FDI decline

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SOURCEBusiness Recorder
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Foreign Direct Investment (FDI), regarded as a key indicator of confidence in an administration’s economic policies usually on the back of higher private domestic investment, declined by a whopping 74.8 percent during July-January 2019 compared to the comparable period of the year before. This was the conclusion of a report published by Fitch Solutions, a rating agency that downgraded Pakistan’s long-term foreign currency issuer default rating to ‘B-‘ from ‘B’ mid-December 2018 on heightened external financing risk and elevated foreign debt repayments, as well as deteriorating fiscal position. A downgrade in rating slows down domestic investment leaves alone FDI. Additionally, with Pakistan expected to go on an International Monetary Fund (IMF) programme soon coupled with Fund Staff members’ statements that rupee remains overvalued, there is little if any likelihood of any investment decisions till a decision has been made in this regard.

Also Read: FDI hits 6-month low as concerns over IMF resurface

Fitch Solutions’ findings are widely at odds with the claims being made by Prime Minister Imran Khan, Special Advisor to the Prime Minister on Industries and Commerce Razzak Dawood and the head of Board of Investment Haroon Sharif as they focus on the commitments made by several prospective foreign investors rather than on the on-ground situation. The intent of Saudi Arabia and the United Arab Emirates (UAE) to invest in excess of 20 billion dollars in Pakistan’s petrochemical sector, participate in projects under the China Pakistan Economic Corridor (CPEC) as well as bid for proposed companies earmarked for privatisation has been touted as proof positive that FDI is likely to flood the Pakistani market within the year or at most by next fiscal year rather than simply trickle into the country as in the past. Such government-to-government deals have on occasion flouted the country’s Public Procurement and Regulatory Authority (PPRA) rules that is allowed under a clause whereby the government may negotiate a deal with another government outside the purview of the PPRA thereby leaving it open to criticism by the Opposition. In addition, government-to-government investment commitments are sometimes stalled because the investing country/company insists on special incentives with respect to taxes and/or tariffs with implications on the budget – either through reduced tax collections and/or through higher subsidies.

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FDI commitment does not automatically translate into actual investment as previous administrations learnt to their cost. The Prime Minister needs to be aware that a number of companies that had indicated a desire to invest in Pakistan during previous administrations have restated their interest, including Exxon Mobil (agreement signed on 28 May 2018), Pepsi and Coca-Cola pledged 1.4 billion dollars, Pak Suzuki pledged 460 million dollars contingent on the government amending the auto policy 2016 with respect to allowing the company to enjoy the same benefits as new entrants. While optimism is natural in the corridors of those entities that are charged with the responsibility of luring foreign investment, yet the Prime Minister would be well advised not to jump the gun and instead wait till actual FDI flows into the country.

Be that as it may, Fitch Solutions’ report was particularly focused on the performance of the auto sector and maintained that “Pakistan’s automotive sector will start to struggle in fiscal year 2018-19 as the risks… namely the over-reliance of the sector on Chinese investment come to fruition…that said the government’s latest decision to remove the vehicle purchasing restrictions on non-tax income filers will provide some support… We have therefore moved to revise down our forecast for new vehicle sales in fiscal year 2018-19 and fiscal year 2019-20 to a 2.4 percent contraction and 1.3 percent growth, respectively.” Needless to add, there are many who do not support the sustained failure of auto companies to meet their commitment towards indigenization of assembly, the failure to assemble cars that conform to international specifications, and removal of the vehicle purchase restrictions on non-filers. Fitch does not weigh the pros and cons of a policy while one would expect that of a government.

(This news/article originally appeared in Business Recorder on March 14th, 2019)

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