FDI plunges 19.2 percent in July-December

KARACHI: Pakistan’s foreign direct investment (FDI) fell 19.2 percent to $1.319 billion in the first six months of 2018/19 fiscal year, figures from the State Bank of Pakistan showed on Wednesday.

However, the FDI rose to $319.2 million in December from $272.8 million a year earlier.

Dried up Chinese inflows were the main cause of the slump, as major coal-fired and wind power projects under $60 billion China-Pakistan Economic Corridor (CPEC) - a part of Beijing’s vast Belt and Road initiative, began operating last year. While some of the power and infrastructure projects were near completion. The investments from other countries remained insignificant. The country attracted $760 million in FDI from China in July-December FY19, down from $1.104 billion in the same period of last year.

Money going into electricity generation projects from the Chinese Independent Power Producers (IPPs) dropped 67 percent to $201.9 million. “Apart from lower Chinese investment flows, policy uncertainty, rising external imbalances and dwindling foreign exchange reserves significantly affect direct investments,” said Dr Salman Shah, former finance minister.

Foreign investors have been waiting to see how the government addresses deteriorated balance of payments and fragile public finances, he said. “FDI could rebound after the announcement of the next budget in June this year.”

After China, the country was expected to sign investment agreements with Saudi Arabia and United Arab Emirates over the coming weeks. The likely sectors could be oil refining, petrochemicals, renewable energy, and mining. According to recent reports, around 100 Chinese investors have scheduled to visit Pakistan to explore investment opportunities in various sectors.

The latest data posted by the SBP on its website showed that other key sectors such as construction, financial business and the telecommunications saw drops and outflows. Direct investment in the construction sector fell to $287.8 million from $350.9 million.

Money going into financial business dropped to $203.4 million from $276.1 million. Telecommunications sector saw an outflow of $135.1 million, compared with $15.3 million last year.

Overall the picture of FDI was gloomy and the prospect was not so much optimistic, according to analysts. The fiscal consolidation and austerity measures were likely to slow the country’s economy. A contraction in domestic demand could reduce the incentive to invest. Credit rating agency’s Fitch Ratings has recently downgraded Pakistan’s long-term foreign currency issuer default rating by one notch, from B to B-. “The downgraded credit rating sends negative signals to the foreign investors as they think the country has less capacity to repay its debt,” an analyst said.

However, FDI could be improved by implementing effective trade policies, creating business friendly environment, and offering tax incentives to the foreign investors. Total foreign investment fell 77.2 percent to $899.5 million in the July to December period, compared with $3.950 billion in the corresponding period last year.

There was an outflow of $419.8 million from the local equity market during the six months of this year compared with $132.4 million in the same period the previous year.