Poor FDI, unwelcoming environment

One area that needs policy focus – foreign investment in the country – continues to be neglected. Or perhaps the efforts are not adding up. For the numbers negate all the claims that the government is making about ‘facilitating the foreign investors’.

According to the data released by the State Bank of Pakistan, foreign direct investment in the country has slipped by over 49 percent year-on-year in 11MFY19. That’s a decline enough to foretell a grim picture of what the annual figures for FY19 will look like. Total gross inflows for 11MFY19 declined by 22 percent, year-on-year, whereas the gross outflows increased twofold in 11MFY19 versus similar period last year. The net FDI in May 2019 dropped by 22 percent, year-on-year.

The story behind the key contributors in net FDI is the same – China continues to be the single largest foreign investor. However, the country is experiencing what it had been warned about many times – the cons of putting all eggs in one basket. As early-harvest projects under CPEC have reached completion, not only FDI inflows from China are drying up, the outflows from the country are also rising. Sectors that were attracting Chinese FDI, such as power, and infrastructure construction have also eased out, while the prospects of conventional sector like telecom, oil and gas, financial business that once attracted much FDI remain bleak.

One reason for neglecting these conventional sectors that attracted most FDI previously is the change in government’s priority sectors. The focus is now apparently to juice export-led and import-substitution sectors and through special economic zones under CPEC.

But so far, it has been all talks, and no results. When the so-called efforts of the government will bear fruits is a crucial question at this time of receding FDI. What’s more alarming is the fact that while the country attracted $1.6 billion FDI in 11MFY19, the repatriated profits and dividends by the foreign investors stood at $1.04 billion (10MFY19). It wouldn’t be wrong to say that the environment in the country is not conducive of luring foreign investors. Political as well as economic instability along with inadequate sector-specific policies and taxation regimes are all to blame. The need for diversification cannot be stressed enough. But the macro-environment – high inflation and interest rates, rising taxes, lower domestic savings and investment – are all likely to dim the FDI prospects. Until such a time that reforms under the IMF start bearing fruit!