Evaluating the risks of investment losses due to the persisting political and economic uncertainty in Pakistan, foreign investors were hesitant as the flow of investment into different sectors of the economy remained sluggish.
Foreign direct investment (FDI) in Pakistan shrank 29% to $141.2 million in May 2022 compared to $199.2 million in the same month of last year, the central bank reported on Friday.
Cumulatively, in the first 11 months (July-May) of current fiscal year, the FDI inflows dropped 5% to $1.59 billion compared to $1.67 billion in the corresponding period of previous year.
Norway emerged as the largest investor with capital injection of $26.6 million in May, followed by the world’s largest and second largest economies, ie the US and China, which invested $17.6 million and $17.3 million respectively.
Foreign investors largely injected equity into their ongoing projects in different sectors which included communication, power and financial business, as they waited for a suitable time to initiate new projects in the country.
“Economic certainty and stability in the rupee-dollar parity are a must for attracting foreign investment to new projects,” Pakistan Business Council (PBC) CEO Ehsan Malik said while talking to The Express Tribune.
“The rupee depreciation has dented foreign investors’ profit margins (in dollar),” as the currency has devalued by around 33% (or Rs51) in the past one year to Rs208.75 against the US dollar.
“Foreign investors are monitoring the government’s moves to get revived the IMF loan programme, which is the last hope for turning around Pakistan’s economy in the short run,” Malik said.
In the medium to long run, there are a number of possible solutions to fix the faltering economy.
Malik observed that multinational companies had invested in the sectors that were based on imports and sold their products in the domestic market.
“Instead Pakistan needs foreign investment in import substitution and export-oriented sectors like agriculture, which is lagging behind due to the lack of technology and expertise,” he said.
Malik was of the view that some of the leading foreign investors would still remain shy of making investment in new projects even after the IMF programme was resumed, as a low productivity of Pakistani labour and a high taxation environment sent negative signals.
Instead of increasing the number of taxpayers in the corporate sector, Pakistan has continued to increase taxes on those sectors that are already taxed. “The government has maintained its old practice of overtaxing the already taxed sectors in this budget (FY23) as well,” he said, adding such practices would shake investor confidence.
China has remained the lead investor in Pakistan over the past two to three years. It made large investments in infrastructure projects under the China-Pakistan Economic Corridor (CPEC).
“However, due to the current law and order situation, it has postponed new investment decisions. Besides, the outstanding dues of Chinese investors have also discouraged them.”
He suggested that Pakistan should identify projects in which it wanted to attract foreign investment and promote those import substitution and export-oriented projects.
Pakistan has remained a large and lucrative market due to its “growing young population and rapidly growing urbanisation in the country.”
Despite offering equal opportunities to both local and foreign investors, Pakistan has largely remained an untapped market for foreign investors, as the ongoing foreign investment in domestic projects has still remained in the initial phase.
Malik further said it was must for the government to boost local investors’ confidence in the domestic economy. These should be the local investors who first initiate investment in import-substitution and export-oriented sectors. The strategy would help the government to attract foreign investors to start new projects in the country.
Country-wise FDI
China remained the single largest foreign direct investor in Pakistan in the first 11 months of FY22. It pour $373 million in the under review period, followed by US, which injected $241 million in the 11 months. Hong Kong invested $137 million. Switzerland and UAE invested $132 million and $131 million, respectively.
China invested $719.5 million in the same 11 months of last fiscal year. It was followed by Hong Kong, UAE and US, who invested in range of $122-138 million each.
Sector-wise FDI
Power sector attracted the largest investment of $567 million in the 11 months of FY22, followed by financial sector and oil and gas exploration. They received $373 million and $188 million respectively.
Power, financial and exploration had remained the top three sectors having won largest foreign investment in the same 11-month of the last fiscal year.
Published in The Express Tribune, June 18th, 2022.
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