Weak FDI; weaker outlook

The first quarter of FY19 has spelled bane for foreign direct investments (FDI) in the country. According to central bank’s data released late yesterday, FDI was down nearly 43 percent. And that’s despite the fall in gross outflows; it is the gross inflows that have been disappointingly low. The story, however, is not new.

With the first phase of CPEC coming to end, investments in power sector have slowed sharply. Investments in power sector more than halved from $205 million in 1QFY18 to $75 million in 1QFY19. Investments in the other CPEC-driven sector, construction, however, grew 44 percent. But construction being a more of labour-intensive industry than a capital-intensive industry, there is only so much growth it can offer in terms of FDI inflow.

Meanwhile, despite all the excitement about auto sector investments, FDI inflow in the sector remains poor. In FY18, the sector attracted a grand total of $52 million, and in the first quarter to date inflow in the sector is at an unmemorable $13 million.

The story of other sectors is also rather well known. Banking and telecom sectors are somewhat saturated on near term basis. Pharmaceutical, even though termed as a sun-rise sector, at the start of this decade, has failed to attract investments in huge quantities due to unfavorable pricing policies. Some suns never rise! There is plenty of scope in other sectors such as mining and agriculture value added sector. But that requires the provinces to improve their governance machinery.

Little wonder then Pakistan’s has put its eggs in China – the CPEC factor whose pace in the coming years is uncertain. The dust on the CPEC screen will settle post IMF and post macro-economic stabilization, which will take its due course. FDI inflows from all other countries on the other hand remain dismal. After a fall of 16 percent year-on-year in FY18, non-Sino FDI inflows dropped 50 percent in 1QFY19.

There is another key number that balance-of-payment managers cannot afford to ignore. In FY18, net FDI had grown 13 percent but profit repatriation had grown 16 percent. This is why FDI net off profit repatriation had only increased 7 percent last year. In 1QFY19, net FDI was $439 million whereas net off profit repatriation is expected to be around $327 million (2M data: $218 million). This means that FDI net off profit repatriation is only about $112 million, which is worse than 1QFY18’s figure of $385 million.

Considering PTI’s silence so far on investments and with the first quarter already behind us amid lack of clarity on the future of CPEC in ongoing fiscal year, best to hold your hopes for FDI in FY19. (For a background on FDI, see also BR Research’s piece titled ‘Wanted: FDI miracles’ published July 19, 2018).