NationalVOLUME 17 ISSUE # 4

Inflow of FDI: A declining trend

The inflow of foreign direct investment (FDI) into Pakistan has seen a decline trend recently. According to the latest State Bank of Pakistan figures, the inflows of net foreign direct investment into Pakistan hit an eight-month low of about $90 million in July this year, down 31% from $129 million in July last year.

It is notable that overall FDI inflows into the country fell in the last fiscal year in line with the global trend. But the trend in Asia was positive which was not reflected in Pakistan’s figures. In FY21, FDI inflows into Pakistan declined to $1.847 billion from $2.598 billion in FY20. This happened in the backdrop of slowing FDI flows globally which fell 35% to $1 trillion in CY20 (which covered the first half of FY21).

But FDI inflows into Asia slightly went up to $535 billion in CY20 from $516 billion in CY19 with both China and India attracting larger inflows. Pakistan failed to benefit from the Asian gain in FDI inflows in the last fiscal year ending in June 2021.

Needless to say, with FDI of less than $2 billion per year, the country cannot improve its balance of payments or stimulate growth and development in various sectors. In the last fiscal year that ended in June, the largest chunk of FDI went into the power sector ($906.1 million), followed by oil and gas exploration ($242.8 million), financial sector ($235.5 million), trade ($142 million), electrical machinery ($114.3 million) and information technology and communication ($99.8 million).

Combined together, these six sectors attracted a little more than $1.74 billion or 92.4% of the total net FDI of $1.847 billion. The sub-sectors of industries and services, which attracted the bulk of $1.847 billion worth of FDI in FY21, are all strategically important, but low volumes of FDI coming into these sectors cannot make a significant impact. Sector-wise distribution of FDI is important to analyse in order to understand where the economy stands and where it is heading.

If FDI in the power sector still constitutes roughly half of the total, it indicates that the most basic need of economic growth, i.e. energy, is in short supply. But it also points to a keen desire of the FDI-recipient country to have high economic growth in future. Large inflows of FDI into the power sector as well as into oil and gas exploration should be taken as a sign of Pakistan preparing itself to become self-sufficient in energy – if not in the near future, but definitely in due course of time.

A special point of note is that the major sources of FDI inflow into Pakistan are limited in number. In the last fiscal year, China topped the list of FDI providers with a 41% share in the total net FDI of $1.847 billion, followed by Hong Kong (8.5%), the US (8.4%), the UK (7.7%), the Netherlands (5.8%) and the UAE (5.5%). Jointly, these six countries provided Pakistan with 77% of the total net FDI.

Pakistan needs no less than $4-6 billion in FDI inflows every year over the next five years to see their impact on sustainable economic growth and development.

Attracting this amount of FDI seems more difficult now more so because of the changed situation in Afghanistan which may drive away prospective foreign investors due to perceived risks from political stability in the region. Apart from this, there are other factors standing in the way of larger inflows of FDI into Pakistan. These include lack of investment-friendly policies, faulty implementation process and lacklustre attitude of state agencies towards foreign investors.

Keeping this in mind, Pakistan will have to redouble its efforts to attract FDI from as many sources as possible instead of relying on a small number of developed countries. For this purpose, Pakistan must formulate new policies that can help attract sizable FDI inflows from other countries as well such as Indonesia and Malaysia, Turkey, Australia, Canada and Russia. In this regard, the main responsibility lies on the Board of Investment which must accelerate the process of finalising investment deals in the fields of their choice.

At the same time, attracting larger FDI inflows will also depend a lot on how well Pakistan positions itself in the global supply chain. Pakistan has just started exports of locally manufactured mobile phones in collaboration with China and South Korea. This is a good sign opening the way for other investors. We should approach reputed multinational companies to set up their manufacturing plants in the country on the basis of relatively cheap labour available here.