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A brief review of FDI in Pakistan over last three years

Foreign Direct Investment (FDI) has not been picking up in Pakistan for the last three years despite regular investments from China. The State Bank of Pakistan (SBP) has called an increase in FDI ‘imperative’ for the sustainability of the economy’s external sector. Foreign Direct Investment in Pakistan increased by US$2,761.10 million in 2016. Foreign Direct Investment in Pakistan averaged US$2,651.26 million from 2010 until 2016, reaching an all-time high of US$3,184.30 million in 2010 and a record low of US$2,099.10 million in 2012.

Gross FDI inflows have been either declining (in FY14 and FY15) or only marginally increased (in FY16) owing to concentration in cross-border mergers and acquisitions. In other words, improvements in net FDI are more a result of lower gross outflows than a pick-up in inflows. On the other hand, higher profit and dividend repatriations by foreign firms led to a 16.3 percent increase in the primary income deficit, which reached US$5.3 billion in FY16; this was almost three times the net FDI received by the country in 2016. Pakistan’s Foreign Direct Investment (FDI) increased by US$234.5 million in August 2017, compared with an increase of US$222.6 million in the previous month. FDI flows to increase to US$3.6 billion in 2018.

Despite an improvement in global investment flows in 2015, FDI flows are yet to pick up pace in a real way for Pakistan. Pakistan could not capitalize on this improvement, mainly due to terrorism and inadequate power supply. But these are being gradually worked on: there has been a notable improvement in the law and order situation as a result of intelligence-based operations. On a similar note, better energy management and incremental addition to power generation capacity has improved power supplies to businesses, in general.

Net FDI in Pakistan was dominated by China, with investments from the country primarily arriving in CPEC-related power projects. As net inflows from the US, UAE and UK dropped significantly, China contributed 32.9 percent to net FDI flows in FY16. This, together with higher net investment from some other countries, led to a sizeable increase of US$ 978.3 million in net FDI over the last year; pushing the level to US$1.9 billion in FY16. Having said that, the level of net FDI is still very low – less than one percent of GDP.

On the other hand, regional economies remained the most attractive destination for foreign investors, and witnessed a significant increase in their net FDI inflows. This could be attributed to their relatively strong economic performance, and favorable macroeconomic and business environment, which is visible from their higher ranks on the Global Competitiveness Index (GCI) and the Ease of Doing Business. These indices generally play an important role in attracting foreign direct investment into the country. In June 2016, India significantly relaxed rules governing FDI flows and foreign ownership in sectors like aviation, defense, and pharmaceuticals, in addition to providing a grace period for foreign firms to comply with localization requirements. Foreign investors can now own 100 percent of domestic airlines, up from the previous limit of 49 percent.

For Pakistan’s Balance of Payments perspective, the UK is an important partner because it accounted for 7.4 percent of the country’s overall export receipts in FY16 and it had the highest share in outstanding FDI in the country. However, UK had a meager 6.2 percent share in net FDI received in FY16. Net flows from the country dropped a sizable 52.9 percent on a year-on-year basis owing to the uncertainty with regards to EU post-Brexit. Despite this, Tesco Plc – UK’s largest and world’s third largest retailer in terms of turnover intends to launch its food and non-food products in Pakistan owing to its fast-growing retail market, growing middle class and the overall size of population.

Net FDI flows in Pakistan are a function of both international developments and country-specific factors. While the international scenario is less likely to see a visible improvement in the foreseeable future, positive developments on the domestic front could serve as a major pull factor. China is likely to remain the top investor in Pakistan, with power sector the main recipient of FDI – through inflows under China-Pakistan Economic Corridor (CPEC) projects. Beverages and auto sectors are also well placed to fetch new investments owing to strong domestic demand. In addition, the planned divestment of Pakistan Steel Mills, PIA and Kot Addu Power Company Limited (KAPCO) will bring in FDI inflows. Besides CPEC-related investments, the country also received significant FDI from three merger and acquisition transactions in food (Dutch Friesland-Engro Foods), consumer electronics (Turkish Arcelik-Dawlance) and financial services industries (Norway Telenor-Tameer Microfinance Bank) in 2016.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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