FDI – all eggs in China’s basket

Foreign direct investment during 11MFY21 continued to be dominated by China (including Hong Kong) – accounting for 49 percent of the total net flows in 11MFY21 versus 42 percent in 11MFY20.

However, despite China leading the FDI flows - largely in the power sector of the country - the overall FDI has been declining for long – 11MFY21 net FDI was down by 28 percent to stand at $1.75 billion. Not only that, FDI from China is also tapering due to CPEC initial infrastructure and construction projects completing. A key factor behind declining net FDI is also the rising outflows, which according to SBP’s latest quarterly report has been due to the repayment of intercompany loans by firms in the telecom, electronics, and power sectors. Falling FDI flows into the country has been a trend that started much before the global FDI was impacted by COVID-19 pandemic.

FDI is concentrated. It has been like this since 2015-16 with the initiation of CPEC; and it looks like it will continue to be like this at least for the foreseeable future as the governemnt is reportedly working on framing an effective strategy for Chinese industrial relocation in Pakistan. While this is a good opportunity to populate the special economic zones (SEZs) and attract FDI especially at a time when industries in China are relocating; it shows that the focus of the government will continue to be attracting investment from China, which might continue to keep attention off other destinations and value chains when it comes to devising an inclusive investment policy. This space has talked about the need to achieve geographic as well as sectoral diversification and depth in foreign direct investment.

Nonetheless, increased investment from China under CPEC is much needed; and especially during a time when global greenfield investment is severely impacted, MNCs have reduced their new equity investments, and parent companies have withdrawn intra-company loans from their affiliates. The central bank has also highlighted that so far whatever FDI is being attracted from China, it is still phase 1 project under CPEC. However, the second phase, which is the shift towards industrial development, agriculture mechanization, tourism and social development is yet to show any FDI flows.