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July 16, 2019

FDI falls 50pc to hit five-year low in FY19

Business

July 16, 2019

KARACHI: Foreign direct investment (FDI) dropped 50 percent to $1.737 billion in July-June 2018/19 hitting five-year low, as currency depreciation, uncertainty about the finalisation of the IMF’s programme, and large twin deficits weighed on the sentiments of global investors.

FDI slid 50 percent to $1.737 billion in July-June 2018/19—the lowest since the fiscal year 2013/14, when FDI stood at $1.698 billion.

Data issued by the State Bank of Pakistan (SBP) on Monday showed that FDI fell 57.9 percent to $130.4 million in June.

Net FDI inflows to Pakistan declined sharply during FY19 due to completion of early harvest projects under the China-Pakistan Economic Corridor (CPEC), with Chinese inflows for the last 12 months dropping to a mere $546.8 million from $2.0 billion in the previous year. The power sector, which was the single largest recipient of the CPEC-related FDI over the last few years, saw an outflow of $253.6 million during July-June FY19 as against inflow of $1.203 billion in FY18. The repayments of loans by power firms to their parent company dragged down direct investment during the period under review.

Telecommunications sector also witnessed $77.6 million outflows, compared with inflows of $100.1 million in FY18.

Economists said an economic slowdown due to stabilisation measures, exchange rate adjustments, high interest rates, lack of privatisation of state-owned enterprises, and structural impediments had dampened investor appetite.

Issues that the country needed to address include governance and improving the business environment to encourage investment and job creation, they said. A lack of economic clarity since Prime Minister Imran Khan took office in August last year also gave negative signals to the foreign investors.

“It’s too early to predict the outlook for direct investment in FY20, as uncertainty period still persists despite the initiation of the IMF programme for balance of payments support,” Dr Ashfaque H Khan, a member of the Economic Advisory Council said. “The first phase of CPEC, related to energy and infrastructure projects, ended, and it has reached its second phase with a focus on agriculture, socioeconomic development, and special economic zones.”

The IMF Executive Board had approved $6 billion 39-month Extended Fund Facility (EFF) arrangement for Pakistan on July 3, and the SBP received the first tranche of $991.4 million on July 10 to help the country reduce economic vulnerabilities and generate sustainable and balanced growth.

The fund projected the FDI to reach $2.107 billion in FY20.

It has been pointed out that the slowdown in FDI inflows has negative implications for the balance of payments, as lower FDI keeps the external financing requirements at elevated levels.

“Thus, while the realised bilateral inflows from friendly countries did provide some support to foreign exchange reserves, its adequacy is still below the three-month of import coverage and the overall balance of payments position remained weak,” the SBP said in its third-quarter report. Portfolio investment at Pakistan Stock Exchange posted an outflow of $415.2 million in FY19 against $240.7 million in the previous year. SBP’s data also revealed that total foreign investment dropped 94.2 percent to $329.9 million in FY19.

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