The latest State Bank of Pakistan (SBP) data shows that the net foreign direct investment (FDI) received in the first five month of the fiscal year 2023 stood at $430 million, almost 50 percent of what was achieved during the same period last year. The figures for November 2022 were also far from impressive. A net $82 million inflow meant that FDI dropped by 13.7 percent from previous month and almost saw a 50 percent drop in comparison to November 2021.
China was the largest investor in the country with over $100 millions being funneled to projects primarily related to the CPEC. Further, more than $200 million of foreign investment was injected in the power sector making it the single largest recipient of FDI during the period. The reluctance of investors to bet on Pakistan also stems from the fact that amid the foreign reserve crisis, the SBP has made it almost impossible to repatriate profits and dividends to foreign holding companies of Pakistani entities.
The importance of FDI is immense for developing countries as they usually run a current account deficit and to bridge that gap, FDI plays a crucial role. Further, it also enables states to build up reserves that can provide cushion in periods of economic uncertainty. Case in point, India.
As per the Economic Times, “India's balance of payments is likely to slip into a $45-50 billion deficit in the current fiscal year, according to an internal assessment by the finance ministry. This order of forex outflow may keep the rupee under pressure, but the centre is confident the deficit can be managed comfortably with foreign exchange reserves at a healthy $531 billion.”
The reluctance of investors to bet on Pakistan also stems from the fact that amid the foreign reserve crisis, the SBP has made it almost impossible to repatriate profits and dividends to foreign holding companies of Pakistani entities.
During the last fiscal year, as per State Bank of Pakistan Annual Report 2021-2022, “FDI rose marginally by 2.7 percent YoY in FY22 to US$1.9 billion, largely due to net inflows into sectors including power, financial firms and energy.”
“The power sector continued to dominate FDI inflows in FY22 largely due to CPEC projects. China and the UAE both significantly invested in the power sector under the Thar Coal Block-I Power Plant as part of the CPEC project, a greater part of which has been completed thus far and is expected to be operational by August 2022. Other important inflows were in coal-powered and hydropower projects under the CPEC umbrella. Financial firms saw the second highest inflows followed by oil and gas services and IT services,” The report further added.
In the last 30 years, Pakistan has seen two major spikes in the influx of foreign investments. First being the period between 1994-1998 where the government devised Private Power Policy, incentivising the formation of Independent Power Producers. Subsequently, the sector brought in a massive $3 billion during the period.
The second spike was the telecom boom of the early 2000s. As per a paper published by Sustainable Development Policy Institute (SDPI), “During 2004-2010, the telecom sector was the largest recipient of FDI in Pakistan. In 2004, several foreign companies, including United Arab Emirates-based Warid Telecom and Norway-based Telenor, started their operations in Pakistan. Telenor acquired its mobile cellular license for US$290 million while Warid did so also by paying the same amount of money.”
“In nutshell, the mobile phone sector alone received an investment of US$ 6 billion during 2004-2010. Only Telenor, and Mobilink, that invested $761 million and $591 million respectively accounted for 52% of all FDI inflows to Pakistan in 2007,” The paper further elaborated.
After the investment dried up from these sectors, the country has struggled to sustain a period of high FDI due to structural weaknesses. The remedy for the situation has been discussed many a times at different forums and there are regional case studies which can be used as a reference point.
A report published by Pakistan Institute of Development Economics quoted the example of China which brought innovation in productivity and management, created linkages between academia and firms for the development of required skills and opened its services sector like real estate, telecommunications, and banking for promoting foreign direct investment.