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Downing FDI: a focus of interest for economic boost

World investment report 2018 released by UNCTAD revealed that the worldwide foreign direct investment (FDI) flows declined by 23 percent during 2017, to $1.43 trillion from a revised $1.87 trillion in 2016. The fall is in stark contrast to other macroeconomic variables, like GDP and trade, which saw substantial improvement during 2017. A fall in the value of net cross-border mergers and acquisitions (M&As) to $694 billion from $887 billion during 2016, contributed to the decline. The report also revealed that the value of announced greenfield investment – an indicator of future trends – also declined by 14 percent, to $720 billion. FDI flows declined sharply in developed economies and economies in transition while those to developing economies stayed stable.

As a consequence, developing economies accounted for a rising share of global FDI inflows during last year, absorbing 47 percent of the total, as against with 36 percent during 2016. Even discounting the volatile financial flows, large one-off transactions and corporate restructurings that inflated FDI numbers in 2015 and 2016, the 2017 fall was still sizeable and part of a longer-term negative cycle.

In the developing countries like Pakistan, State Bank of Pakistan (SBP) statistics showed that FDI during July-September FY19 clocked in at $439.5 million as against to $765 million previous year. The Government of Pakistan desperately requires foreign exchange inflows to cap the growing current account deficit. The fall in inflows comes at a time when the country’s depleting foreign exchange reserves have already fallen to alarmingly low levels at $14.6 billion counting SBP’s $8.089 billion offering enough only for 2 months of import cover.

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Different sources recorded that all Pakistani governments have always been keen to attract FDI and have tried to launch reforms for enhancing the investment environment. Focus stayed on how to enhance the business condition in the country. Despite the tall claims, the government’s condition is still bad and the business community particularly foreign investors are hesitant to invest in Pakistan. Doing business in the country is one of the tough tasks, there are many gaps on account of transparency, policy and ranking of key indicators for doing business is very low.

Sources also recorded that the present Government of Pakistan has officially approached the International Monetary Fund (IMF) to borrow $12 billion to meet the rising foreign exchange requirements. The outflow of portfolio investment also deteriorated the overall foreign private investment in Pakistan, which declined by 63 percent in first quarter. An outflow of $185 million was observed in the foreign portfolio investment (FPI) during the quarter under review compared to $78 million in the same quarter last fiscal year. The overall FPI during the quarter fell by 63 percent standing $254 million as against to inflows of $687 million in the first quarter of previous fiscal year.

 

In tandem with last few quarters, the experts recorded that China led the list of countries pouring investment into Pakistan. The Asian giant made up for 64 percent of the total FDI during the quarter contributing $281 million. However, in comparison with the same period last fiscal year, China’s investments in the country dipped by 43 percent during the period under review.

Following China, UK contributed $51 million, US $25 million and Switzerland $39.6 million. Pakistan is ranked 97 on the transparency and policy indicator. It declines on 102 in bribe and regulatory index. The experts also recorded that property rights index is even worse at 115 position. Wasting of public resources is another concern for the country and it is ranked on 58 on the competitive index. Legal in-efficiency is also hindering the FDI in a country like Pakistan and is ranked at 83 on this front. The present government has proclaimed its plan to develop investment friendly strategies to attract foreign investments while it also ensured to reduce cost of doing business in Pakistan.

Sources of external finance, developing economies and LDCs
Details Growth rates (%)
2017 2013–2017 average Volatility index
Developing Economies
FDI 0 0 20
Remittances 9 5 27
ODA and other official flows -1 2 19
Portfolio investment 110 -80 88
Other investment (mainly bank loans) 70 -25 90
Least Developed Countries
FDI -17 6 23
Remittances 4 3 35
ODA and other official flows -1 2 17
Portfolio investment 21 -13 237
Other investment (mainly bank loans) -58 6 113
Conclusion

No doubt, foreign investment is a major indicator of any economy which creates jobs opportunities, economic growth, expand trade and improve livelihoods of the people as well. For growing the foreign investment in Pakistan, the present government must focus the internal situation and particularly the infrastructure of Pakistan. These are the prerequisites to pave the way for sustainable peace and prosperity in the country.

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