FDI challenge

Updated 18 Nov 2020

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DESPITE a 10-month-high foreign direct investment of $317.4m in the previous month, net foreign investment flows into the country shrank by 14.5pc to $587.5m in the first four months of the ongoing fiscal from a year ago. That is not all. A major chunk of the direct investment flows made its way from China to coal and other power projects being constructed as part of the CPEC initiative following the resumption of work on schemes during the period when a decline in Covid-19 infections was being witnessed. Besides CPEC projects, telecommunication, financial services and oil and gas were the other major recipients of FDI during these months, according to recent data published by the State Bank of Pakistan.

Owing to a number of reasons, Pakistan has never been a favoured destination of foreign investors. Barring the record-high FDI flows of $5.6bn and $5.4bn in 2007 and 2008, foreign investment has remained less than 1pc of the size of the economy although other economies comparable to Pakistan have attracted FDI close to 3pc of their GDP. It must be noted that the FDI flows into the country in recent years have originated mostly from China in transport, power and other infrastructure projects undertaken under the CPEC initiative. Chinese investment also has slowed down significantly since the completion of the ‘early harvest’ schemes related to CPEC. Chances of FDI flowing into new non-CPEC projects in the near to medium term appear to be very slim at the moment. The resumption of work on power projects, dams and railway infrastructure under CPEC may increase Chinese flows modestly though. Facing a chronic balance-of-payments problem with negative Net International Reserves, Pakistan needs to urgently woo non-debt-creating foreign investment, especially in export-oriented industries, to increase its overseas shipments and replace foreign debt to pay its import bill. With global FDI flows plummeting in the wake of the Covid-19 health crisis, the government must invest heavily in modern industrial and agricultural infrastructure for that to happen.

Published in Dawn, November 18th, 2020