November 27, 2018 (MLN): Foreign direct investment (FDI) is viewed as a stimulus to economic growth and development in developing countries like Pakistan, as it creates jobs, upgrades skills, encourages competition, transfers technology and contributes in the fiscal stability of the country.
A high rate of attracting FDI reaffirms the government initiatives and long term planning for the economic prosperity of their respective countries.
An efficient Fiscal Policy encourages a healthy rate of Investment and savings, paving way for capital formation. Conversely, in emerging economies the rate of domestic savings falls short of the preferred level because of lower per capita income.
To fill the gap between savings and investments, inward FDI can prove to be an important source.
In this regard, Pakistan depicts a fluctuating and declining trend of FDI inflows.
During the last five years, FDI in Pakistan has shown a fluctuating trend, touching a peak of $692 million in December 2016, after which, a huge decline could be observed.
The massive jump in December 2016 figure is due to the company’s acquisition, valuing at $462 million by the Netherlands-based Friesland Campina. This took the Netherlands on top of the list of countries with the highest FDI in Pakistan.
In the month of October 2018, FDI reached to $161 million, a decline of 42% has been observed as compared to the same month previous year despite regular investments from china.
Net FDI in Pakistan (US$ million)
Today, Pakistan’s economy needs a large amount of funds for development of various sectors like energy & power sector, telecom sector, banking sector, transportation and infrastructure sector and many other related sectors that are directly connected to economic growth.
Since FY2009-10 to FY2014-15, Oil and Gas sector has been considered to be at the top among all other sectors which received more or less half of the net FDI.
During FY18, net FDI inflows to Pakistan increased, albeit marginally, to US$ 3 billion from US$ 2.7 billion previous year. During the 4MFY19, it stood at US$ 600.7 million. The power and construction sectors attracted more than half of the net FDI.
Likewise, the telecommunications sector also witnessed higher inflows, due to the acquisition of telecom tower services by a Malaysian firm, from a leading cellular service provider in Pakistan for US$ 110.3 million.
Sector-wise Net FDI (US$ million)
Source: Board of Investment, Pakistan
Note: The figures in brackets are in negative
While, FDI inflows to South Asia dropped in 2017, Pakistan continued to attract foreign investment, mainly from China, for CPEC-related projects.
China has remained the top investor in Pakistan, since FY2013-14 till date. Before that UK and USA had been the top investors.
Over the past 10 years, UAE, Hong Kong, Netherlands, Switzerland and Italy have been the major contributors of FDI inflows in Pakistan.
Country-wise Net FDI (US$ million)
Source: Board of Investment, Pakistan
Note: The figures in brackets are in negative.
There exist a number of factors include social, economic and infrastructure that affect the flow of FDI in Pakistan.
The government needs to focus on infrastructure development, in order to minimize the cost of doing business for the investors and allow them to maximize the rate of return on their investments.
Emphasis should be placed on minimizing political instability and corruption, as they turn out to be the primary reasons for foreign investors’ reluctance, to invest in Pakistan.
The government of Pakistan has been asserting that CPEC is game changer, but the inflows from China are still not encouraging enough. However, since there are 8 more months left until the end of current fiscal year, we can expect and hope for Pakistan’s FDI numbers to improve.
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