The recent resetting of ties with the USA, in particular, and with the West, in general, may or may not help Pakistan attract more foreign investment. It depends on how quickly Islamabad can convince the world that it has no intention of becoming part of any power bloc. It also depends on how soon the current turbulent phase of local politics is over and a new phase of stability takes hold.

Apart from geopolitical considerations, foreign funds traditionally land in the countries where doing business is easier, fair market practices prevail, dispute resolution system works smoothly, intellectual property rights are protected, policies affecting foreign investors remain consistent — and above all — where foreign investors can feel at home.

Judged on these matrices, Pakistan remains a poor candidate for attracting foreign direct investment (FDI). According to the World Bank, net FDI inflows into Pakistan equaled less than one per cent of GDP during the past 11 years, between 2011 and 2021. And, if the current trend persists, net FDI inflows cannot reach 1pc of Pakistan’s projected GDP even in 2022.

However, recent interest rate tightening by the State Bank of Pakistan (SBP) followed by skyrocketing treasury bill rates should accelerate net inflows of foreign portfolio investment (FPI).

Why do net FDI inflows remain below 1pc of GDP even after the launching of the multi-billion dollar CPEC is a question that merits serious deliberations

The SBP’s dramatic, unscheduled interest rate hiking by 250 basis points on April 7, coinciding with the last day of the PTI government, triggered large increases in T-bills and bonds yields, providing further incentives to foreign investors. Even before the 7th April increase in the SBP policy rate — from 9.75pc to 12.25pc — interest rates were high enough to lure foreign investment in zero-risk, T-bills and Pakistan Investment Bonds (PIBs). Foreign investors had already invested half a billion dollars in these bonds and bills in nine months of FY22 between July 2021 and March 2022. Whereas during the same period of the FY21, they had not invested in the government debt papers, SBP data shows.

Why net FDI inflows into Pakistan remain below 1pc of GDP even after the launching of the multi-billion dollar China-Pakistan Economic Corridor (CPEC) is a question that merits serious deliberations. The structure of Chinese funding of CPEC projects includes loans and foreign investment made by the Chinese state-run agencies as well as private sector parties.

But since Pakistan often struggles with balance of payments issues, seeking the loan part of CPEC-related funding (over and above the occasional forex support funds from China) becomes a priority. That said, the bulk of Pakistan’s net FDI comes from China ($751 million out of a total of $1.82 billion in FY21). Other main sources include UAE, UK, USA, Netherlands and Hong Kong. Now, Saudi Arabia, Kuwait and Turkey are also willing to make increased foreign direct investment in multiple sectors.

According to a late January update of the State Department’s Office of Investment Affairs, over the last two years, US companies have pledged more than $1.5bn of investment in Pakistan but only a small fraction of the promised investment has come in

After the change of government in Pakistan, prospects for the faster materialisation of the old US investment pledges have brightened and US investors may even look for new investment opportunities. According to a late January update of the State Department’s Office of Investment Affairs, “over the last two years, US companies have pledged more than $1.5bn of investment in Pakistan.” Only a small fraction of the promised investment has come in, though.

The new government must ensure that those investment pledges materialise as early as possible. The areas of interest for American investors include fast-moving consumer goods, agri-business, financial services, franchising and information and communication technology. Pakistan has a dire need in each of these areas — and enough scope—for inward foreign investment. In the financial sector, particularly, lots of foreign direct investment could flow into the proposed digital banks on a local-foreign partnership basis. SBP has received 20 applications for digital banks. These applications include some moved by international investors, others by local investors — and yet others jointly.

New investment pledges could be sought easily not only from the US but from all over the developed world. However, it must be ensured that the impediments to the fast materialisation of old pledges are removed.

Kuwait plans to invest $750m in the near future in Pakistan’s water management and financial sector. Kuwait Investment Authority’s Enertech Holding Co. and Pak Kuwait Investment Co have already applied for a digital bank license in Pakistan, according to media reports. The two entities are already working on a $200m water pipeline.

We need to diversify the main origins of FDI inflows with better economic diplomacy. Investment pledges from such countries as Saudi Arabia (in the oil exploration and refining sector), Turkey (construction and retail sector) and Kuwait must be pursued vigorously.

Given the fact that Pakistan often remains short of foreign exchange and exports and remittances fall short of meeting even the country’s merchandise imports bill, the importance of attracting as much foreign investment into the country as possible is obvious. Foreign investment coming into the government debt papers has a limitation. Such “hot money” which comes when the T-bills and bonds rates are very high, flies away within days and weeks once interest rates start falling. Foreign investment in the stock market is also often temporary in nature.

Foreign direct investment is the real thing. But to get this real thing in a big way Pakistan needs to change. In a country still seen by many in the world as one plagued by the menace of terrorism and extremism, it would be too much to expect that large amounts of FDI would flow in unless we as a nation eradicate the twin evils. Can we do this?

Published in Dawn, The Business and Finance Weekly, May 9th, 2022