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Future outlook for FDI in Pakistan

Published on 12th Oct, Edition 41, 2015

 

Pakistan received foreign direct investment (FDI) of $119.3 million in the first two months of current fiscal year 2015-16, which is 7.5 percent higher than the FDI received in the same period a year ago. The FDI increased to $8.3 million year-on-year (YoY) in July-August, as it amounted to almost $111 million in the corresponding months of last fiscal year 2014-15, according to the State Bank of Pakistan (SBP).

The country received FDI of $709.3 million in 2014-15, which was 58.2 percent less than the FDI received in the preceding fiscal year. Net foreign investment in the country fell a whopping 79.9 percent to $37.7 million in the first two months of current fiscal year 2015-16. Foreign portfolio investment in July-August FY16 dipped by a staggering 163.9 percent, as the investors pulled out $72.6 million from the equity market during the period under review. Some analysts, however, see no significant change in outlook for FDI in Pakistan in the next fiscal year.

Major factor

With $131.5 million investment, China was the largest contributor to the FDI in July-August 2015-16 period. Prospects are bright for further rise in FDI from China in view of the China-Pakistan Economic Corridor (CPEC) to be built at a cost of $46 billion. This year, Pakistan and China signed 51 deals, mostly related to CPEC, which will link Pakistan’s Gwadar Port in Balochistan and Kashghar in China’s northwestern Xinjiang province, during two-day visit of the Chinese President Xi Jinping to Pakistan. The implementation of infrastructure development and energy projects under the CPEC is expected to further improve investment environment.

The inward investment in the energy sector is expected to increase, as the government plans power generation projects under the CPEC. Analysts believe that the growing energy demands make the country an emerging investment destination for the foreign companies, operating in the power generation. According to the central bank, the capital investment into Pakistan, with the power sector investments accounts for $111.1 million — a first of the total in two months of this fiscal year.

China is investing in Pakistan’s energy sector in a big way. The two countries have signed 14 deals generate 10,400 megawatts (MW) of electricity immediately, while more projects with a combined generation capacity of 6,445MW, would be completed in the second phase. The energy projects approved by the Chinese government include Port Qasim (coal) that would generate 1,320MW, Sukki Kanari (hydropower) 870MW, Sahiwal (coal) 1,320MW, Engro Thar (coal) 660MW, Muzaffargarh (coal) 1,320MW, Gwadar (coal) 300MW, Quaid-i-Azam Solar Park 1,000MW, United Energy (wind) 100MW, Dawood (wind) 50MW, Sachal (wind) 50MW, Sunnec (wind) 50MW, Rahim Yar Khan (coal) 1,320MW, SSRL Thar (coal) 1,320MW and Karot (hydropower) 720MW. The short-term projects will be put into operation in next two to three years.

FDI inflows are essential to sustain the economy’s external sector. This month, the international ratings agency Moody’s assigned a provisional rating of (P)B3 to Pakistan’s announced global bond offering while keeping the outlook stable. In its statement, it said the implementation of the CPEC will help bolster growth through investment in transportation and power generation infrastructure. “Pakistan’s B3 issuer rating reflects moderate economic strength with a supply-constrained economy that has been resistant to structural change,” the ratings agency said in a statement. “Although the scale of the economy is relatively large, globally, Pakistan’s per-capita income level is relatively very low.”

Moody’s observed that the government has gained significant traction on reforms under the International Monetary Fund’s program, key goals of which include deficit reduction, resolving constraints in the energy sector, and the privatization of several state-owned enterprises.

 

Normalcy in the business hub

Law and order problem in the country affected greatly the business and industrial activities which causing a slump in overall economic growth. Security problem has critically marred overall business environment in Pakistan. Foreign investors and businessmen fear to invest or expand their existing stake in the country due to security concerns. For years, lawlessness ruled supreme in Karachi, the country’s financial hub, where people were daily killed in politically and ethnically motivated violence.

The government continues its struggle for peace in Karachi, which accounts for around a fifth of the country’s GDP. For years, the law enforcers remained spectators, while terrorists were in full romance hurling bombs and firing rockets on roads and streets of country’ commercial capital. Crime mafias had got the license to kill the innocent citizens.

The former government had blatantly failed to restore peace in Karachi. Industrialists and businessmen in Karachi demanded the government to call the army to control the worsening law and order situation in the city, as situation had gone out of the control of civilian authorities. The local businessmen were paying money to the extortionists to run their businesses in Karachi. Many businessmen and industrialists had been killed for not paying the extortion money and many had moved their manufacturing units abroad. The business community accused that the civilian government failed to control the militant wings of political parties, which use their influence to pressurize the police to release militant workers. The country economy reels as the Karachi bleeds. A stable and peaceful Karachi is essential to boost industrial and commercial activities with an aim to bounce the economy back to the growth track.

The country’s industry and exports are worst hit by the unsatisfactory security situation in the port city. The law and order problem has already shattered the investors’ confidence. The cash-strapped country direly needs foreign inflows to revive the economic growth. There is no hope for foreign investments in the restive economic hub.

Present government led by Prime Minister Nawaz Sharif launched a targeted operation in Karachi against extortionist mafia and extremist outfits and criminal elements, which had held the country’s financial capital hostage. The rangers and police are conducting a targeted operation against target killers and criminals. There is a marked improvement in the level of violence. The central bank is hopeful that recent improvements in the law and order situation and continued macroeconomic stability are likely to increase the prospects for long-term foreign capital inflows.

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