Pakistan’s economy is anticipated to contract further as FDI flows decline in the wake of the current scenario in Afghanistan. Pakistan’s economic managers should be concerned about the persistent fall in FDI flows in recent years.
In July, net flows declined by slightly under 39% year over year, continuing a pattern that began last fiscal year, when long-term, non-debt-creating investments fell by 29% to 1.85 billion dollars from the previous year. Inward FDI flows have been declining or stagnating during the last four years, whereas outward FDI flows have increased. As a result, FDI stocks have dropped from 41.9 billion dollars in 2016 to 35.6 billion dollars in 2020. Net FDI flows are projected to fall further as fears about the impact of the Afghan crisis on Pakistan grow.
The spike in Pakistan bond yields following the collapse of the government in Kabul implies a lack of trust in the economy among international investors. If the unrest and uncertainty in Afghanistan persist, Pakistan’s export profits may suffer.
Meanwhile, Pakistan’s trade imbalance reached USD 3.058 billion in July, raising alarm bells.The government’s fight against the country’s ballooning trade imbalance is backfiring, as the gap worsened by 81.4 percent in the first month of the current fiscal year (FY22), owing mostly to a nearly double increase in imports compared to exports.
In July this year, the merchandise trade imbalance was USD 3.058 billion, up from USD 1.686 billion in the same month last year. In FY18, the trade imbalance hit an all-time high of USD 37.7 billion. Since December 2020, the trade gap has been expanding, owing primarily to exponential rise in imports and comparably moderate development in exports.
Following the current scenario in the war-torn country, Pakistan stated that Afghan refugees will be housed in special camps set up near the Afghan border. Around three million Afghan refugees live in Pakistan, nearly half of whom are there illegally.
