Ten years ago, China’s share in Pakistan’s annual inflow of foreign direct investment (FDI) was almost negligible. Today, by the end of February 2018, China’s share has soared to 66 percent, according to the monthly FDI data released over the weekend by the State Bank of Pakistan.
Likewise, the share of power and construction sector in Pakistan’s annual FDI inflow was also ignorable back in 2008. By the end of first eight months of fiscal year 2018, these two sectors now have a combined share of 61 percent in the country’s total net FDI received in 8MFY18.
Although by January 2018, net FDI inflow in the country was down about 3 percent, February 2018 numbers have more than doubled year-on-year to $341 million from $147 million in February 2017. This has helped grow 8MFY18 figures by 16 percent, kudos for which.
But it so happens that even the growth in February 2018 comes on the back of China on the one hand, and power and construction at the other. Of the net increase of $194 million in February 2018, $146 million came from China (including Hong Kong), and $71 million from the United Kingdom. These inflows were offset by some outflows such as $21 million net FDI outflow to the UAE.
Likewise, of the $194 million increase in net FDI inflow, an additional $130 million came from power ($80mn) and construction ($50mn).
The other major net inflow was in food ($62 million). For definition sake, FDI inflows/outflows include cash received for investment in equity, inter-company loan; capital equipment brought in/out and reinvested earnings.
There is no denying that Pakistan needs investment in power and construction. But those are not the only sectors where the country needs to attract investments.
There is also no denying that Anglo-Saxon and European investors were sitting on the fence until the reality of CPEC hit them with the Chinese investing across a wide range of sectors leaving Anglo-Saxon/European players wanting of Islamabad’s attention. But should Pakistan be really putting all its eggs in one basket.
At some point Pakistan will need to attract non-Sino investors to balance the geographical tilt of the FDI, and hopefully there will some inflows in the automobile sector by the close of the year. But as stressed earlier, there is a need to woo existing non-Sino investors to reinvest their earnings Pakistan.
As BR Research’s analysis titled, a case to boost reinvested earnings! (published March 14, 2018)
https://www.brecorder.com/2018/03/14/404892/a-case-to-boost-reinvested-earnings/ showed even if the government was able to lure investors to reinvest just 15 percent of the profit repatriated in the 7MFY18, net FDI inflow would have been 12 percent higher in 7MFY18 rather than 3 percent down (latest profit numbers will be released later this month).
Boosting FDI is not only critical for raising Pakistan’s investment to GDP ratio that remains low in the face of weak domestic savings. It is also important in the balance-of-payment context. Between FY13 and FY16, FDI and remittance together covered more than 90 percent of the trade deficit. In FY17 that cover dropped to 71 percent and by December 2017 it had slipped further to 66 percent. And that is a concern which offsets the cheerful 16 percent FDI growth seen so far.
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