The State Bank of Pakistan (SBP) needs to find out just what spooked foreign direct investment (FDI) towards the end of the last fiscal year, especially in June, just when everything about the external account looked so rosy. FDI fell about 29 percent year-on-year as the last fiscal drew to a close. It was up y-o-y in April and May, in the latter a good 63 percent but then for some reason it just plunged about 23 percent in June and dragged the annual figure well into the red. If it hadn’t been for the rather robust equity market that attracted 175 percent more foreign portfolio investment (FPI) than the previous year, and record remittances which clocked in at about $30 billion for the year, the country’s external account would not have been much better than a year ago. But with the rupee having lost about 3.5-4 percent against the dollar since the start of June, businesses are worrying more than usual and inflation is starting to rise once again.

The state bank still sits atop foreign exchange reserves that are at a five-year high, but it would still be wrong not to worry about the fluctuations in the FDI graph. One part of the problem is our old habit of putting too many of our eggs in too few baskets. For the last few years, most of our foreign investment has come from China. And when Beijing suffers economic trauma or contraction, like it did at the height of the pandemic, or is busy looking the other way for a whole host of reasons, our FDI outlook changes very quickly. Successive governments have tried to change this trend but nobody was able to achieve more than $2.7 billion in FDI which came in 2018.

Monetary authorities need to be very vigilant because on top of all other problems another downward drag on FDI can be expected as a reaction to the situation in Afghanistan. As we all know only too well, whenever a security volcano erupts across the western border its lava invariably finds its way into Pakistan and foreign investors duly beeline for the exit lounge. Therefore, the sooner the government works out a strategy to calm rattled nerves of foreign investors, the better for everybody concerned. Let’s not forget that a security breakdown can also send the stock market into a tailspin, so the FPI trend could also change.

So far Pakistan has done a better job than most countries of protecting its economy from the effects of the pandemic. Yet now it must do more and make sure that the money that flows through the veins of the economy keeps coming into the country. 

 

Source: Daily Times