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

KARACHI: Pakistan’s net foreign direct investment (FDI) increased by 56 percent, reaching $1.524 billion in the seven months of the current fiscal year, the central bank data showed on Tuesday.

The SBP’s data indicates that in January, the country recorded a net FDI inflow of $194 million, showing a 14 percent rise compared with the $170 million inflows during the same period last year. The country also saw an outflow of $132 million in January 2024.

The majority direct investments came from China, with FDI from Chinese companies rising by 437 percent to $634 million from July to January FY25. Investments from Hong Kong also grew by 28 percent, reaching $155 million. The United Kingdom contributed $148 million in FDI during July-January FY25 period, compared with $138 million last year.

According to analysts, the rise in foreign investment demonstrates increased investor confidence, which is fueled by economic stability and progress on International Monetary Fund reforms.“The rise in net foreign investment to $99 million from last year’s -$107 million reflects improved investor confidence, driven by economic stability and progress on IMF reforms,” said Saad Hanif, the head of research at Ismail Iqbal Securities. “Net FDI stood at $194.4 million, driven by strong inflows in financial services ($64.0 million), electricity ($61.1 million), mining ($30.9 million), and manufacturing ($30.4 million),” Hanif said. “

Meanwhile, outflows included $85.1 million from debt securities and $10.1 million from equity securities, alongside sectoral outflows in information & communication (-$10.9 million) and transportation (-$3.7 million),” he added.

The SBP also highlighted Pakistan’s current account swung into deficit in January as the nation’s trade gap increased due to higher imports and weak exports. The current account turned to a deficit of $420 million in January from a surplus of $474 million in the previous month. The shortfall increased by 4 percent year-on-year. However, the country reported a current account surplus of $682 million in the seven months of the fiscal year 2025, compared with a deficit of $1.8 billion in the same period last year.

Following a $402 million deficit in FY25’s first quarter (July–September), the current account showed strong performance in the second quarter (October–December), achieving a $1.504 billion surplus. However, the current account showed a deficit in January, contrary to analysts’ expectations, who had forecast a moderate surplus driven by a rise in imports and a slight decline in remittances. “Increase in deficit of trade and services due to surge in imports of goods and fall in exports of services are the primary reason behind current account deficit. The slowdown in other personal transfers during January has further exacerbated the situation,” said Awais Ashraf, the director of research at AKD Securities Limited.

In January, remittance inflows from Pakistanis working abroad increased to $3 billion, marking a 25 percent growth compared with a year ago, though they were down 3 percent from the previous month. The SBP reported that goods imports rose by 11 percent month-on-month and 17 percent year-on-year to reach $5.455 billion in January. Meanwhile, goods exports decreased by 4 percent MoM but rose by 10 percent YoY to $2.94 billion. As a result, the goods trade deficit increased to $2.5 billion, which was 37 percent higher than the previous month and 26 percent higher compared with a year earlier.

Imports of services increased by 4 percent YoY but declined by 3 percent MoM to $1 billion. In contrast, services exports rose by 1 percent YoY but fell by 13 percent month-on-month to $691 million. Consequently, the services trade deficit increased by 30 percent month-on-month to $315 million. Overall, the trade deficit swelled to $2.8 billion in January, the highest level since August 2022.

Analysts note that the financial account, which comprises foreign investments and loans, is drying up. If this trend continues, the SBP may be forced to maintain a current account surplus with limited options, such as allowing the rupee to weaken and refraining from further interest rate cuts. Import restrictions could return as a last resort if the depletion of reserves accelerates. As of February 7, the SBP’s reserves stood at $11.17 billion, sufficient to cover just over two months of imports.

Sana Tawfik, an analyst and economist at Arif Habib Limited, indicated that due to increased domestic demand, there will likely be pressure on imports in the future. She emphasised that imports of essential items should take priority, given the level of forex reserves. However, remittances will be supported by two Eid festivals during this fiscal year. If pressures mount on foreign exchange reserves due to a higher import bill and external debt repayments, a deficit rather than a surplus may materialise in FY25, Tawfik noted.