Each passing month has been strengthening the ongoing trend of Sino-isation of Pakistan’s FDI. The latest tick – for March 2018 – also reconfirms that trend.
Following the 52 percent year-on-year drop in March 2018, net FDI inflow stood at 4 percent year-on-year for 9MFY18. That growth is nothing to write home about. What is worth talking about is this. The net increase in FDI in dollars terms was $89 million in the nine-month period.
From sectoral perspective, that increase of $89 million is mainly a result of net increases in coal power ($337mn) and construction ($262mn) sectors mostly offset by $416 million net decline in food sector and $96 million fall in petroleum refinery. Power and construction sectors combined contribute 69 percent to total FDI inflow in the year to date compared to 2.9 percent in FY08. The decline in food sector is because last year there was that famous Engro Food deal with Netherland-based Company, whereas this year no major food sector FDI has happened.
From country-wise perspective, the biggest net contributor was of course China with a net increase of $543 million in 9MFY18 over 9MFY17, followed by inflow from Malaysia with an inflow increase of $103 million, thanks to the telecom tower sharing deal. These gains were eroded by net declines from Netherlands ($394mn), Turkey ($115mn) and the UAE ($78mn). China now accounts for 64 percent of total 9MFY18 FDI as against 0.25 percent share in FY08.
Much has been written about the looming risks emerging from Pakistan’s failure to diversify its FDI basket from both sectoral and country wise perspective. A detailed analysis has been published last month. (See BR Research FDIs: diversification calling published March 28 & March 29, 2018).
In its latest State of Economy (SoE) report, the central bank maintains that “the stagnation in FDI calls for a more concerted policy effort”. Though it doesn’t share its own thinking about what could be a “concerted policy effort”, it does flag Pakistan’s weaknesses in Ease of Doing Business indicators. One would expect the central bank to offer in-depth diagnosis and solutions over FDI than the convenient reasoning of doing business rankings. But it’s not as if the government has listened to the bank’s other specific proposals on a host of other macroeconomic and sectoral governance areas.
The central bank also shows concerns over rising profit repatriation. “In addition to a sharp increase in the trade deficit, higher profit repatriation by multinational companies operating in Pakistan, dented the growth in worker remittances and contributed to the rising current account gap,” wrote the bank in its SoE report published earlier this month.
BR Research’s analysis titled, A case to boost reinvested earnings! (published March 14, 2018) 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. Hopefully, the upcoming budget will offer some carrots to existing players on the ground to slow down the growth of profit repatriation.
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