Foreign Direct Investment (FDI) data released by the State Bank of Pakistan (SBP) during the first four months of the current year showed a decline of 48 percent in comparison to the comparable period of last year. Inflows (July-October) were estimated at 480.1 million dollars while outflows amounted to 164 million dollars, giving a net inflow of 316.1 million dollars in the current year, a figure that compares unfavourably with net inflows of 610.5 million dollars July-October 2015-16. Month-on-month FDI fell by 68 percent in October 2016 compared to October 2015 - or net inflows were estimated at 66.8 million dollars in October 2016 while the comparable figure for October 2015 was 207.1 million dollars. Needless to add, this is appallingly poor performance for Pakistan given that we are neither a small economy, with a Gross Domestic Product of over 29,597 trillion rupees last year, nor is growth stagnating as per government data citing a 4.7 growth last year (as per budget documents) and projected a 5.7 growth for the current year.
So what is going wrong? Economists point to a multiplicity of factors responsible for the decline in FDI - all of which cannot be dismissed by the usual government response to criticism: low FDI reflects a factor external to its own decision-making, for example, global recession that has impacted negatively on FDI as well as consumer exports, and/or what was inherited by the incumbent government notably serious security concerns which the government rightly claims are being tackled effectively, and the lack of infrastructure notably energy shortages that are being dealt with through the launch of major generation projects that have not yet been completed. Critics, however, argue that the government by focusing almost exclusively on generation has ignored the distribution/transmission network that is obsolete which does not have the capacity to take more than 16000MW while our productive sectors, particularly exports, are ailing because of the anti-growth taxes and anti-business measures as well as an overvalued rupee. Ease of doing business has surprisingly become more of a challenge during the Sharif administration, associated with being pro-business, in comparison to the Zardari-led government widely regarded as anti-business as per the index tabulated by the World Bank. These are clearly not factors that are likely to attract FDI.
There was a general perception that once the 46 billion dollar envisaged Chinese investment began to be disbursed under the China Pakistan Economic Corridor (CPEC) the country would be able to show an FDI figure that would rival many a developed country leave alone a developing country. Earlier this year, Ahsan Iqbal, the Minister responsible for implementing the CPEC, publicly stated that the Chinese government/private companies were legally obligated to complete lengthy paperwork for each and every project under the CPEC before disbursement could be initiated - paperwork that was expected to be completed by the final quarter of the current calendar year. Clearly this paperwork has not been completed yet and one would hope that in another month or so the country would be able to show a healthy rise in FDI.
True, that the government has been able to issue 2 billion dollar Eurobonds and one billion sukuk, with the intention of issuing another 184 billion rupees in the current year, yet these are well above the market rate and would simply raise our external debt repayments which already account for a sizeable portion of our annual expenditure.
Significantly portfolio investment has also declined due to profit taking by the foreign investors and while portfolio investment cannot be relied on as a factor for growth simply because it can exit overnight leaving the economy in dire straits, as happened in 1997 in several East Asian countries triggering a financial crisis, yet it is likely that once the CPEC projects are completed, profits would be remitted out of the country and into China - a possibility that so far does not appear to concern the government.
To conclude, there is now mounting evidence that in spite of the massive projected inflows under CPEC, the Sharif administration has been unable to attract foreign investors and in this context, it is advisable for the government to begin to revisit its economic strategies to date.