Finance: The state of foreign investment

Net foreign investment inflows into Pakistan totalled $305 million in July 2024, the first month of FY25, from just $105.5m in July 2023. Terrific. But, can the country attract this much every month on average and end up attracting more than $3.6 billion in foreign investment by June 2025? Well, that depends on a lot of things, both economic and political.

According to the State Bank of Pakistan, yearly total foreign investment fell from $4.58bn in FY21 to around $1.86bn in FY22 before plunging to just $601m in FY23. In FY24, that ended in June 2024, total foreign investment more than doubled to $1.52bn from a year ago but remained too short of reaching the heights witnessed in the preceding two years.
Pakistan’s foreign investment inflows exhibit a direct relationship with domestic political stability and the level of political ties with the countries and regions from where this investment originates.
The nation still remembers how, during the Musharraf era, Pakistan had become the choicest place for foreign investment because of Islamabad’s deep strategic relationship with the West and with the Western darling countries in the Gulf region.
The recent surge in violence in Balochistan and Khyber Pakhtunkhwa, and growing public protests and business closures along with “shutter-down strikes” by opposition parties against the current hybrid regime across the country warrant a truly thoughtful state response.
Similarly, whereas the current regime cannot be blamed for all the economic problems that have made the lives of many Pakistanis miserable, it must admit where it has been and still is a part of the problem and then reverse the course. Had this regime been sincere in creating a friendly environment for foreign investors, it would have also taken concrete steps to check for widespread corruption at every tier of the state machinery.
Still, the spokespersons of the current hybrid regime continue to claim that big foreign investments worth billions of dollars will come in soon. One can only hope and pray.
Pakistan’s current economic situation requires more foreign direct investment to help create jobs, enhance industrial competition, and adopt the latest technologies. However, three years of records show that net foreign direct investment (FDI) inflows have remained stagnant below the $2bn mark. Even in FY21, when the total foreign investment had reached a remarkable level of $4.58bn, the share of FDI was just $1.82bn.
This slightly increased to $1.94bn in FY22, then slipped to $1.63bn in FY23, and rose modestly again to $1.90bn in FY24, SBP stats reveal. Since the entire amount of FDI in each of these years came into private sector projects, one cannot overlook the importance of ease of doing business in the country as an important determinant apart from political stability and regional alliances.
During this fiscal year, this factor will also play an important role. Regardless of the billions of dollars worth of foreign investment pledged by Saudi Arabia, the United Arab Emirates and Qatar in mineral exploration, oil processing, energy and agriculture sectors, actual inflows would remain dependent on whether Pakistan can offer an investment-friendly environment.
The same holds true for investment promises made by Chinese companies in projects under the second phase of China-Pakistan Economic Corridor.
Ensuring security, providing a hassle-free corporate litigation mechanism, upgrading roads and railways, and making water, gas, and electricity available for foreign-funded projects hold the keys to success, whether these projects are located inside a dedicated investment zone or elsewhere.
The security situation is worsening day by day. Only the right set of carrot-and-stick policies and their meticulous implementation at all levels with total political ownership can help improve the situation. This cannot be done without first developing a broader consensus among all political parties and between the entire political class and the establishment. The sooner this first milestone is achieved, the better.
On the other hand, the government also needs to find ways to pacify agitating businesses hit hard by recently introduced higher taxes and ongoing energy price hikes. If it is not done at an early stage, the requisite grounds for receiving FDI in the priority sector cannot be prepared easily.
Part of the total foreign investment comes through foreign investment in private sector equities, and that is where political stability at home plays a decisive role. It was not before FY24 that Pakistan received any foreign portfolio investment in equities on a net basis — and that too in moderate volume, just $120m.
In the first month of this fiscal year, fortunately, the country got $23.6m in equity investment. A sustainable respite in the current political volatility and uncertainty, as well as an improvement in the security situation, may help attract a much larger portfolio investment this year than in the last year.
Published in Dawn, The Business and Finance Weekly, September 2nd, 2024