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FDI: recovering flows

In its recent Monetary Policy Statement, the SBP highlighted declining Foreign Direct Investment (FDI) into Pakistan as a major risk to external stability, where the country received total FDI of US$1.77bn in 10MFY10 down 44.6%YoY. Currently, FDI is financing around 57% of the Current Account deficit and hence we concur that any steep drop in investment inflows will lead to a corresponding surge in the external debt financing gap. In this report, we assess the role foreign investment inflows have played in financing the Current Account deficit and in maintaining Balance of Payment stability in CY10. Based on the broad-based increase in FDI in recent months, we expect investment inflow of US$2.2bn in FY10 as compared to our estimated Current Account deficit of US$3.5bn for the full year. In our view, the remaining gap would be met by long-term multilateral debt financing already committed to Pakistan. Therefore, Forex reserve accretion will likely continue till Jun’10 and we expect the country’s Forex reserves to increase to ~US$16.5bn by end-FY10.

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