Criticality of FDI

After touching a peak of over $ 8 billion in 2006-07, foreign direct investment (FDI) has been lagging in Pakistan. FDI in Pakistan averaged $2.6 billion from 2010 to 2016, reaching a peak of $ 3.1 billion in 2010 and a record low, $ 2 billion, in 2012. The averaged out FDI from 2013 to 2016 is recorded as $ 2.7 billion, which means that in the past decade FDI in Pakistan has not gone above $ 3 billion. This is an alarming situation for an economy driven by one of the world’s fastest growing middle class creating growing demand for consumer products, energy, transport, healthcare, real estate, construction and others.

Equally alarming is the nosedive of our exports, which have slid down to $ 2 billion. The balance of trade is negative, $3.2 billion. The only good news are foreign remittances touching $ 4.6 billion.

We come across some promising news which presents a misleading picture. According to data uploaded by the State Bank of Pakistan last week, foreign direct investment increased by 155 percent during the first two months of the current fiscal year, in comparison to the corresponding period of the last fiscal year. However, in a broader perspective, increase in FDI is insignificant. The reality is that FDI has been stagnant over the last one decade.

The major contributor to this rise is reported to be China, with the total inflows of $ 259 million, against $ 48.4 million in July-August last year. There is confusion as to whether the funds from China can be defined as FDI or as a loan, which has to be repaid with interest.

FDI is truly definable as strategic investment with equity participation and ownership by a foreign investor, such as a subsidiary of a foreign company in Pakistan with full management control, or joint venture or transfer of technology. FDI not merely brings in foreign exchange, but with it comes transfer of technology, training of local human resources and contribution into the national economy in a more sustainable manner through revenue from duties and taxes. The Overseas Investors’ Chamber of Commerce and Industry (OICCI), with a membership of around 200 multinational companies, is a significant contributor to the national economy. The member companies contribute over 25 percent of Pakistan’s revenues through duties and taxes.

Funding received from China is more a loan than FDI. FDI is largely in the shape of equity in power plants in the private sector. Whereas the major part of Chinese funding is financing of the energy projects in Pakistan.

In phase 1, around $ 15.5 billion worth of energy projects, largely power projects, are to be constructed by the private sectors of the two countries, which will be financed by China’s Export-Import Bank (Exim) on commercial terms with a 5 to 6 percent interest rate. The lien of the bank is on the project itself with no liability of the Government of Pakistan, which is more of a facilitator in this case. However, there is a commitment from the Pakistani government to purchase electricity from these plants at pre-negotiated prices. There is a source of concern regarding the affordability of electricity in Pakistan and the profitability these projects are deriving out of it at the expense of the people of Pakistan.

This regime of project financing from China lacks transparency and needs to be managed with caution. The International Monetary Fund has warned that “any demand-driven economic expansion as a result of project implementation is expected to be limited, as increased investment may initially be offset by a significant increase in imports as Chinese contractors are expected to import a large share of the required machinery and raw materials.”

There are also soft loans from China in the public sector. In August 2015, China reportedly announced that concessionary loans for several projects in Gwadar totalling $ 757 million will be at a zero-interest rate, which will include construction of the $140 million East Bay Expressway project, installation of breakwaters in Gwadar at a cost of $ 130 million, a $ 360 million coal power plant in Gwadar, a $ 27 million project to dredge berths in Gwadar harbour and a $ 100 million 300-bed hospital in Gwadar.

While funding from China is the need of the day for Pakistan for sustenance of its economy and build up infrastructure, the government must not lose its focus on FDI, especially from the G-20 countries. With the absence of FDI, technology transfer from advanced countries is dying out, and so are the footprints of these technology giants in Pakistan.

The government needs to carefully work out and identify the reasons for the stagnant FDI and depleting exports – a lethal combination which has put the economy and sovereignty of Pakistan at stake. Regretfully, no office of the government appears to have recognized the reality, leave aside finding solutions and working them out. With Prime Minister Abbasi in the seat of influence, with his being a professional, one can hope for some focus on the subject.