Jump in foreign investment

Inflows of foreign investment into Pakistan during the current fiscal have been quite impressive. According to the latest data released by the State Bank, Foreign Direct Investment (FDI) surged by dollar 373 million or 78 percent to dollar 850 million during July-November, 2019 compared to dollar 477 million in the corresponding period of last year. FDI inflows during this period amounted to dollar 1.176 billion as against the outflows of dollar 326 million. A detailed analysis revealed that most of the investment inflows came from Norway and China which contributed about 56 percent of the total FDI. Norway's direct investment stood at dollar 334 million as against the outflow of dollar 74 million in the same period of last year while investment from China also posted a notable increase of dollar 48 million or 51 percent to dollar 142 million compared to dollar 94 million in the same period of FY19. Sector-wise data showed that telecommunication sector attracted the highest investment of dollar 280 million as against a net outflow of dollar 123 million in the same period of last year. The massive jump in investment in this sector was due to one-off payments made by telecom companies - Telenor, Warid and Zong - for renewal of their licences. Financial business received an investment of dollar 131 million during the first five months of the current fiscal compared to dollar 65 million last year. Investment in power sector clocked in at dollar 54 million compared to a net outflow of dollar 347 million in the same period of last year. The biggest debacle was, however, noted in the construction sector where foreign investment dipped to dollar 7.5 million compared to dollar 243 million last year. The net portfolio investment of dollar 19.5 million during July-November, 2019 also compared favourably with an outflow of dollar 330 million in the same period of last year while foreign public investment including in T-bills and PIBs stood at dollar 1.137 billion compared to almost zero in the corresponding period of last year. The FDI inflows in November, 2019 also increased to dollar 285.4 million compared to dollar 200 million in the same month of last year.

A substantial increase in FDI during the first five months of FY20 is of course a very positive development for the country and is a strong reflection of growing confidence of foreign investors in the resilience and soundness of Pakistan's economy. Such a confidence seems to have been boosted due to the resolve of the present government to remove basic weaknesses of the economy, in particular its unwavering efforts to reduce the twin deficits to sustainable levels, and its loan agreement with the IMF which almost guarantees the implementation of a series of reforms during the programme period. Needless to say that the increase in foreign investment would enhance the productive capacity of the economy, help to bridge the gap between domestic savings and investment in the country, upgrade the level of technology, accelerate the GDP growth rate, increase foreign exchange reserves of the country, provide more employment opportunities and reduce poverty. However, while overall foreign investment would appear to be very promising, this development should be taken with a pinch of salt in our context. Firstly, most of the increase in investment was due to some one-off payments and higher portfolio investment together with some abnormal inflows in public debt instruments like T-bills and PIBs. These kinds of inflows generally do not add to the productivity of the economy and could leave the country suddenly when the domestic macroeconomic indicators are not favourable or net returns in other countries become relatively more attractive than those offered in Pakistan. Secondly, though the aggregate amount of foreign investment has shown a healthy improvement during the year, we should not be very much satisfied with this trend as the total amount of FDI is still too small to make much difference on the overall development of the country and is also meagre as compared to FDI inflows in other countries of the region. And thirdly, it is a well-known fact that the level of FDI in the country continues to be dismal and mostly in quick yielding enterprises despite providing all kinds of incentives and inducements to foreign investors. All of this shows that there is something seriously wrong with our policies. As Pakistan cannot hope to make sufficient progress without adequate level of foreign investment, it is important for the policymakers to thoroughly analyse the reasons for the low levels of FDI and undertake necessary measures to improve its inflows significantly to play a much greater role in the development of the country.