Wanted: FDI miracles

That Pakistan missed its FDI goals for five years in a row was flagged in last month’s FDI coverage (See ‘Missed FDI goals!’ published June 22, 2018). An updated graph is reproduced here as a gentle reminder of the promises unkept. That Pakistan failed to grow its FDI in FY18 (a meagre increase of 0.8%) made headlines yesterday. What’s next and what’s the context?

First, a quick background! Pakistan’s FDI is less than one percent of its GDP. In a country that lacks domestic savings, that number is very poor. (For more comparisons read ‘Poor FDI; poorer transparency’ published May 17, 2018).
https://www.brecorder.com/2018/05/17/418200/poor-fdi-poorer-transparency/

Second, while net FDI has grown since FY15, the year when CPEC agreement was signed, FDI net off profit repatriation has likely worsened over last year. Data for full year FY18 profit repatriation hasn’t been released as yet (it will be released later this month). But if average 11MFY18 trends are any guide, this year will likely end with a 35 percent year-on-year drop in FDI net off profit repatriation. (For more on this problem and possible solution, read: ‘A case to boost reinvested earnings!’ March 14, 2018).

Third, for those who may have strangely missed this trend, Pakistan is putting all its eggs in one basket – the Chinese basket. China plus Hong Kong (since Chinese FDI is also routed through Hong Kong) accounted for 62 percent of total FDI in FY18, from 6.5 percent ten years ago. (For a rare by-country-by-sector FDI graphs see: ‘FDIs: diversification calling’ March 28 2018 & March 29 2018).

What is going to happen to the Chinese basket? The first immortal truth to remember is that the full size of Chinese basket isn’t known. For all the CPEC mantra, Chinese FDI between FY16 and FY18 – i.e. since the signing of the CPEC agreement in April 2015 – has totaled $4.1 billion; whereas Chinese debt is estimated to be around $7.5 billion, albeit these aren’t officially claimed as FDI.

Of the $46 billion CPEC, $35 billion was said to be pure investment and the rest soft loans. Then how is it that in the early-harvest part of the CPEC, debt has far outpaced FDI? Plus, although there is lack of clarity on this front, the early-harvest part was touted to be north of $14-15 billion. Even if one assumes that all of Chinese debt is for CPEC projects, the total so far is about $11.6 billion.

In January this year, when BR Research interviewed Rana Afzal – the then minister of state for finance –he said the CPEC numbers were being reconciled at the moment. About six months later, June 19 2018, BR Research published an interview with Miftah Ismail, Rana’s former boss, and asked for clarity over CPEC-related FDI.

His response: “There is an accounting issue. Some of the CPEC inflows come as loans in capital accounts; and there needs to be accounting reconciliation, which in fact is currently underway.” Is it really that complicated that Q-block, P-block and the central bank can’t reconcile the numbers in six months or is there a well-intended design to keep the public in the dark?

Whatever the number is, here is a parting food for thought: “FDI inflows are expected to remain lower in FY19 than last year as a number of CPEC energy projects are in their advance stages of completion. Therefore, in overall terms, the high current account deficit, together with limited financial inflows, would continue to keep the balance of payments under pressure,” so sayeth the central bank in its latest State of Pakistan’s Economy report for third quarter FY18. Considering that FDI inflows from all other countries are already damp squib, nothing short of miracle deals will be needed next year.