A one-time inflow of dollars creates local jobs, but continuous repatriation afterwards leads to a drawdown on the country’s foreign exchange reserves
THE PTI government is betting heavily on industrial cooperation with China for attracting foreign direct investment (FDI) in 2019.
The country has received overall investment ‘commitments’ worth $40 billion for the next three to five years, according to Board of Investment (BOI) Chairman Haroon Sharif.
“More than selling Pakistan to (new) investors, my challenge is to materialise these commitments,” Mr Sharif told Dawn.
Considered to be the best source of foreign exchange after exports and remittances, FDI creates jobs without increasing the debt repayment burden.
But attracting $40bn in five years seems ambitious. Total FDI in the last five years amounted to only $10.8bn. It dropped 35 per cent in the first five months of 2018-19 largely because Chinese investment in early-harvest power projects slowed down.
What’s different this time, the BOI chairman says, is the planned establishment of nine industrial estates across the country, known as Special Economic Zones (SEZs), under the China-Pakistan Economic Corridor (CPEC).
A working paper recently published by the Centre of Excellence for CPEC shows that the SEZs are expected to create their first 30,000 jobs in 2018-19. The expected number of SEZ-based new jobs for the next five years is almost 400,000.
Mr Sharif says BOI has ‘prioritised’ four SEZs — Nowshera, Dhabeji, Faisalabad and Islamabad — for earlier completion.
While government officials hope that rising FDI will spur GDP growth and help the country crawl out of a recurring balance-of-payments crisis in the long run, some economists believe otherwise.
“FDI has become a drain on the economy,” says Dr Kaiser Bengali, an economist who served as adviser to Sindh and Balochistan governments.
FDI flows are not debt-creating, but foreign investors repatriate profits and dividends every year. Theoretically, it should not be a problem for a nation’s external account if foreign investment is export-oriented. For example, China attracted massive foreign investments to produce exportable goods. Even if an American investor repatriated 90 cents out of every dollar earned by exporting made-in-China goods, Beijing still had a notional net gain of 10 cents.
However, the pattern of FDI in Pakistan shows it has mostly been in services or consumption-based sectors: banks, telecoms, packaged food, beverages, drugs, toiletries, clothing etc.
In other words, these companies earn in rupees but repatriate their profits in dollars. A one-time inflow of dollars creates local jobs, but continuous repatriation afterwards leads to a drawdown on the country’s foreign exchange reserves.
“Over the years, FDI has resulted in a net foreign exchange loss for the country,” says Dr Bengali.
Profit repatriation for the first five months of this fiscal year was $822 million as opposed to FDI of $881m.
After gathering pace in Musharraf years, FDI flows peaked in 2007-08 with $5.4bn. Yet Pakistan had to seek a bailout from the International Monetary Fund twice in the following 10 years for balance-of-payments support. The country is once again on the doorsteps of the IMF because it lacks foreign exchange reserves to meet its dollar-denominated liabilities.
Mr Sharif of BOI agrees that FDI hasn’t been export-oriented so far. “About 90pc of the economy is based on consumption. A recurring balance-of-payments crisis clearly means exports are not taking place,” he says.
China and Pakistan have agreed on five priority sectors for industrial cooperation: value-added textiles, petro-chemicals, agro-based food, light engineering and mining. The BOI is now asking foreign investors to aim for exporting at least 20pc of their output, says Mr Sharif.
“We’ll give them more incentives. Consumption-led FDI is not a good thing. Results will start appearing after June 2019,” he adds.
But announcing incentives for SEZ-based factories without fixing the underlying problems can only have a limited effect on the overall economy. After all, most of the 500-plus industrial estates set up by past governments lie in ruins today.
A recent paper published by the Sustainable Development Research Centre at SZABIST estimates the tax-to-GDP ratio for the manufacturing sector at 29pc as opposed to just 0.5pc and 6pc for agriculture and services sectors, respectively.
This shows the burden of taxes is overwhelmingly on the industry.
The study found the manufacturing sector depends heavily on imports instead of domestic raw materials: as much as 48pc of these imported raw materials are used to produce consumer goods that are sold mostly in the local market.
In short, Pakistan has become a “high import-content, consumption economy”. Therefore, the multiplier effect — i.e. the increase in final income because of new spending — of domestic manufacturing activity is weak in Pakistan. In fact, the multiplier effect is generated in the countries from where Pakistan imports raw materials, the study says.
Dr Bengali doesn’t believe the latest push for FDI will result in any significant jump in exports. “If there was any export potential under the existing macroeconomic framework, exporters would have already tapped it. Whatever we export, we do it on account of subsidies. The cost of every subsidy is eventually borne by the taxpayer,” he says.
Published in Dawn, The Business and Finance Weekly, December 31st, 2018
