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Where’s CPEC in our FDI?

Updated Oct 24, 2016 09:41am


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Foreign direct investment inflows into Pakistan have maintained a steady decline, from a $5.2bn peak in 2007-08, for a variety of reasons, but chiefly due to adverse security perception, political instability and governance challenges.

But the further, more than one-third (38pc), slump in net FDI inflows for the first quarter of the current fiscal year surprised many who expected a ‘ratchet up’ impact due to the beginning of the China-Pakistan Economic Corridor, and the feel-good atmosphere brought about by the improved macro-economic fundamentals created by government circles.

China holds the top slot in terms of FDI contribution to Pakistan, replacing the United States and the UK.

The State Bank of Pakistan reported foreign direct investment for first three months (July-September 2016) at $249.4m against $403.3m of same period last year, down 38.2 pc. After adjusting for portfolio inflows and outflows, the total foreign investment in the first quarter of the current fiscal year was reported at $368.1m when compared with $793.2m of same period last year, showing a further decline of 53.6 pc.

This should be a cause of concern for all because FDI is not only a source of foreign capital but also a trigger to technology transfer, improvement in managerial skills and market access — all critically important for a higher growth trajectory.

This gets more alarming when other sources of foreign inflows — slowing remittances and falling exports — are also entering the danger zone and the country’s debt profile is expanding. Already, the government is reported to have contracted foreign loans about $15bn greater than targeted in three years as foreign investments and exports failed to support international reserves.

Political uncertainty arising out of repeated attempts to derail the government, volatile cities, energy shortages over a longer period, terrorist activities and the resultant adverse travel advisories for investors from western governments have a contributed to the overall investment environment.

Not surprisingly, the country slipped two points to the 138th position among 189 in the World Bank Doing Business Ranking in 2016 from 136th in 2015. According to the IMF “Pakistan’s weak business climate continues to constrain private investment and economic growth” as its ranking in starting a business, getting credit, and trading across borders worsened.

Thus, lengthy procedures and high costs for opening a new business and paying taxes, limited access to credit notably for small and medium enterprises (SMEs), complex border trading requirements, constraints in accessing electricity, and weak contract enforcement continue to weigh on the country’s business climate, which ranks below the South Asia average and comparative emerging markets countries, the IMF observed.

While the government is currently working on reducing procedures for opening new businesses and energy shortages have started to reduce, it is hopeful the low FDI trend would reverse soon.

Miftah Ismail, the chairman Board of Investment (BOI) is equally perplexed over the FDI numbers but believes the dip was an early and temporary phenomenon that would pick up soon as CPEC related projects take off. He hoped the FDI would end up at the very least a 35pc higher than last year.

He said it was also beyond his understanding why numbers were falling. He called a meeting with the SBP and the ministries of finance and commerce to find out if FDI was being correctly recorded or there was a problem in methodology.

He suspected the institutions concerned were only recording the flows in cash and not machinery and equipment, as in case of Chinese projects. However, after reviewing the processes and methodology the BOI chief was convinced there was no problem.

Mr Miftah, however, said some projects like Chashma Nuclear Power Plant were developed through Chinese loans and hence accounted for as foreign debt and not as foreign direct investment. So, FDI data based on two-three months does not depict the true picture because a substantial investment in a given month, or lack of it, could swing the figures either way.

He explained that net foreign direct investment was arrived at after deducting interest payments and profit repatriations by foreign companies with at least 15pc shareholding in local companies. For example, the gross FDI last year was estimated at about $2.25bn that fell down to $1.28bn after accounting for about $1.067bn of interest payment and profit repatriation.

On the other hand, the 1320MW Coal power plant of $2.5bn and another project at Port Qasim with similar capacity and cost estimates would progress significantly during the current year and add to the FDI number. Also, a $500m investment in Engro by foreigners will be materialising followed by about $250m foreign investment in Dawlance as their local sponsors reduce their shareholding.

On top of that, a large multinational company was investing around $100m in an FMCG while CocaCola was adding its investment by another $200-300m this year. Nestle has already made some investments and half of that would also be materialising this year. He firmly believed the net FDI at the end of the current year would work out at $1.8-1.9bn, suggesting around 50pc increase.

Responding to a question, he did not agreed that low FDI was also a question mark on the role and performance of the BOI — a one-window facility for attracting and facilitating foreign investment.

He said the BOI had basically two roles including facilitation to foreign investors and holding seminars and soft marketing of Pakistan abroad

On top of that, the BOI has now adopted a new role. For example, as chairman of the BOI he was able to resolve a longstanding dispute with Russian investors that would open up the country for more investment. “Also, we were able to author a new policy for the automobile sector, get it approved and are now working towards its implementation.

“The BOI also has played central role in the preparation of a support package for the export sector that is currently in the approval phase”, he concluded.

Published in Dawn, Business & Finance weekly, October 24th, 2016


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Comments (7) Closed

Anis Oct 24, 2016 11:18am

Pakistan always compares with India. Would love to get the figure of FDI India managed in the same period. Will the author or any one else give the Indian figure, please.

M. Emad Oct 24, 2016 12:55pm

China going to invest about $40bn in Bangladesh in next five years.

Manju Oct 24, 2016 04:00pm

@ANIS -India's FDI for the 2nd quarter of 2016(July,Aug,Sept) is 4.876 Billion USD and expected to cross 5 billion(Oct,Nov,Dec) in next quarter.The only negative is Industrial output that is going down but with "No to China" campaign in swing Industrial output might catch up due to growing demand in domestic market after FY2016. Annual FDI inflow for India for FY2015 is 44.5 billion USD and FY16 is projected to cross 60 billion USD.For Pakistan most of the FDI comes from China,Middle East whose economies are on the down(due to Yuan devaluation and oil prices fall) even opening for Russian markets might not help much.

ROHIT PANDEY Oct 24, 2016 04:41pm

@Anis Just a few days back, 'Dawn' reported the arms deal where India bought S 400 missiles and announced a joint production of Kamov helicopters.

What was not mentioned was the investment by Rosneft the Russian oil company buying out Essar Oil for $13 billion!:) That is the LARGEST ever FDI in a venture by any foreign company in India.

India ranked no 1 in the world last year in 2015 with a net inflow of $65 billion.

gknatarajan Oct 24, 2016 06:31pm

@Manju china gave laon to srilankan govt. for development o a port and siphoned back the money in construction contracts by chinese contractors using chinese workers. after some years srilankan govt, found that paying back intere+loanamt. is beyond its capacity and chinese agreed clevely to convert the loan into equity and became a full owner of the it will be under thier control. profit also will be repatriated and operated on thier terms? this is a typicla example of china"s help to other nations, ! ultimately they will take over all infrastructure of the terroritory and you will become subservient to them!

citizen Oct 24, 2016 08:04pm

We all gloat over CPEC, still we dont know how much loan and how investment.. Last year UAE crown prince promised an investment of 75 billions in indian infrastructure.. Why a friendly islamic brotherly country like UAE not investing in an islamic country like Pakisthan and in India?

Madras Oct 26, 2016 10:26pm

@Anis India received $55 billion in 2015