Foreign Direct Investment and Economic Development
How Political Instability is Affecting FDI and Hindering Economic Development in Pakistan 2022
What is FDI?
FDI stands for foreign direct investment. It is an investment made by a company or individual in one country or another. In business interests, one person or country invests in another country by either establishing a new business or subsidiary or acquiring business assets in another country. It is deemed as the FDI of the country receiving it. The purpose behind such investment is to make a profit.
The most comment form of FDI includes any long-term or short-term capital and earnings on reinvestment.
What is the importance of FDI?
FDI plays a crucial role in any country’s betterment and economic development. It can help to generate employment, bring in new technologies and know-how, and contribute to the transfer of best practices. FDI can also help to stimulate competition and promote entrepreneurship. All of these factors can lead to increased productivity and economic growth.
In 1981 FDI showed 6.95% of the world GDP, which increased to 23.525 in 2004. (UNCTAD Report 2004)
FDI is an important part of globalization, connecting countries, states, regions, and MNCs on one platform.
Role of FDI and economic growth in developing countries
FDI can be a powerful tool for promoting economic growth in developing countries. Developing countries rely on FDI to boost their economic growth. By providing capital, technology, and know-how, FDI can help to raise productivity levels and spur economic development. It also plays a pertinent role in accelerating economic activity and generating more employment opportunities in the country. In addition, FDI can promote competition and entrepreneurship, further driving economic growth.
Impact of FDI on Economic growth in Pakistan from 2021 to 2022
FDI has played a significant role in the economic development of Pakistan over the past few years. Between 2012 and 2016, Pakistan received an average of $2.8 billion per year in FDI inflows. This investment has helped to spur economic growth and create jobs. According to the World Bank FDI is expected to play a positive role in Pakistan’sPakistan’s economy in the coming years, with inflows projected to reach $3.5 billion by 2022.
FDI increased to 2.6% during the fiscal year 2021–22, reaching $1.87 Billion shows how FDI is positively impacting Pakistan’sPakistan’s Economy. The major FDI inflow was from China, followed by the United States, Switzerland, UAE, and Hongkong.
This huge influx of foreign investment has helped to boost productivity and spur economic development. In the coming years FDI is expected to play a role in Pakistan’sPakistan’s economy, with inflows projected to reach $3.5 billion by 2022.
Factors affecting FDI in Pakistan
Foreign direct investment (FDI) plays an important role in capital accumulation. It is a huge source of acquiring capital in Pakistan. FDI can help to boost economic growth and development, as well as create new jobs. However, several factors can impact the level of FDI in Pakistan.
During the first half of FY 2022 impact of FDI on economic growth in Pakistan has been positive. One of the main factors is the country’s political stability. Investors may be reluctant to commit their capital if there is instability or uncertainty. Another key factor is the availability of skilled labor. If Pakistan can provide a pool of talented workers, it may be more attractive to foreign investors.
One major reason is war and terror. A country under war or terror is unlikely to attract any FDI short-term or long-term as investors feel hesitant to take the risk. Another reason for the decline in investment is the war in Ukraine and surge in petroleum prices in the international market, and rising inflation. Pakistan’sPakistan’s current political scenario has added fuel to the fire in further declining FDI inflow. FDI inflow declined to 33% in February.
Due to the surge in petrol prices in the international market, the increase in the price of commodities has increased the trade deficit. FDI was showing a positive inflow of 6% till February 2022. Despite a healthy return on PIBS, the cash outflow reached $353 Million in March
Political instability dents foreign investors’ confidence. Anjum Nisar (April 2022)
There was a huge out flux of cash of about $1.5Billion during the fiscal year due to the current political scenario and instability in Pakistan. The investors have lost their trust despite having high returns on Pakistan Investment Bonds PIBs. This decline or outflow of cash on FDI has rattled Pakistan’s economy.
Despite having good relations with China, Pakistan has failed to attract FDI from Chinese investors. FDI inflow from china dropped to $384 million in 2022 compared to $522 million in 2021. This decline was reported when CPEC ended its projects in Pakistan, causing a sharp decline in FDI.
Observed other factors, it is expected that Pakistan can get back on track and attract more foreign direct investment if there is a more secure environment for investors with less political instability and risk. Other important considerations include infrastructure, tax incentives, and market size. By improving these factors, Pakistan can make itself more appealing to foreign investors and encourage greater levels of FDI.
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