Pakistan has won back foreign investors’ confidence in the national economy as multinational companies (MNCs) invested a net $193.6 million in different sectors like power and telecommunication in December 2020 compared to net divestment of $16 million in the previous month.
Investment, however, remained significantly low in December 2020 and in the first half (July-December) of current fiscal year 2020-21 compared to the same month and same half of previous year.
Earlier, the central bank said the Covid-19 pandemic prompted foreign investors to hold back major investment decisions for emerging economies like Pakistan. The flow of foreign investment was already low due to the global economic slowdown in the pre-Covid period.
Foreign direct investment (FDI) dropped almost 61% to $193.6 million in December 2020 compared to $493 million in December 2019. The investment fell around 30% to $952.6 million in the first half of FY21 compared to $1.36 billion in the same period of previous year, the State Bank of Pakistan (SBP) reported on Monday.
Even before the Covid-19 pandemic, the investment outlook was weak in the wake of slowing global growth, falling commodity prices and rising protectionism. The pandemic shock aggravated foreign investment prospects, the central bank said in its first quarter (July-September 2020) report on the State of Pakistan’s Economy released on January 5.
“After the Covid-19 outbreak, investors’ confidence was further eroded by the disruption in input supplies, rising uncertainties, and liquidity and credit constraints for multinational corporations (MNCs). Moreover, re-invested earnings, which have a significant share in FDI, were likely impacted as well, whereas investments in new projects could have been withheld due to the prevailing uncertainties,” the bank said.
FDI in Pakistan is concentrated in a few non-export-oriented sectors such as power, construction, financial business, oil and gas exploration, electric machinery and telecommunications.
In the first quarter of FY21, these sectors attracted around 90% of total FDI into the country, while investment in key exporting sectors such as textile, food and leather products had a very little share in total investment.
“This suggests the need to continue promoting foreign investment in export-oriented manufacturing sectors to further boost overall exports,” said the central bank.
Disaggregated analysis shows that FDI inflows during the period are partially attributed to investment from China to finance the ongoing work on CPEC-related projects.
Apart from CPEC-related inflows from China, FDI was mostly concentrated in financial business, oil and gas exploration, and communication sectors.
CPEC has now entered its second phase, with emphasis shifting from infrastructure development to industrial development, agriculture mechanisation, tourism, hi-tech finance and social development.
Several Special Economic Zones (SEZs) are to be established that could enhance the country’s productive capacity, expand the export base, and provide a major impetus to economic and social development through their backward and forward linkages with the rest of the economy, the SBP said.
Country-wise FDI
China was the largest foreign investor in Pakistan. It poured a net $358.9 million in the first half of FY21, followed by Hong Kong, which invested $86.3 million. The Netherlands invested $72.3 million.
Top three foreign investors were China, Norway and Malta in the corresponding half of previous year. They had invested $395.8 million, $288.5 million and $111.1 million respectively.
Sector-wise FDI
The power sector received the largest net investment of $434.9 million during July-December 2020, followed by the financial sector, which received a net $145.9 million.
The oil and gas exploration sector attracted foreign investment of $123 million in the six-month period.
Communications, power and financial business were the top three sectors, which received foreign investment of $432 million, $262.2 million and $162.1 million respectively during July-December 2019.
Published in The Express Tribune, January 19th, 2021.
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