistan remains an unattractive destination for FDI and portfolio investment has been spiked in recent years with a discount rate of 13.25 percent in July-March 2020 and the present rate of 7 percent compares very favourably with the near zero interest rates in other parts of the world still grappling with a pandemic fuelled recession. Much more work is required to formulate policies designed to attract FDI to make it the engine of growth in the short to the medium term.

Copyright Business Recorder, 2021

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