|Noaman Abdul Majid
Foreign Direct Investment (FDI) is one of the key drivers of economic growth in developing economies as it brings much-required financial and knowledge capital to these upcoming markets. Pakistan receives one of the FDI among emerging markets and developing economies.
According to the State Bank’s Annual Report 2019 – 2020 on State of the Economy, Pakistan received US$ 2.6 and 1.4 billion as FDI in 2020 and 2019 respectively (The 9-month figure for July to March 2021 was $1.4 billion). It includes CPEC related investments and licenses renewal fees from telecom companies during 2020.
In comparison, according to World Bank data for 2019, countries like Myanmar (US$ 2.3 billion), Cambodia (US$ 4 billion), Malaysia (US$ 7.7 billion) Egypt (US$ 9 billion), and Vietnam (US$ 16 billion) fared better than us. India received almost US$ 50 billion as FDI in 2019.
This is despite the fact that we have a fairly liberal investment regime, strong domestic market, improved security environment, and international image. If we look at the FDI numbers over the last decade, the picture doesn’t look attractive either, although we have experienced brief phases of decent economic growth after every few years. So the question arises, what prevents international institutional investors from coming into Pakistan?
Why low FDIs in Pakistan?
Multinational enterprises, sovereign wealth funds, and development finance institutions operate in multiple jurisdictions across the globe. They have a sophisticated investment evaluation framework and highly qualified investment teams to evaluate each investment opportunity.
On top of it, they are vigorously approached from all over the globe to put their money into different projects and countries. As a result, in order to secure international money in the form of FDI is a highly challenging job for a country like Pakistan which is rarely on the priority list of these sophisticated investors and which drastically lacks adequate homework and presentation mechanism to demonstrate investor readiness.
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Historically, our investment pitch has been that since we have fertile land, beautiful mountains, and a large domestic market, the institutional investors should invest in our agriculture, tourism, and FMCG sectors, etc. However, these broad statements are seldom backed by feasibility studies and investment memoranda prepared and vetted by top consulting firms and investment banks.
These documents are mostly prepared by bureaucrats lacking expertise in specialized disciplines like investment strategy and investor relations so hardly receive any significant attention from the institutional investors.
This has been a major impediment in capitalizing upon the strategic investment commitments from some of our friendly countries as well whose sovereign wealth funds are staffed by some of the best paid international investment bankers.
Any kind of half-cooked investment proposals which lack professional depth and sophistication never reach the top echelons of decision-makers in any institutional investment framework. In fact, they are sometimes counterproductive as they create a not-so-desirable image of the potential investment destination.
China remained the largest investor in Pakistan but the inflows were less than the previous year. The SBP data showed that the FDI in 11MFY21 from China was $728m compared to $843m in 11MFY20.@zlj517 @libijian2 @zhang_heqing @WangXianfeng8 @ShaheenChen @DostiFM98 @PDChina pic.twitter.com/GhstxAzTMk
— Pakistan Economic Net (@NetPakistan) June 19, 2021
Looking at the big picture, according to UNCTAD the Global foreign direct investment (FDI) collapsed in 2020, falling 42% from $1.5 trillion in 2019 to an estimated $859 billion in 2020 and it is likely to weaken further in 2021.
In addition, there is a global shift towards investments into developed countries due to risk averseness, better regulatory frameworks, and a sophisticated technology ecosystem. It creates a challenging situation for developing countries like Pakistan to attract the right quality of FDI which brings knowledge capital alongside the financial flows. Going forward, these challenges for Pakistan would be further compounded by the fact the global FDI environment would be more competitive in the wake of COVID-19.
What needs to be done?
Hence it is recommended that a combination of these steps be taken on an urgent basis to fix the FDI promotion regime. Firstly, either completely revamp the current Board of Investment or set up a new investment promotion agency specifically for the purpose of targeting FDI which can work in collaboration with but independently from the current BOI.
Secondly create an International Advisory Board from key FDI regions including the US, EU, GCC, and ASEAN comprising of investment bankers, businessmen, and prominent Pakistanis who have held senior positions in the international financial system to guide and connect the government in the global investment landscape.
Thirdly put in place a concerted effort to engage international investment banks and strategy consultants specializing in equity raising and connect them with large Pakistani businesses. These international players are well aware of how to engage potential clients and potential investors.
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Fourthly, the concerned agency should have highly professional human resources drawn from the private sector with clear performance indicators. Career bureaucrats are generally not trained in this specialized discipline nor they are motivated enough to achieve any stringent targets.
Lastly, the agency should have an adequate budget for marketing and business planning to deliver upon its expectations. Any half-baked measures don’t work in international markets. If these recommendations are implemented with full vigor and strategic commitment, we can start witnessing tangible results in the next 2 – 3 years.
The way forward for Pakistan
Pakistan having improved upon its general security and goodwill variables as well as relatively stellar economic performance compared to other regional countries, can smartly position itself as a promising and upcoming FDI destination provided that our investment promotion agencies have a focused business strategy, completed detailed homework, and achieved a very high level of investor readiness to put them ahead of other competitors.
With a comprehensive investment analysis, presentation, and targeting mechanism in place, we can target a sustained level of US$ 4 – 6 billion in FDI in the next 3 – 5 years. Otherwise, we will keep lingering at the current levels of FDI and miss the potential FDI opportunities which are vital for our long-term sustainable economic growth.
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It will create a further economic gap among Pakistan and other regional markets as well as have serious geopolitical implications and challenges for the country because FDI is one of the key drivers of global economic clout and we can ill afford it ignore it further.
Noaman Abdul Majid is CEO of WIXEMAN GLOBAL, a strategy consulting firm practicing in GCC and Pakistan. He has advised several GCC government entities on setting up and restructuring foreign investment platforms. He is a Fellow Chartered Management Accountant from the UK, Fellow Chartered Accountant from Pakistan, a Chartered Islamic Finance Professional from Malaysia, and master’s in Economics from Karachi University. He tweets at: @NoamanAMajid.
The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.