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FDI: challenges and the way forward

An essential component of a robust and open economic system, Foreign Direct Investment (FDI) serves as a crucial driver for development. In the case of Pakistan, it has been eagerly awaited as a potential saviour for the past so many years. The country has experienced fluctuating trends in FDI, characterized by brief peaks followed by downturns that have recently maintained a declining trajectory. This is not due to a lack of potential; rather, it stems from the complexities associated with instability, ad-hoc planning, and incompetence. It is crucial to recognize that the benefits of FDI do not automatically or uniformly materialize across sectors; instead, they necessitate a well-designed framework to attract and effectively utilize these investments. We must understand that it is always domestic policies that attract and optimize FDI. It needs to stressed even at the cost of being repetitive, that without fixing policy issues and without facilitating existing investors, we cannot attract sustainable FDI. This has been the author’s tagline of advocacy for the investment landscape.

Pakistan finds itself struggling with stagnant FDI figures, standing at a mere USD 1.77 billion in 2023. Despite earnest efforts by the Special Investment Facilitation Council (SIFC) to create an enabling environment for businesses and investors this last year, the anticipated surge in FDI remains elusive.

The effort has been to build a narrative through articles, discussions on various fora, podcasts, and face-to-face conversations with decision-makers in the power corridors of the twin cities, emphasizing the urgent need to create an enabling environment for businesses and attract both local and foreign investors. It is, unfortunate that in 2022 and 2023 instead of attracting more investors, we saw a number of Multinational Companies (MNCs) exit Pakistan, while many others prepare to leave. The reason is simply the non-existence of policy continuity.

At approximately 0.59% of the GDP, the declining FDI figures highlight the failure of current policies to attract foreign investment. The disparity between promises and actual results demands a closer look at the structural issues hindering Pakistan’s economic growth.

In 2022, FDI witnessed a significant decline, amounting to USD 1.34 billion, representing a substantial 37.63% decrease from the previous year’s figure of USD 2.15 billion. However, 2021 saw a 4.38% increase in FDI, compared with 2020, when the inflow was USD 2.06 billion, marking a 7.92% decline from the 2019 figure of USD 2.23 billion, which itself had seen a significant 28.61% increase from the 2018 FDI.

The current FDI stands at USD 1,771.2 million, considering inflows of USD 2,368.4 million and outflows of USD 597.2 million. This data merits closer scrutiny by all stakeholders if they wish to stabilize the economy and boost its potential.

For comparison, let us just look at Bangladesh’s quarterly updates of FDI. Bangladesh’s FDI increased by USD 913.3 million in Sep 2023, compared with an increase of 1.1 USD billion in the previous quarter. Various fundamental factors have played a role in the growth of FDI inflows in Bangladesh. These include measures such as trade and exchange liberalization, the implementation of current account convertibility, a focus on private sector-led development, the liberalization of investment regulations, the privatization of infrastructure and services for both domestic and foreign entities, and notably, the keen interest of foreign investors in the energy and telecommunication sectors. Pakistan has to write a similar story and it can.

We must understand the strong correlation between FDI and international trade, the spill-over effects and externalities concerning the domestic business sector, and the direct influence on structural factors–FDI contributes to both factor productivity and income growth in a far more impactful manner than any domestic investment can.

Progress has been seen in the privatization of government-owned entities, with one mega project underway, but we will need a locked plan to make sure we meet our goals. The term “locked” is deliberately employed to reinforce zero tolerance for interference. Intervention – yes, but only to ensure time-bound delivery. It is feared that the possibility of pledges of USD 25 billion each made by Saudi Arabia and the UAE may not materialize because of our ill-conceived and inconsistent policies. Our strategy must cover at least 20 to 25 years, to attract investment both locally and from abroad.

Similarly, the long-term cost that we stand to pay through the dwindling capacity of the Board of Investment (BoI) and the Privatization Commission is going to cost us dearly, unless addressed via re-structuring and competent leadership. Standing at USD 1.77 billion today, may just turn into quicksand unless emergency measures are taken by the new government.

The resistance to embracing reforms within institutions, especially the Federal Board of Revenue (FBR), is a glaring roadblock. The recent delays in many tasks on the ground (any direct reference here is deliberately avoided), despite the Caretaker Prime Minister’s clear directives, clearly showcased the complacency of ministries and the bureaucracy, and their disregard for the country’s progress. The situation is further compromised by the presence of mafias with vested interests, who manipulate the system to protect personal interests.

Pakistan had general elections earlier this month and seems to have drowned in more ambiguities than rising under clear directions. The ensuing chaos can only be resolved with a collaborative approach. The world does not function in silos and our political and military leadership need to acknowledge that survival is embedded in creating a trilateral approach where the expertise of technocrats (competent individuals from the private sector both from within Pakistan and abroad, with at least 3-5 year contracts) complement the political vision and the military scaffolding that is so necessary for regional competitiveness. All eyes are hopeful to see the long-desired stability underline the State’s economic and investment goals – its institutions being empowered to deal with international interests as per a set policy framework.

All agents of change must come on one page; discussion is integral to the future of this country. There is no progress unless fundamental issues of 3Es– Economy, Education, and Environment–are addressed unanimously, by the trigon of democratic leadership, subject experts, and protectors of the land.

Retrospectively speaking, it is imperative that key figures, including senior leaders from mainstream political parties and the military, acknowledge the errors, reflect, and restructure. Nation-building efforts are critical –a divided nation cannot thrive. We have to move beyond mere rhetoric and make tangible strides towards addressing this 3E emergency.

Looking at the evolving political landscape, it is advisable that the new government be best prepared to handle the economic challenges facing Pakistan. Honestly speaking, it appears that a strategy or a competent team that could take this very heavy responsibility and deliver is yet to be formed although there has been advocacy and also need recognition for expertise to be on-boarded from the private sector/technocrats. A strong economy is the best support for political stability and attraction for investors. Once a team and strategy are finalised, the objective for all stakeholders must be to deliver within timelines.

Muhammad Azfar Ahsan, "FDI: challenges and the way forward," Business recorder. 2024-02-26.
Keywords: Economics , Economic system , Economic growth , Income growth , Federal Board , Telecommunication , Economy , Pakistan , Saudi Arabia , Bangladesh , UAE , USD , US

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