Rise in FDI

Foreign Direct Investment (FDI) received by the country during FY2015-16 would appear to be very encouraging in percentage terms. According to the latest data released by the State Bank on 20th July, 2016, it rose by as much as 39 percent during 2015-16 to reach $1.281 billion as compared to $923 million during FY15. A major boost in FDI was provided by Chinese investment mainly under the China Pakistan Economic Corridor (CPEC) which shot up to $594 million in FY16 as against $257 million in the previous fiscal, registering an increase of 130 percent. The second highest FDI was from Norway, with the amount rising to $172 million followed by the UAE ($164 million), Hong Kong ($130.9 million) and Italy ($103.5 million). However, FDI from the US turned negative by $65 million in sharp contrast to the inflow of $08 million in FY14-15. The net outflow of portfolio investment during FY16 was also $319.7 million. Sector-wise, FDI in power sector more than doubled, jumping from $219 million in FY15 to $566.6 million during 2015-16. Oil and gas exploration sector, despite being the second biggest attraction for FDI, however, underperformed with the FDI falling to $261 million this fiscal from $299 million a year earlier. Information technology showed a disinvestment of $14.7 million compared to the disinvestment of $20 million in FY14-15. The most significant fall in FDI was noted in the case of financial business. It could hardly attract $28 million during FY15-16 compared to $256 million in the previous year.
While welcoming the boost in FDI during FY16 in percentage terms, several factors need to be noted. Although the FDI has gone up by 39 percent, its level is still very meagre compared to most of the other countries in the region and cannot make a significant impact on the growth rate of the economy and bridging the gap between savings and investment requirements of the country. Moreover, net inflows of FDI in the country have not only been small but declined substantially during the recent years. FDI inflows which stood at $5.4 billion in FY08 have been declining almost consistently since then to hover around $1 billion. This is a disturbing trend which needs to be sharply reversed for gaining assess to modern technology of production, upgradation of skill levels and integration of the domestic economy with international standards. Another disturbing trend is the lack of interest by traditional foreign investors witnessed during FY15-16. This is evident from a fall in FDI from countries such as US and Saudi Arabia. The inflows from such countries need to be improved to satisfactory levels in order to diversify the sources of FDI. This is so because FDI from China is mostly project-specific and cannot be relied upon for introducing state of the art of technology on a consistent basis. As for individual sectors are concerned, the fall in FDI in financial business (banks), telecommunication and information technology during FY15-16 may be due to the saturation point reached in the country in these areas but the decline in oil and gas exploration can hardly be explained. It could be due to lower oil and gas prices in the world market but commitments are generally on long-term basis in this sector. Another worrying aspect is that though the level of FDI has improved in the outgoing year, the country has not been able to attract any reasonable level of investment despite improved law and order situation, better energy supplies and a lot of propaganda to highlight economic achievements of the country to attract the attention of foreign investors. Anyhow, there is no doubt about the urgent need to increase the FDI inflows more sharply than in the previous fiscal year to supplement domestic savings and accelerate the process of development. Foreign investors seem to avoid the country due to political instability, bureaucratic hurdles, corruption, lack of good governance and poor infrastructure. All these negative factors could be impediments to the smooth flows, of foreign investment. Another factor which could slow down the flow of investment is the termination of the present IMF programme in September, 2016. Foreign investors may feel that Pakistan would be unable to continue with the reform process without the IMF breathing on its neck. Overall, policymakers need to analyse the subject thoroughly and remove the obstacles with a view to smoothing the FDI flows for the larger economic interest of the country on an urgent basis.