Increasing investor confidence: FDI surges 56% to $1.52bn in July-January

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Pakistan’s Net FDI Surges by 56% to $1.52 Billion in Seven Months

KARACHI: Pakistan’s net foreign direct investment (FDI) rose by 56%, reaching $1.524 billion in the first seven months of the current fiscal year, according to data released by the State Bank of Pakistan (SBP) on Tuesday.

In January alone, net FDI inflows totaled $194 million, marking a 14% increase from the $170 million recorded during the same period last year. However, the country also saw an FDI outflow of $132 million in January 2024.

China Leads Foreign Investment

China remained the largest investor, with FDI from Chinese companies surging by 437% to $634 million from July to January FY25. Hong Kong followed with a 28% increase in investments, reaching $155 million, while the United Kingdom contributed $148 million, up from $138 million in the previous year.

According to analysts, the significant rise in foreign investment reflects improved investor confidence, driven by economic stability and progress on International Monetary Fund (IMF) reforms.

“The increase in net foreign investment to $99 million from last year’s negative $107 million indicates growing investor confidence,” said Saad Hanif, head of research at Ismail Iqbal Securities.

Sector-Wise Breakdown of FDI

Net FDI in January 2024 stood at $194.4 million, with strong inflows in:

• Financial Services: $64 million
• Electricity: $61.1 million
• Mining: $30.9 million
• Manufacturing: $30.4 million

Meanwhile, outflows were recorded in:

• Debt securities: $85.1 million
• Equity securities: $10.1 million
• Information & Communication: -$10.9 million
• Transportation: -$3.7 million

Current Account Turns to Deficit in January

The SBP also reported that Pakistan’s current account balance swung into deficit in January due to a widening trade gap, caused by rising imports and weak exports. The current account posted a $420 million deficit in January, compared to a $474 million surplus in December. However, for the first seven months of FY25, Pakistan recorded a $682 million surplus, a sharp turnaround from the $1.8 billion deficit in the same period last year.

While the first quarter of FY25 (July-September) recorded a $402 million deficit, the second quarter (October-December) saw a $1.504 billion surplus. However, analysts had expected a moderate surplus in January, which did not materialize due to rising imports and a decline in remittances.

“The increase in trade and services deficits due to higher imports and lower service exports drove the current account into deficit. Additionally, a slowdown in personal transfers worsened the situation,” said Awais Ashraf, director of research at AKD Securities Limited.

Trade Deficit Expands as Imports Rise

• Remittances: $3 billion in January (+25% YoY, -3% MoM)
• Goods Imports: $5.455 billion (+11% MoM, +17% YoY)
• Goods Exports: $2.94 billion (-4% MoM, +10% YoY)
• Goods Trade Deficit: $2.5 billion (+37% MoM, +26% YoY)
• Services Imports: $1 billion (+4% YoY, -3% MoM)
• Services Exports: $691 million (+1% YoY, -13% MoM)
• Services Trade Deficit: $315 million (+30% MoM)

Overall, the total trade deficit reached $2.8 billion in January, the highest level since August 2022.

Financial Account Pressures and SBP Reserves

Analysts warn that Pakistan’s financial account, which includes foreign investments and loans, is drying up. If this trend persists, the SBP may have limited options to manage the situation, including:

• Allowing the rupee to depreciate
• Delaying interest rate cuts
• Reintroducing import restrictions if reserve depletion accelerates

As of February 7, SBP reserves stood at $11.17 billion, covering just over two months of imports.

Outlook: Growing Import Pressure

Sana Tawfik, an analyst at Arif Habib Limited, noted that rising domestic demand could increase pressure on imports in the coming months. She emphasized the need to prioritize essential imports given the current level of forex reserves.

“While remittances will see support from the two Eid festivals this fiscal year, rising import bills and external debt repayments could lead to a current account deficit rather than a surplus in FY25,” Tawfik stated.

With mounting external challenges, Pakistan’s economic outlook remains dependent on maintaining investor confidence, managing imports, and securing additional foreign inflows.