FeaturedNationalVOLUME 19 ISSUE # 6

Challenges and prospects of external borrowing and FDI

In recent months, Pakistan has faced significant challenges in meeting its external borrowing targets and attracting foreign direct investment (FDI). The shortfall in external borrowing, as reported by the Pakistan Bureau of Statistics (PBS), and the modest rise in FDI prompt a closer examination of the economic landscape. This analysis delves into the factors contributing to the shortfall, explores the establishment of the Special Investment Facilitation Council (SIFC) for attracting FDI, and assesses the efforts made to safeguard the country’s long-term interests in the face of evolving global economic dynamics.

External borrowing fell short of the budgeted target by 51 percent, according to data released by the Pakistan Bureau of Statistics (PBS). From July to November 2023, the borrowing amounted to $4.285 billion, compared to the total budget of $24.2 billion for the year (equivalent to 6,874,426 million rupees with a projected exchange rate of 284 rupees to the dollar). This figure was well below the expected $10 billion for the first five months of the fiscal year.

This shortfall occurred despite the staff-level agreement (SLA) reached during the first review of the ongoing Stand-By Arrangement with the International Monetary Fund on November 15. The SLA revealed two key factors: firstly, the finance ministry, led by Ishaq Dar, had unrealistically budgeted $6.1 billion from Sukuk/Eurobonds issuance (435 billion rupees) and borrowing from foreign commercial banks (1,305 billion rupees). This reliance on market comfort with ongoing policies was absent, as international rating agencies did not upgrade Pakistan’s rating post-SLA. Secondly, there was a slower pace of official pledged inflows, with friendly countries expressing concerns over Pakistan’s failure to meet contractual obligations, particularly in the energy sector, while others awaited the election results.

External borrowing during the initial five months of the current year was 16.2 percent lower than the same period last year, totaling $5.114 billion. This decline reflects a diminishing confidence in ongoing policies, closely monitored by the IMF.

Simultaneously, the State Bank of Pakistan (SBP) posted two generally positive indicators on its website. However, their impact on other key macroeconomic indicators tended to lean more towards the negative.

In November, the current account deficit, a persistent cyclical issue for Pakistan, was in surplus at $9 million, compared to a deficit of $157 million in November 2022. The July-November 2023 current account deficit was $1.16 billion, down from $3.264 billion in the same period last fiscal year.

Despite the decrease in the current account deficit, this was not due to an increase in exports, which only rose by 1.93 percent from $11,942 million in July-November 2022 to $12,172 million in the same period of 2023. Instead, it resulted from a significant decline in imports, engineered through prohibitive exchange restrictions, dropping from $26,064 million in July-November 2022 to $21,550 million during the first five months of the current fiscal year, a decline of 17.32 percent.

The decline in imports affected the import of raw materials, negatively impacting the large-scale manufacturing (LSM) sector, the primary export earner and a major source of income tax revenue. The LSM index for October recorded negative growth of 4.08 percent, negative 2 percent month on month, and negative 0.44 percent from July to October this year, compared to the same period last year.

While the current account deficit decreased, it came at the expense of the LSM sector, resulting in lower exports and a reduced growth rate.

Foreign direct investment (FDI) increased by 8 percent, but the overall figure remained low, rising from $607 million in July-November 2022 to $656 million in the comparable period of this year. Pakistan has struggled to attract significant FDI, with historical data showing an average of $156.51 million from 1997 to 2023. The highest recorded FDI was $1262.9 million in June 2008, while the lowest was negative $390.9 million in October 2018.

In overall terms, these amounts represent an average of only 0.2 percent of the total global FDI flows and less than one percent of the Asian subtotal. To enhance foreign direct investment (FDI) from Gulf Cooperation Council countries, the Special Investment Facilitation Council (SIFC) has been established, featuring high-level civilian and military engagement. Despite significant pledges, no binding contracts have been signed thus far.

Encouragingly, the SIFC has decided to involve an internationally renowned project development, financial, and legal consultancy firm for the assessment of feasibilities and bankable projects, as reported by the SIFC. This step is crucial for evaluating and scrutinizing the details of all contracts, aiming to ensure that, unlike agreements in the past, the nation’s long-term interests are adequately safeguarded.

As Pakistan grapples with the complexities of external borrowing and FDI, the establishment of the Special Investment Facilitation Council emerges as a notable initiative. While significant pledges from Gulf Cooperation Council countries have been received, the absence of binding contracts raises concerns. The decision of the SIFC to enlist the expertise of an international consultancy firm for project evaluations signals a commitment to prudently navigating future agreements. As the nation strives to secure its economic interests, the coming months will be critical in determining the success of these efforts and their impact on Pakistan’s economic trajectory.