Foreign direct investment (FDI) in South Asia rose by 20 per cent to $71 billion in 2020 driven by strong mergers and acquisitions in India, according to the World Investment Report 2021 of the United Nations Conference on Trade and Development (Unctad).

In India, FDI increased 27pc to $64b amid its struggle to contain the Covid-19 outbreak as robust investments through acquisitions in Information and communications technology (software and hardware) and construction bolstered foreign private investment. Cross-border mergers and acquisitions surged 83pc to $27b with major deals involving ICT, health, infrastructure and energy. Large transactions included the acquisition of Jio Platforms by Jaadhu, a subsidiary of Facebook, for $5.7bn, the acquisition of Tower Infrastructure Trust by Brookfield of Canada and GIC of Singapore for $3.7bn and the sale of the electrical and automation division of Larsen & Toubro India for $2.1bn. Another mega-deal — Unilever India’s merger with GlaxoSmithKline Consumer Healthcare India for $4.6b — also contributed.

In contrast, FDI in Pakistan was down by almost 6pc to $2.1bn, cushioned by continued investments in power generation and telecommunication industries.

According to Unctad, the FDI flows to India have grown by a whopping 45pc from $44.5bn in 2016 to $64bn in 2020. Pakistan on the other hand found FDI contract by almost a fifth from $2.5bn to $2.1bn in the same period, the more than 30pc growth in inward flows to South Asia to $70.9bn notwithstanding.

Pakistan’s share of FDI starts looking even more negligible when compared with inflows of $662.5bn to the developing nations last year. At the present level of $1.8bn, the annual FDI flows aren’t even sufficient to finance the country’s 10-day imports (of $5.4bn in July).

Even other developing economies have attracted much better flows than Pakistan. Vietnam, for instance, received FDI inflows of $15.8b. Likewise, Indonesia has jacked up inward foreign private investment to $18.6bn. China has led by attracting a whopping $149.3bn. Even Bangladesh has left Pakistan behind by wooing $2.6bn despite the pandemic.

Historically, Pakistan has only very briefly attracted reasonable FDI inflows of $5.6bn and $5.4bn in 2007 and 2008, mainly in telecom, power generation and financial services. However, that momentum could not be sustained because of deteriorating security conditions due to militant violence across the country, the global financial meltdown, political upheaval in the country, a poor perception of the country, inconsistent economic policies, lack of rule of law and so on.

FDI is considered crucial for the economic development of a country as it helps lift the GDP of the host nation and increases employment opportunities by improving aggregate productivity in addition to facilitating the transfer of technology, skills and efficient business management practices. More crucially, Pakistan needs much more non-debt creating, longer-term FDI flows to support its precarious balance-of-payments problem.

Analysts argue that improved, sustained FDI flows could help cut the country’s reliance on foreign borrowings for financing the trade deficit. Many contend that the periodic exchange rate turmoil frequently bringing the home currency under pressure could also be handled by attracting greater FDI.

With the trade deficit growing much faster than anticipated because of the global commodity price shocks as well as the increase in domestic demand on the back of a combination of expansionary fiscal and monetary policies being pursued by the government ahead of the 2023 elections, the Imran Khan administration will soon be under pressure to secure additional debt to finance the current account and to shield and build its foreign exchange reserves since exports are slow to rise and remittances are projected to flatten at best and decline at worst going forward.

Even though the modest increase in exports and unprecedented growth in remittances did help the government partially finance and contain its current account deficit at 0.6pc of GDP last fiscal year, it had to borrow extensively and at higher rates from commercial sources to build its reserves.

With the central bank estimating the current account deficit to widen to a ‘manageable’ 2pc-3pc of GDP this fiscal year, some analysts think it could get out of hands if the commodity prices continue to rise on pandemic related disruptions and resurgence of global demand. A financial analyst based in Karachi points out that the government needs to work simultaneously on exports, remittances and foreign private investment for raising non-debt creating sources for financing trade deficit and building reserves.

Nevertheless, we see foreign investors fleeing this country. Not only that the annual FDI flows into Pakistan have declined, but we also see its stock decreasing over the last five years. The FDI stock in the country has fallen from $41.9bn to $35.6bn in five years to 2020. Bangladesh on the other hand has built its FDI stocks from $14.5bn to $19.6bn and India from $318.3bn to $480.3bn in the same period.

The situation isn’t much different in the case of flight of portfolio investment as the country saw a net outflow of $1.99bn between January 2016 to June 2021. Recently, Italian energy major Eni sold its assets and left Pakistan. Now the market is abuzz with reports that the Malaysian and French sponsors of Liberty Power and Uchh Power are exploring the market to find buyers for their projects. That may or may not happen but this shows that foreign investors are frustrated with the inconsistent government policies.

Both these investors had refused to revise their original power purchase agreements with the government to reduce their profits like others. The agreements have partially been implemented as the government is reported to have scrapped the deals with the power companies set up under the 2002 policy for fear of the watchdog National Accountability Bureau, and decided to renegotiate power purchases agreements with them. This trend needs to change now.

As the analyst quoted above points out, Pakistan has in place the most liberal policy regime to attract FDI in the region. “But the problem is that Pakistan is not seen as a place where rule of law and agreements are respected. We have great potential to woo FDI; but we need to learn to respect our commitments, pursue consistent policies and keep politics out of business.”

Published in Dawn, The Business and Finance Weekly, August 9th, 2021