FDI dependence on China

Business Recorder (BR) Research

The China-affect has taken over foreign direct investment (FDI) in Pakistan. During the last three years of PML-N’s government, China has been largely funding the investments in the country – whether it is the telecommunication sector attracting investments for 3G/4G or the China-Pakistan Economic Corridor (CPEC) bringing in infrastructure and energy.

With SBP’s latest data for May 2016, the country’s net FDI for 11MFY16 saw an increase of 10.5 percent, year-on-year, crossing a billion-dollar mark. The FDI includes $24 million of privatization proceeds, without which FDI stood at $1.06 billion in eleven months.

Of all the sectors, the power sector has been able to attract the biggest chunk of investment from China under CPEC – almost 50 percent of the total net FDI in 11MFY16. Within this sector, growth in investment in coal-fired power generation has been phenomenal. China’s share in net FDI for 11MFY16 exceeds 50 percent.

A key trend to notice here is that while China is upping its investment in the country, almost all countries that had traditionally invested in Pakistan are either reducing investment over the years (lower inflows) or pulling out their investments (higher outflows). This is going against what the government and the economists have been hoping and projecting – that CPEC will improve investor confidence and will help Pakistan attract investment from other regions of the world as well.

The latest Economic Survey of Pakistan brags about better government policies to attract foreign investors, improvement in the investment climate, and a comprehensive FDI strategy with special programs to promote the linkages between domestically and foreign-owned private enterprises. But results are yet to be seen.

This also supports what Nadeem Elahi, President, American Business Council of Pakistan talked about in his recent sitting with BR Research. A look at net FDI over the last few years shows that amid other countries, investment from the USA has been falling with a net outflow in 11MFY16. The reasons highlighted for were both global and domestic.

“In certain sectors, you see a shift, which is not specific to Pakistan, for instance, banking and financial services. Ten years ago, Citibank had a visible presence in Pakistan; now it doesn’t… Barclays exited; Bank of America had exited a long time ago. So the presence of foreign banks has shrunk dramatically”, said Elahi.

The Pakistan-specific reasons he highlighted for the decline in FDI from the US largely pertains to the price freeze and devolution in the pharma sector, inconsistent tax policies that penalize the registered taxpayers, and the exclusion of Anglo-Saxon investors from the CPEC periphery areas. In short, the country is expecting FDI from China under CPEC to boost investor confidence in the country, whereas it looks as if paying little attention to diversifying and focusing beyond China. That could have repercussions in the long run.

First published: June 22, 2016.