Covid-19 has disrupted international trade and investment flows all over the world. According to the United Nations Conference on Trade and Development (UNCTAD), global FDI flows were down by 49 per cent in the first half of 2020. Greenfield investments have been hit especially hard, falling by 37pc in the first nine months of the year.
Despite this bleak picture globally, FDI inflows into Pakistan have been quite resilient. This continues a trend of generally strong performance in attracting inward FDI in the years immediately preceding the emergence of Covid-19. Between 2015 and 2019, FDI inflows into Pakistan expanded from $1.67 billion to $2.22bn. As of 2019, the value of inward FDI stock into Pakistan had reached $34.8bn. Even amid the onset of the pandemic, Pakistan’s inward FDI flows increased by 9pc in the first half of 2020 on a year-on-year basis.
The greater resilience of FDI inflows into Pakistan in the face of Covid-19–related shocks is in stark contrast to the general picture globally and in Pakistan’s regional neighbours, including key Commonwealth comparator countries in Asia. Overall FDI inflows into Asia declined by 12pc in the first half of 2020 compared with the same six-month average for 2019. In contrast, Pakistan has bucked the trend.
The greater resilience of inward FDI in Pakistan is because of the central role of Chinese investment in the country through the Belt and Road Initiative
The greater resilience of inward FDI in Pakistan may be due to the central role of Chinese investment in the country through the Belt and Road Initiative (BRI) and the China-Pakistan Economic Corridor (CPEC). Pakistan is the largest recipient of FDI under the BRI. FDI linked to the BRI is likely to have been committed long in advance of the emergence of Covid-19 and seems more resilient to such external shocks given its focus on long-term infrastructure development projects. Moreover, it reflects the strength of China-Pakistan economic relations.
Although overall FDI flows into Pakistan have been resilient, greenfield investments into the country have taken a significant hit since the Covid-19 pandemic began. This is in line with the evidence globally where, according to UNCTAD, new greenfield investment announcements, along with cross-border mergers and acquisitions, declined by more than 50pc in the first few months of 2020. Covid-19 has created simultaneous supply, demand and policy shocks, affecting all aspects of FDI. As a result of these shocks, global FDI flows have slowed on the back of delays in the implementation of existing investment projects, deferred investment decisions, lower reinvested earnings (a major source of finance for FDI deals) and declining equity capital flows.
In Pakistan, the total value of new greenfield investments plunged in each of the first three quarters of 2020 compared with the same periods in 2019. The declines were especially stark in second and third quarters — coinciding with the intensification of the pandemic globally — where new greenfield investments in Pakistan amounted to just 6.5pc and 0.4pc of their values in 2019.
The sharp decline in greenfield investments in Pakistan is concerning. Such investments involve new ventures in which a parent company builds operations in a foreign country from the ground up. They can thus make important contributions to the creation of new jobs, development of productive capacity and transfer of new technologies. Indeed, the number of jobs created through greenfield investments in Pakistan declined markedly in each of the first three quarters of 2020. Over this period, just 548 new jobs were created via greenfield investments, down from 6,212 jobs in the same three quarters in 2019.
Most sectors traditionally attracting greenfield investments in Pakistan have been affected. Greenfield investment in the coal, oil and gas sector, which accounted for 43pc of the value of all greenfield investments into Pakistan between 2015 and 2019, plummeted from $1.5bn in the first three quarters of 2019 to just $143.2 million over the same period in 2020. Other key sectors for greenfield investments in 2019 have been similarly affected. For example, no new project announcements were made in communications or renewable energy up to the end of September 2020.
Looking ahead, and considering the profile of greenfield FDI in Pakistan (which is mostly concentrated in coal, oil and gas and energy sectors), there is a case to be made for diversifying its sectoral distribution. This will require targeted policy interventions to build productive capacity and shift labour and other resources to higher productivity activities within and between sectors. Such interventions are central to generating sustained structural economic transformation, expand exports and create decent jobs in Pakistan.
Recently, Pakistan has improved its performance on the ease of doing business index and launched tax incentives to attract investments. Even so, regulatory reforms to Pakistan’s investment environment could help. These should include targeted investment promotion and facilitation activities in health, education and e-commerce sectors, as well as a focus on attracting and retaining investment into high value–added manufacturing, ICT-related sectors and high-productivity services.
Pakistan may also wish to reconsider its position with respect to the Regional Comprehensive Economic Partnership (RCEP). Spanning 15 countries, RCEP is the world’s largest free trade agreement and is expected to boost Asia-Pacific intra-regional trade and investment. Pakistan has robust and longstanding trade and investment linkages with RCEP countries. The trade and investment provisions in the RCEP agreement offer scope to strengthen these ties by dismantling existing barriers to both inward and outward investment flows between Pakistan and key regional neighbours.
The writers are international trade economists at the Commonwealth Secretariat in London
Published in Dawn, The Business and Finance Weekly, December 28th, 2020