Two Years of PTI-Led Government: "Foreign flows: PTI govt's bittersweet encounter"

ARTICLE: Two years into Pakistan Tehreek-e-Insaaf's government have been a roller coaster ride not only in terms of its performance on various fronts but also in terms of exogenous factors and global events. From a troubled economy close to collapsing to stabilization and austerity measures; from reformative efforts and tough choices to populist decisions and promise busters; from successful moments to utter failures; from self-inflicted crises to natural disasters and global health emergencies; two years have been eventful for the first timers. Non-debt creating foreign flows have been crucial for the rocking economy especially remittances that have been serving as a lifeline for many years. At the same time, the significance of foreign direct investment (FDI) is paramount in lifting economic growth, although this avenue has remained rather unimpressive. Comparing the government's economic progress on various fronts with previous government turns into a futile exercise with significant changes in exchange rate management, and interest rates. But has Pakistan Tehreeke-Insaaf been able to live up to its own promises? We could call it a bittersweet experience so far.

Remittances holding up

Under Prime Minister Imran Khan known for his reverence and reliance on overseas Pakistanis, remittances were one area where PTI's ambitious targets were touted to reflect reality. However, two years into the government, it became clear that it takes more than charm to attract abnormal flows.

Overall, remittances grew by nine percent on average in two years (FY19-FY20) reaching the highest ever received from overseas residents. The situation can be looked at from two angles. First, the growth of 11 and 6 percent in the last two years was surely not an unprecedented rise in remittances. Or second, that remittances have endured abnormal circumstances such as debilitating economy, turmoil in host countries and the coronavirus pandemic.

PTI's success in posting growth in remittances is based on the central bank's and Pakistan Remittance Initiative (PRI) efforts from incentives for exchange companies to increased tie-ups in host countries to government's crackdown on hawala/hundi and corruption. The current government's time in office has seen significant changes in the economic growth of key host countries. Despite the declining stock of immigrant workers in key remittance corridors like Saudi Arabia, UAE and the other GCC countries due to ongoing economic turmoil and nationalist priorities, remittances from them rebounded in the latest year as efforts were initiated by the authorities to salvage growth in key corridors.

Also, timely action aided Pakistan in not only mitigating COVID-19's impact on remittances - which was otherwise expected to reduce remittances by at least 25 percent year-on-year - but also increase the flow through official channels. The restricted and limited activity in the informal channels such as Hawala and Hundi due to border closure resulted in diversion of the foreign exchange towards official channels.

FDI on a slippery road

On the other hand, the situation with foreign direct investment has been rancorous. Unlike remittances, FDI has missed the government's attention - so say the numbers. While volatile exchange rate, delay in the finalization of IMF program and weaknesses at the fiscal and external front contributed to the already deteriorating foreign investment in FY19, austerity measures, interest rate environment and the global pandemic added further in FY20. Net FDI in the latest fiscal year (FY20) stood 88 percent year-on-year higher, but it was largely driven by low base of FY19, and a decline in overall outflows than a significant growth in inflows. After a very weak FY19 where net FDI was down by over 50 percent year-on-year, total FDI inflows in FY20 increased by 18 percent year-on-year, while the outflows came down by 49 percent. Knowingly (or unknowingly), the government kept boasting about the so-called growth.

PTI government missed on many counts to jumpstart the sector. Foreign direct investment in Pakistan is marred not only by weakening inflows despite improved law and order situation but also a lack of diversification and an aggressive policy stance. Despite promises and claims of working to fix the investment climate for both local and foreign layers, PTI government has not been able to bring the much needed diversification highlighted by the failure to not only attract investment in unconventional sectors but also the traditional and once stable segments. The only source of significant consistent FDI continues to be China with investment in CPEC related projects in power and infrastructure, which is also now coming down as projects complete. FDI in construction sector was negligible in FY20 despite the focus that the sector has received in recent times, and investment in communication has always been restricted to telecom.

Also, one of their unfulfilled attempts is their claim to focus on export-oriented and manufacturing segments for attracting FDI. While a streak of hope was seen in FY19 as FDI in the manufacturing sector doubled and contributed 56 percent of net FDI in that year, the same lost steam in FY20 falling back to only 17 percent of net FDI.

The way forward

COVID-19 has changed how economies operate. Once considered a reliable source for support, remittances have also become precarious to the global pandemic. Though FY21 has started off on a positive note with highest ever monthly remittance inflows, the challenge for the government is their sustainability; recent growth has emanated from factors including Eid-ul-Azha related flows and financial settlements for laid off workers returning home. Government hopes that the seamless digital transaction facilitation for overseas Pakistanis would boost remittances. But it is equally important to explore new corridors, as well as for the government to strengthen and revive the traditional corridors by matching the skills requirement with changing job market in these countries, which needs undue focus on skills development.

FDI is more endangered as now it has a new ally - the bad luck from coronavirus that the policy makers will have little control over. Recovery in FDI flows now also depends on external factors like how the global economic recovery pans out post pandemic. Though countries have opened, economic activity and investor sentiment in many is still sour and will take a while to recover, which should mean that the outlook for FDI in FY21 is generally not upbeat. Meanwhile, government should put efforts to diversify in terms of sectors and countries, revamp taxation policy; increase focus on export-oriented sectors including IT services that have seen significant growth over the last decade; and strengthen the Board of Investment to do its job of FDI promotion and encouraging foreign investors to reinvest in the country.

Copyright Business Recorder, 2020