Pakistan has recently witnessed a significant uptick in Foreign Direct Investment (FDI) and portfolio investment, signaling positive momentum in the country’s economic situation. In July, the first month of fiscal year 2025 (FY25), FDI surged by 64%, driven primarily by investments related to the China-Pakistan Economic Corridor (CPEC). However, despite these encouraging developments, the country continues to face considerable economic challenges, including political instability and potential external shocks that could impact its fragile recovery.

The Asian Development Bank (ADB) highlighted the pivotal role of remittances in Pakistan’s economy, equating them to 10% of the nation’s GDP. During the COVID-19 pandemic, remittances surged by an impressive 19.8%, reaching an unprecedented $31.1 billion, according to an ADB blog focused on Pakistan’s remittance landscape. The report emphasized that remittances are instrumental in alleviating poverty and bolstering foreign exchange reserves. To further enhance remittance inflows, the ADB suggested that Pakistan offer more incentives to its overseas diaspora. Additionally, the report underscored the reliability of remittances as a funding source during economic downturns and volatility. With the implementation of appropriate policy measures, these remittances could be transformed into investments, fostering greater economic productivity and growth.

However, the report also pointed out that Pakistan faces challenges in managing its external payment obligations. Notably, remittances from overseas Pakistanis amounted to $3 billion in July 2024, the first month of the current fiscal year. The central bank noted a substantial 47.6% year-on-year growth in remittances during July 2024.

The State Bank of Pakistan (SBP) reported that the remittance inflows in July 2024 primarily originated from Saudi Arabia ($761.1 million), the United Arab Emirates ($611.1 million), the United Kingdom ($443.5 million), and the United States ($300.1 million).

In a related economic development, Pakistan’s trade deficit contracted by over 12% to $24.09 billion during the fiscal year 2023-24 (FY24), driven by a significant rise in exports coupled with a slight decrease in imports, as per data released by the Pakistan Bureau of Statistics (PBS).

The trade deficit, representing the gap between exports and imports, was recorded at $24.09 billion for the period from July to June 2023-24, compared to $27.47 billion during the same period the previous year. This improvement was attributed to a 10.54% increase in exports, which rose to $30.65 billion in FY24 from $27.72 billion in FY23, while imports slightly dipped by 0.84% to $54.73 billion in FY24, down from $55.19 billion in FY23.

Despite this annual improvement, the country’s trade deficit for June 2024 surged by 30.39% year-on-year, reaching $2.39 billion compared to $1.83 billion in June 2023. Both exports and imports rose during July, but the increase in imports was more substantial. Exports in June 2024 grew by 7.3% to $2.53 billion, while imports jumped by 17.43% to $4.92 billion compared to the same month the previous year.

On a month-to-month comparison, the trade deficit widened by 15.13% in June 2024, climbing to $2.39 billion from $2.07 billion in May 2024, with exports declining significantly and imports remaining relatively stable.

Exports in Pakistan saw a significant decline of 10.92%, dropping to $2.53 billion in June 2024 from $2.84 billion in May 2024. In contrast, imports experienced a marginal increase of 0.08%, rising to $4.92 billion from $4.91 billion in the previous month.

Foreign Direct Investment (FDI) in Pakistan, however, showed a positive trend, increasing by 64% in July 2024, the first month of the fiscal year 2025 (FY25), according to data released by the State Bank of Pakistan (SBP). The country attracted net FDI of $136.3 million in July 2024, up from $83.2 million in July 2023, representing a $53 million increase. Total FDI inflows for July 2024 were recorded at $198.3 million, with outflows amounting to $62 million.

China emerged as the largest source of FDI, particularly through projects related to the China-Pakistan Economic Corridor (CPEC), with investments rising to $45 million in July 2024 from $21.2 million in the same period the previous year. Hong Kong and Sweden followed, contributing $44.4 million and $24.2 million, respectively.

Portfolio investment also saw a significant boost, increasing by 45.4% to reach $23.6 million in July 2024, compared to $16.3 million in July 2023. Overall, Pakistan’s total foreign investment, which includes FDI, portfolio investment, and foreign public investment, surged by 189%, reaching $305 million in July 2024, up from $105.5 million in July 2023.

Despite these positive developments in investment, the international credit rating agency Fitch has expressed concerns that Pakistan’s ongoing political instability could jeopardize the country’s economic recovery. The latest Pakistan Country Risk Report highlights the vulnerable state of the economy, noting that urban protests have significantly disrupted economic activities.

The report also points to the fragile political environment, specifically mentioning that Pakistan Tehreek-e-Insaaf (PTI) founder Imran Khan is likely to remain in prison despite several successful legal appeals. This situation could allow Pakistan to continue implementing IMF-mandated reforms, which are projected to support an economic growth rate of 3.5% for FY2024-25.

Fitch further projects that the policy rate could reach 16% this fiscal year, potentially decreasing to 14% in the next fiscal year. The exchange rate has stabilized beyond initial expectations, with the dollar forecasted to reach Rs290 by the end of this year and Rs310 by 2025. Additionally, the rating agency warned that another potential flood or natural disaster could pose a severe threat to Pakistan’s already fragile economy.

Pakistan has recently witnessed a significant uptick in Foreign Direct Investment (FDI) and portfolio investment, signaling positive momentum in the country’s economic landscape. In July 2024, the first month of fiscal year 2025 (FY25), FDI surged by 64%, driven primarily by investments related to the China-Pakistan Economic Corridor (CPEC). However, despite these encouraging developments, the country continues to face considerable economic challenges, including political instability and potential external shocks that could impact its fragile recovery.

While the recent surge in foreign investment provides a much-needed boost to Pakistan’s economy, the path ahead remains fraught with challenges. Political instability and the threat of natural disasters pose significant risks to sustained economic recovery. To fully capitalize on the positive investment trends, Pakistan must navigate these challenges carefully, ensuring the stability required for long-term growth and resilience.