All hopes are lost when one looks at FDI numbers; foreign direct investment in Pakistan has stayed low for too long and continues to do so. Where FY21 turned out to be better for the country’s exports and remittances, it remained gloomy for FDI. Net FDI in FY21 was down by 29 percent year-on-year with inflows down by 9 percent and outflows higher by 61 percent.
Similar to the ongoing trend, power sector continued to dominate the net FDI inflows accounting for nearly 50 percent of the net FDI during FY21. Half of the investment (50 percent) arrived from China, which continues to be the single largest source of FDI for Pakistan.
Part of the decline in FDI is due to the overall global slowdown in in foreign investments since the outbreak of Covid-19 where almost every country - developed or developing (excluding China and India) – witnessed a sharp decline in these foreign inflows. However, apart from the global FDI trend, the lackadaisical pace of FDI in the country has been a much older phenomenon due to indigenous factors.
Key sectors besides the power segment as shown in the illustration have smaller share in total FDI where some sectors have seen their contribution to FDI falling in FY21 versus FY20 not only due to overall decline in FDI but also sector induced slowdown. Particularly the telecommunication segment as highlighted in SBP’s third quarterly report that says that cellular service firms had borrowed from their foreign parent companies last year (FY20) to deposit their license renewal fees with the governemnt, which meant that these firms did not have to make large license renewal fee payments in FY21 and thus did not receive any fresh foreign investments. Moreover, it also highlights that some companies paid their intercompany loans this year, which slightly increased the gross FDI outflows from the telecom sector in FY21.
Other than that, FDI in key sectors like oil and gas has remained stagnant at best with many MNCs wrapping up their operations in Pakistan. Exporting and value addition sectors like textile also did poorly as the net FDI declined to just $6.9 million in FY21 versus $37.7 million in FY20- a drop of 86 percent.
Not only that, FDI from key source country - China is also tapering due to CPEC initial infrastructure and construction projects completing. A key factor behind declining net FDI is also the rising outflows, which according to SBP’s latest quarterly report has been due to the repayment of intercompany loans by firms in the telecom, electronics and power sectors.
Investment from China under CPEC is much needed; and especially during a time when global greenfield investment is severely impacted. At the same time, FDI from other vibrant sectors of the economy is also crucial. Recent measures to attract investment include ease in FX regime for service firms especially the ICT companies, policies for cellphone manufacturing and electric vehicles and focus on the second phase of CPEC through the setting up of special economic zones (SEZs). However, much more is required to get Pakistan on the same progress road as its counterparts like Vietnam, Bangladesh, etc. There is a need for geographic as well as sectoral diversification and depth for FDI to scale.
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