Decreasing FDI flows

Published August 19, 2021

THE consistent decline in FDI flows into Pakistan in recent years should worry our economic managers. The net flows fell by just under 39pc year-on-year in July in continuation of the trend witnessed last fiscal when long-term, non-debt-creating investments plummeted by 29pc to $1.85bn from the previous year. State Bank data for the last four years shows that inward FDI flows are either plunging or stagnating while outward flows have surged over time. Hence, FDI stocks have declined from $41.9bn to $35.6bn in five years from 2016 to 2020. With rising fears of the impact of the Afghan situation on Pakistan, net FDI flows are expected to shrink further. The rise in Pakistan bond yields soon after the collapse of the government in Kabul indicates the loss of global investors’ confidence in the economy. Pakistan may also face reduction in its export revenues if the instability and uncertainty in Afghanistan linger.

FDI is crucial as it helps technology and skill transfer, improves business management practices, lifts exports and the economic growth of host nations, and creates jobs. These inflows are more important for countries like Pakistan facing balance-of-payments problems to cut their reliance on expensive foreign debt so they can finance their imports and build reserves. Hence, we see countries offering a slew of tax, regulatory and other concessions to attract foreign investors. Somehow Pakistan has never been able to inspire foreign investors because of frequent changes in policies, lack of rule of law, poor security conditions, political instability, macroeconomic troubles, etc. While FDI in South Asia spiked by 20pc to $71bn in 2020 despite Covid-19, Pakistan saw these flows come down sharply to less than 0.75pc of its GDP. FDI flows to India rose by 27pc to $64bn in various sectors of its economy during the same year. Indonesia and Vietnam received FDI flows of $18.6bn and $15.8bn. With the government piling up foreign debt and the share of short-term expensive borrowings growing rapidly, and exports slow to grow, it is time policymakers addressed the reasons pushing investors away.

Published in Dawn, August 19th, 2021

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