FDI in dire straits

Headlines saying “FDI draught taking hold” won’t be breaking news if foreign direct investment continues to slump. FDI in Pakistan is in woeful state, and unfortunately, whatever efforts the government claims it is making are not reflecting in numbers. As per the latest data released by the State Bank, net foreign direct investment in the country plunged by 35 percent, year-on-year in 5MFY19 despite $280 million net inflows in November 2018 – the highest monthly net figure in FY19 so far. The month-on-month increase in November FDI stood at 73 percent, while on a year-on-year basis; November FDI was up by 17 percent, according to the SBP data.

Country-wise as well as sector-wise, there isn’t much to tell; China continues to dominate FDI where it accounted for almost 90 percent of the total FDI in November 2018 with a total share of 66 percent in 5MFY19.

All key sectors including oil and gas exploration, power, financial business, communication and construction have witnessed a shrink in net inflows in 5MFY19. However, an anomaly was seen in electrical machinery segment where net FDI in the sector amounted to $119 million in November 2018 versus almost negligible inflows in all the previous months.

While the source country responsible for investment in electrical machinery isn’t delineated in the data released by the central bank, it’s no hard guess that investment in the sector stemmed from Chinese investment in solar and LNG plant equipment, etc. Net FDI from China amounted to $249 million for November 2018, while the three sectors: power, construction and electrical machinery totaled $237 million for the same months.

Nonetheless, there is a serious lack of diversification in FDI source and sector. It seems that the government is not taking the FDI situation seriously; or if it is, the approach isn’t yielding results. Is it the uncertainty stemming from the IMF bailout situation which is keeping the investors at bay? Or is it that ‘potential’ investors are not being rightly facilitated by the government? Are investors waiting for stability in the rupee versus the dollar, or is it the lack of reliable infrastructure, corruption at various levels, and political instability? Issues must be sorted out soon.

In conversation with BR Research in a recent interview, (published Friday, 16 November 2018), BOI Chairman, Haroon Sharif highlighted that the lead route to attract investments is through construction of the Special Economic Zones (SEZs) being built under CPEC, which goes onto show that the government is shifting focus to export oriented areas to attract FDI. If that is so, data needs to start showing results soon.