FDI decline

Published July 20, 2021

THE worrisome, sharp decline in the more permanent, non-debt-creating foreign direct investment, or FDI, should be a cause of concern for the government’s financial team. FDI inflows shrank by a hefty 29pc to $1.85bn, or equal to just 0.6pc of GDP, during the last fiscal from $2.6bn a year before, the new central bank data shows. The Covid-19 health crisis, that has gripped much of the world, has been a factor in the reduction of FDI inflows to Pakistan, but blaming the pandemic alone will not help since the plunge in investment is not a one-off event for the country. While there may be some improvement in sight in the bigger economic picture, Pakistan has been struggling to attract long-term foreign private capital ever since Chinese investment under the multibillion-dollar CPEC initiative began to dry up following the completion of large power and transport infrastructure projects. In fact, China still remains the largest investor in Pakistan, according to State Bank data, in spite of a decrease in inflows from its companies and banks. The investment inflows from Western economies to Pakistan have, nevertheless, declined more drastically despite decades of trade and political relations with the US and the European nations.

There are several reasons such as the threat of terrorism, macroeconomic instability, political volatility, energy shortages, etc that have kept foreign investors from bringing money into Pakistan in the past. But a major factor keeping foreign investors away is the country’s lack of integration with the regional and global economy, as well as inconsistent economic policies. The decreasing volume of FDI from the country’s traditional trade and economic partners is also reflective of a decline in political ties with the West. Therefore, we have seen FDI inflows to Pakistan decrease over the past two decades against the global trend of investors rushing to developing countries like Bangladesh, Vietnam, etc. The FDI inflows are important to keep the pressure off the country’s balance-of-payments situation and plug depletion of the central bank’s foreign exchange reserves by strengthening the financial account of the State Bank. Besides, FDI encourages technology transfer, improves business management practices and brings competition in the market. For an economy the size of Pakistan, how difficult would it be to attract FDI? Yet we can hardly expect foreign investors to bring their money to Pakistan unless we consistently pursue investment-friendly economic policies and become part of the global supply chain.

Published in Dawn, July 20th, 2021

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