KARACHI: Foreign investors are sweet-talkers. They tend to gloss over unpleasant facts while speaking to the press. So when the head of the UK’s premier development finance institution (DFI) uses words like “very fragile” for the state of Pakistan’s economy, it should set off alarm bells in Islamabad.

“As an investor, it’s obviously a concern. It obviously makes a difference as you think about what you might be able to do in the future,” said British International Investment (BII) Chief Executive Nick O’Donohoe while speaking to a small group of journalists at the British Deputy High Commission recently.

BII has made commitments of $350 million through debt and equity in a number of projects in renewable energy, financial inclusion and venture-capital space. In renewable energy alone, its $180m portfolio consists of about half a dozen wind, solar and hydro projects that produce a total of 462 megawatts.

Mr O’Donohoe stopped short of making a definitive comment on the possibility of sovereign default, but noted that “some sort of clarity” was needed for foreign investors. “Any investor will tell you that they hate uncertainty,” he said.

The clearest sign of trouble is that BII has been facing problems in repatriating its dollar dividends abroad. Pakistan is in the middle of a serious dollar shortage, with banks refusing to open letters of credit for even food and energy imports. Foreign exchange reserves of the country are at a multi-year low, forcing the government to stop large dollar outflows, including those by overseas investors.

According to Habib Yousuf, regional director of BII based in Karachi, the DFI has faced payment delays in terms of dollar-based dividends, beginning in the second half of 2022. “But the problem isn’t at a level where we’d be overly concerned about it,” he said in an attempt to downplay the seriousness of the complaint.

This is despite the fact that the country touts a liberal foreign investment policy that allows 100 per cent profit repatriation. According to one source, the total amount of dividends pending for repatriation to overseas investors is in excess of $1bn.

However, BII has been receiving interest and principal payments on investments made in the form of debt. Those payments have faced no delays, he said, noting that roughly 60pc of the Pakistan portfolio of BII consists of debt.

Responding to a question, Mr Yousuf said none of the companies that BII has invested in are export-oriented. In other words, the revenue streams of BII-backed companies are all rupee-based.

Left-leaning economists like Dr Kaiser Bengali have long held that foreign direct investment (FDI) in consumption-oriented sectors is inherently counter-productive. This type of FDI increases imports in the form of raw materials but contributes little to grow the dollar-earning export base of the country. Furthermore, foreign investors convert their rupee-based earnings into dollars and repatriate the already scarce foreign exchange, further widening the balance of payments.

“We are a financial investor… We’re providing capital, which isn’t otherwise available in the country. We’re trying to fulfil a need,” he said.

In response to a question about the receding role of western economic powers in setting up big-ticket infrastructure projects in Pakistan, British Deputy High Commissioner Sarah Mooney said the needs of the economy are different now.

“The judgment on these major, big-ticket items is very, very difficult (to make) historically. One of the most beneficial ways to invest in an economy is to grow the private sector,” she said in an implicit reference to large infrastructure projects worth tens of billions of dollars that Pakistan is building with the backing of China under the latter’s Belt and Road Initiative.

Published in Dawn, January 22nd, 2023