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FDI flow helps create competitive business environment

In Pakistan, statistics showed that in the first two months of the current fiscal year of 2020-21 the Foreign Direct Investment (FDI) jumped 40 percent to $226.7 million as overseas investors are encouragingly betting on economic recovery from the five-month of downturn. International studies revealed that the overall advantages of FDI for developing country economies are well documented. Given the appropriate host-country strategies and a basic level of development, the experts also said that FDI triggers technology spillovers, helps human capital formation, contributes to foreign trade integration, assists create a more competitive business environment and improves enterprise development. It is said that all of these contribute to higher economic growth, which is the most potent tool for alleviating poverty in developing countries. Furthermore, beyond the strictly economic advantages, FDI may assist enhance environmental and social situations in the host country by, for instance, transferring cleaner technologies and leading to more socially responsible corporate strategies.kamal1pic1

According to the State Bank of Pakistan (SBP) FDI climbed from $162 million in the corresponding period of the last fiscal year in the country. According to the statistics, majority of new investments were seen in financial businesses, electrical machinery and oil and gas exploration sectors. Despite increased, it is urged that optimistic rhetoric regarding foreign investment in Pakistan, the incumbent the government has found it slow going in its attempts to broaden the tax base and reform the taxation system as it remained embroiled in Pakistan’s immediate finance needs to offset a balance of payments crisis. As a consequence, the country remains a challenging environment for foreign financiers despite having a relatively open foreign investment regime.

It is recorded that the Government of Pakistan had made significant progress over the last year in transitioning to a market-determined exchange rate and reversing its large current account deficit, while inflation has declined each month of 2020. Furthermore, even though Pakistan jumped 28 places on the World Bank’s ease of doing business ranking, its present position of 108 demonstrates much room for improvement.

It is also recorded that even though the government has presented a relatively open foreign investment regime, the country remains a challenging environment for foreign investors. The main causes for this were an enhancing but unpredictable security condition, hard business climate, lengthy dispute resolution processes, poor intellectual property rights (IPR) enforcement, inconsistent taxation strategies, and lack of harmonization of principles across the provinces as against to regional competitors.

 

US, which was consistently one of the top five sources of FDI in the country over the past two decades, saw China overtake it during 2019, mainly because of CPEC projects. Moreover, US investments in Pakistan declined from $386 million during 2018 to just $88 million during 2019. However, over the past year and a half, US corporations have pledged greater than $1.5 billion in direct investments in Pakistan in the fast-moving consumer goods, financial services, franchising, information and communications technology (ICT), thermal and renewable energy, and healthcare services. Furthermore, statistics showed that in August, FDI totaled $112.3 million, depicting 24 percent growth from the same month of FY2020. Business activity is rebounding after the government lifted coronavirus lockdown in August. Moreover, FDI in financial sector sharply grew to $85.4 million in July-August FY2021. That was compared with $14 million a year earlier. FDI in the electrical machinery rose to $36.5 million from $15 million. kamal1pic2

The oil and gas exploration sector attracted $34.3 million of FDI during 2-month of the current fiscal year as opposed to $25.1 million in the corresponding period last year. The experts also reported that Norway in Pakistan was the largest investor followed by Netherlands and Malta. During July-August, investment from Norway grew to $45 million from $0.1 million a year ago. Investment from the Netherlands reached at $39.6 million as against with $3.7 million previous year. In the first two months of the current fiscal year, the country fetched $30 million from Malta. Foreign funds managers invested $59.8 million in the government securities like treasury bills and Pakistan Investment Bonds in July-August against with $71 million a year ago. Statistics released by SBP identified that outflows from the stock market reached at $76.3 million in July-August as against inflow of $36.3 million in the corresponding period of last fiscal year. Total foreign investment declined 21.9 percent to $210.2 million during the period under review.

Conclusion

No doubt, the foreign inflows are the lifeline of Pakistan’s economy struggling to enhance its balance of payment position and pay import bills with imports almost triple than exports. The Government of Pakistan is dependent on foreign debts to reduce its current account deficit. Current account swung into surplus of $424 million in July compared with deficits of $100 million in June and $613 million in July previous year. FDI is also a productive source for the economic growth of a country.

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