Net foreign direct investment (FDI) inflows have jumped 68 percent in the first half ending December 2019 and everyone seem to have grown love eyes over that data; after all December 2019 alone saw net FDI grow 52 percent year-on-year. And considering that growth at the same time last year (1HFY19) was in fact a negative 58 percent, the fiscal year so-far is much better as far as FDI is concerned. Yay!
According to data released by the State Bank of Pakistan, net FDI in 1HFY20 has grown both in the case of China (including Hong Kong), and the rest of the world. In the case of former, it grew 74 percent, the latter 65 percent. A round of applause please! Another reason to cheer perhaps is the fact that gross FDI inflow in December 2019 ($566 million) was the highest monthly number since December 2016.
But at the risk of being a kill joy, might one point out a few less obvious aspects of this growth left hidden behind the euphoria.
By definition, net FDI is gross FDI inflows adjusted by gross FDI outflows. It so happened that in October 2018 a Chinese power company had repaid an intercompany loan of around $530 million to its parent company. This had resulted in net FDI outflow of $371 in October 2018. In contrast, October 2019 saw a nominal gross outflow leading to a net FDI inflow of $108 million.
That difference alone accounts nearly all of the growth in 1HFY20. Central bank data shows that because of this Chinese FDI outflow factor, gross FDI outflow dropped 63 percent ($660mn) year-on-year in 1HFY20 outpacing the overlooked fall in gross inflows of 6 percent ($117mn) in the same period.
For foreign exchange purposes, the net FDI number may be important. But to gauge the level of confidence and interest of foreign investors in a country, or to look at an indicative trend for expansion or altogether new projects, gross FDI inflow numbers are more important than net FDI because it reflects both new investments coming into the country, and the reinvested profits. In light of this, FDI trends show that foreign investors aren’t as gooey eyed about Pakistan as net FDI data often makes people believe. Now that’s a heart breaker!