Energy sector attracts highest FDI in Q1FY25

LAHORE: Energy sector, including power and oil & exploration, attracted foreign direct investment (FDI) worth $585.6 million during July-September 2024-25 (Q1FY25) against the $266.3 million recorded in the corresponding period last year (Q1FY24).

This sector has largely remained a primary focus for FDI, with the power sector emerging as the leading recipient, followed by financial services and oil and gas exploration. The energy sector alone showed a growth of 119.9 per cent over the first quarter of the current year against the corresponding period of last fiscal.

Despite recent gains, the country’s FDI landscape reveals a troubling dependence on a few sectors and one dominant investor, underscoring the urgent need for a more diversified investment strategy, according to a report by the Overseas Investors Chamber of Commerce and Industry (OICCI) on Pakistan’s FDI.

Separately, in one of its recently released reports, the State Bank of Pakistan (SBP) announced that the country attracted $771 million in FDI during the first quarter of FY25, reflecting a 48 per cent increase compared to the same period last year. While this growth is noteworthy, it underscores a troubling reliance on a narrow investor base and limited sectors.

As global FDI trends shift towards dynamic industries, Pakistan has the opportunity to diversify its FDI portfolio significantly. Per the OICCI report, key areas for growth include technology and digital services, and with strong investments in IT, cloud computing, AI, and fintech, the tech sector presents a lucrative opportunity. As the world increasingly embraces sustainability, significant investments are flowing into solar, wind, and green hydrogen projects. Manufacturing particularly in the automotive sector driven by electric vehicles, as well as electronics, healthcare, logistics, and e-commerce also need attention.

China continues to lead the charge, contributing a significant $404 million, which accounts for 52 per cent of the total FDI in Q1FY25. Notably, September alone saw inflows worth $244.8 million from Chinese investors. Other contributors include Hong Kong ($99 million), the UK ($72 million), and the US ($29 million), indicating a slight diversification.

However, Pakistan’s FDI growth remains constrained by structural issues, political instability and global economic factors. Although the China-Pakistan Economic Corridor (CPEC) has positioned Pakistan as a key trade corridor, security concerns and regulatory hurdles continue to hinder potential investments.

In the backdrop of strategic FDI opportunities for the country’s future, FDI portfolio trends globally are to be kept in the perspective in this connection, which shows shift towards more dynamic industries, the OICCI report added.

Geopolitical shifts, such as the US-China trade war, offer both opportunities and challenges. Meanwhile, tightening global financial conditions, rising interest rates and exchange rate volatility have made capital scarcer and returns more uncertain.

It is pertinent to mention here that the global FDI landscape has been turbulent, with inflows dropping 42 per cent in 2020 due to the pandemic, before rebounding sharply in 2021. Yet, renewed challenges have continued to undermine investor confidence. In Pakistan, FDI has been even more inconsistent, with inflows fluctuating between $1.5 billion and $2.5 billion over the last decade. Recent years have seen a decline in investment, exacerbated by economic and political uncertainties.

Despite minor positive changes, such as the establishment of the Special Investment Facilitation Council (SIFC), Pakistan’s regulatory environment remains over-regulated and complex. Other emerging economies, like Vietnam and Indonesia, have adopted more proactive measures to attract foreign investment by simplifying bureaucratic processes and improving infrastructure.

To address such challenges, the OICCI stressed that Pakistan should take measures for enhancing investor confidence and position country as an attractive investment destination, targeted strategies are essential. Key recommendations include political and security improvements, regulatory streamlining, transparent investment policies, strengthening legal protections and rebuilding reputation.

While Pakistan has shown potential for foreign direct investment, a strategic overhaul is imperative. By diversifying its investment portfolio and addressing systemic challenges, the country can attract a broader range of investors and foster sustainable economic growth, the report added. Overseas investors believe that a concerted effort to improve the investment climate could position Pakistan as a competitive player in the global FDI landscape, opening doors to long-term prosperity.