Foreign Direct Investment Dropped by 50% in FY19

Foreign investments in Pakistan failed to show an improved picture in Jul-Mar FY19. The Foreign Direct Investment (FDI) stood at US$1.737 billion in July-June (2018-19) compared to the investment of $3.47 billion recorded during the same period, a year ago, showing negative growth of 50 percent due to a slowdown in CPEC inflows.

The state bank in its third quarterly report on the state of Pakistan’s economy for fiscal year 2018-19 said that the uncertainty regarding the exchange rate (Dollar-Rupee) adjustment and finalization of IMF program, country’s vulnerable external and fiscal position, and downgrading of Pakistan’s credit rating by Fitch in December 2018 may have dented the investors’ confidence.

Despite the unfavorable condition, Pakistan managed to finance its current account gap by the substantial external financing from friendly countries and commercial banks. Most of this financing was realized in the third quarter, which supported the country’s depleting FX reserves.

The power sector, which remained the single largest recipient of the CPEC-related FDI over the last few years witnessed an outflow of US$ 293.7 million during Jul-Mar FY19. This was due to the repayment of an intercompany loan of around US$ 530.0 million by a power entity to its parent company in October 2018 stated the report.

Pakistani equities, after declining by almost 5,000 points between Jul-Dec FY19, became attractive for investors as the price-to-earnings ratio was bottoming out by the end of 2018. Other investment During Jul-Mar FY19, the net inflow of FX liabilities more than doubled to US$ 11.2 billion compared to US$ 4.7 billion recorded last year.

Moreover, the outflow from telecommunications dragged down the overall investment during Jul-Mar FY19, as telecom firms operating in Pakistan made principal loan repayments to their parent companies abroad.

On a positive note, some other sectors, including chemicals, beverages and automobiles, were on the investors’ radar during the period under review. A few automakers have now started investing in Pakistan, following the incentives announced under the Automotive Development Policy 2016-21.

Foreign portfolio investment During Jul-Mar FY19, overall portfolio investment witnessed an outflow of US$ 398.0 million against an inflow of US$ 2.3 billion in last year, when the government had raised US$ 2.5 billion from Eurobond and Sukuk.

During the last fiscal year, construction attracted $ 421 million foreign direct investment, oil and gas exploration $ 309 million, financial business $286 million, electrical machinery $ 166 million, automotive $ 113, Chemical $ 134 million, and beverage $ 99 million.

While foreign investment was insufficient to bridge the current account gap, the external financing from bilateral (China, Saudi Arabia and the UAE) and commercial sources not only plugged the current account gap but also provided some support to Pakistan”s FX reserves during the last fiscal year.

Similarly, the Foreign portfolio investors increased the divestment in shares listed at the Pakistan Stock Exchange (PSX) as they divested $415.2 million in FY19 compared to $240.7 million in FY18

This was the fourth consecutive fiscal year in which foreign portfolio investors remained net sellers at the country’s bourse.

Total Foreign investments in Pakistan also failed to show an improved picture and declined sharply 94.2 percent or $5.351 billion to $330 million in FY19 as against $5.68 billion in FY18.