Foreign direct investment - as crucial as it is – has been critically weak in Pakistan over the last decade with no meaningful rebound.The country has been inflicted with its homegrown structural challenges that have a discouraging effect on the investors. Of late, the political uncertainty and economic instability is triggering complete halt in any sort of Greenfield investments. On the other hand, brownfield investment is also drying up. Most FDI in the country is in imports-related sectors such as that by MNCs instead of export oriented segments. Political uncertainty and economic mismanagement in the last three months brought another bout of fear among the foreign investors – a reflection of which can be found in recent FDI stats. The latest budget announced also did nothing FDI sectors. The delay in IMF agreement is again playing its role in keeping the foreign investors on fence. And all this adds to the existing structural challenges faced by foreign investor such as complex taxation and other doing business indicators.
However, the global factors and geopolitics has also been playing a key disturbing the FDI climate in the country. Recently, war between Russia and Ukraine and the commodity super cycle are the two exogenous factors slowing down investments. Global FDI that rebounded in 2021 to pre-pandemic levels to touch $1.6 trillion is likely to remain fragile in 2022 especially in the developing countries due to the ongoing war between Ukraine and Russia along with food, fuel and financial crunch around the world amid inflation and rising interest rates.
In May 2022, FDI was seen declining by 29 percent year-on-year, while 17 percent on a month-on-month basis. What is alarming is that the net inflows have been declining continuously, which means FDI coming in is drying up. In May 2022, FDI inflows were down by 37 percent, year-on-year. Country-wise, Norway, USA and China dominated FDI, which is reflected the sectors that attracted FDI in May 2022. Sector-wise, the power sector led the net FDI as usual followed by communication and financial business.
In 11MFY22, net FDI in the country was down by 5 percent year-on-year. On the whole,the power sector was again the major sector for FDI with 36 percent share in the total followed by financial business sector, oil and gas exploration and communication. Chinese investment in the country declined sharply by 48 percent year-on-year. However, China still remained the largest investing country, accounting for 23 percent of the total net FDI. The US was the second largest investor with an increase of 97 percent in net FDI for 11MFY22.
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