FDI key in breaking the export curse

Sounds good but equally hard as the FDI coming into the country is not only short but also very specific in terms of sector and source. The FDI story in Pakistan has been banal with net inflows not picking up the much wanted pace. In the recent couple of years, these inflows have largely been dictated by China Pakistan Economic Corridor (CPEC) with inflows from China in sectors like power and construction taking a lion’s share in the total net foreign inflows.

The narrative is the same with the 7MFY18 FDI figures recently released by the central bank. Net FDI for 7MFY18 stood at $1,488 million, down by three percent versus 7MFY17. As the charts show, these figures can easily be explained by three words: power, construction and China. However, January FDI flows of $106 million (down by 46 percent MoM) have broken the consolidation achieved in the FDI momentum built particularly since May 2017.

There’s no denying that the CPEC led foreign investment has supported FDI figures of late. However, it is high time that the authorities come out of this ‘all eggs in one basket’ approach. They have to understand FDI’s importance.

There have been studies that show that FDI has helped in upgrading the developing country’s export structure. And in the inaugural Global Investment Competitiveness Report 2017-2018 released this month by the World Bank Group highlights how FDI is a major contributor to development for many developing countries, surpassing most source of external finance like remittance, portfolio investment and ODA. One key benefit of FDI that it talks about is the access to foreign markets (exports) in upgrading growth and adding value to the domestic industry.

A look at the trade deficit unfortunately reveals that this might not be the case in Pakistan. The illustration shows how external flows like remittance and FDI have been unable to cover the rising trade deficit. For Pakistan, FDI alone averages only 8-9 percent of the trade deficit. Most of the foreign investors coming into he country in recent years have been looking at factors like large market size, bulging population and low cost labour, whereas minimal efforts have been made by the governments to bring in FDI that can help in import substitution and generate exports.

The column has talked about FDI diversification many times; the authorities need to look beyond CPEC led FDI to sectors that can also boost exports. Ironically, a lot of recent FDI is only likely to fuel more imports!