International studies identified that the Foreign Inflows plays a significant role in development of any country. Although significance of such inflows is much larger in developing states but it is not limited to them. Emerging economies, even developed states, also need foreign inflows to manage their economy. However, size and the composition of such inflows are determined on the basis of country specific requirements.
The need of foreign capital usually arises with the lack of capital in host country and low saving and investment ratios. Furthermore, low household income reduces the government’s earning from taxes and hence it reduces government expenditures and consequently growth of the country slows down. With the passage of time, it is also identified that less developed states have become more and more dependent on foreign inflows because of which their growth is totally reliant on funds from other states. The result of this dependence is generally a shock on host country when these inflows are completely or partially dried- up. Furthermore, misallocation of funds is also a very critical challenge. If inflows are not well directed and not supported with sufficient research on host country, they may adversely affect growth of a country due to growing poverty and unemployment rate with low investment on human capital. In the developing states like Pakistan, foreign inflows are of critical significance the country. In addition to the low saving and investment ratios and lack of physical and human capital, Pakistan is faced with political and macroeconomic instability because of which large and continuous flow of foreign inflows is required to supplement its growth.
| World GDP and Trade Volume Growth (%) | ||||
|---|---|---|---|---|
| Details | 2019 | 2020 | 2021 | 2022 |
| World GDP growth | 2.8 | -3.3 | 6.0 | 4.4 |
| United States | 2.2 | -3.5 | 6.4 | 3.5 |
| Euro Area | 1.3 | -6.6 | 4.4 | 3.8 |
| United Kingdom | 1.4 | -9.9 | 5.3 | 5.1 |
| China | 5.8 | 2.3 | 8.4 | 5.6 |
| Middle East and Central Asia | 1.2 | -2.9 | 3.7 | 3.8 |
| World Trade Volume | 0.9 | -8.5 | 8.4 | 6.5 |
| Source: IMF World Economic Outlook, April 2021 | ||||
According to facts released by the State Bank of Pakistan (SBP), the FDI in the telecommunication sector plunged 94.4 percent, dropping from $622.5 million in FY20 to just $34.8 million in FY21. Textile industry fared no better as foreign investment in the sector fell from $37.7 million in FY20 to $6.9 million in FY21, a decline of 81.6 percent. On the flip side, the FDI in IT services climbed 71.4 percent to $49 million in FY2020-21. Investment in the sector had stood at $28.6 million in fiscal year 2019-20. Similarly, the power sector also witnessed a rise in FDI as foreign investment rose from $765.6 million in FY20 to $906.1 million in FY2021.
Statistics presently released by the sources showed that the inflow of foreign direct investment (FDI) into different sectors of Pakistan’s economy declined 28.9 percent to $1.85 billion in FY2020-21 mainly because of the worldwide travel disruption that prevented foreigners from visiting the country for investment purposes. According to facts released by the State Bank of Pakistan (SBP), the foreign investment in the country had stood at $2.6 billion in FY2019-20. The Experts identified that the main cause behind the drop in FDI was the Covid-19 pandemic. The number of foreigners who visited in the country in the last fiscal year nosedived on the back of worldwide travel restrictions, hence the volume of direct investment declined also. No doubt, FDI rises when foreigners land and explore business opportunities in Pakistan. Ongoing Covid-19 led to the closure of borders and travel curbs in various states which, in turn, restricted the number of foreigners who were eager to explore and invest in the country.
Sources identified that the malady had a substantial effect on the international business environment because of which less foreign investment entered many states and Pakistan was one of them. If the bigger picture is considered, the whole world was in trouble; hence many foreigners were unable to invest in Pakistan. It is also said that travel is direly needed for greenfield investment and with restrictions in place, it was bound to fall, adding that business travel dropped to very low levels during FY2021. On the other hand, it is also added that the foreign investment in FY2020 was on the higher side because of massive payments made through telecommunication firms for the renewal of their licences. Because of this, the biggest decline in net FDI during FY2020-21 was witnessed in the telecom sector. Statistics showed that FDI also declined during FY21 due to a high base effect, aided by hefty investments made by telecom firms in FY2020. FDI in oil and gas exploration decreased because many multinationals in the sector wrapped up their operations in Pakistan. In June 2021 alone, the FDI amounted to $135.4 million, which was 22.5 percent lower than the foreign investment of $174.8 million recorded in the corresponding month of last year.
No doubt, private sector investment has become one of the most essential sources of international capital flows to developing countries. Foreign Direct Investment (FDI) as one type of private sector investment has the potential to drive economic growth and development. Understanding the factors that motivate or deter foreign investors from investing in a developing country therefore is crucial. It is argued that a rapidly deteriorating domestic situation due to weakened governance and limited security provision within the country has increased the perceived levels of risk and uncertainty associated with investing in Pakistan. This has resulted in a sharp decline in FDI inflows to the country. Despite of all, the present government of Pakistan has been trying to provide conducive environment to the foreign investors in Pakistan.