- The pandemic has made privatisation a problem
As the government is reportedly looking to privatize Pakistan Steel Mills (PSM), among other state-owned enterprises (SOEs), it should know that regardless of the debate that whether SOEs should be privatized or not, given the current pandemic and with it the existence of lockdowns in many parts of the world, these times of great economic uncertainty do not present themselves as the best time.
For one, aggregate demand and supply have collapsed, and winds of deglobalization have gained strength, and things are likely to follow this trend at least till there becomes available an appropriate vaccine. These are indeed not the best time to expect a lot of interest from foreign investors, especially in assets like PSM, which are in really bad shape, both in terms of efficiency and debt.
In fact, according to a recently released ‘World Investment Report 2020: International production beyond the pandemic’ by United Nations Conference on Trade and Development (UNCTAD) ‘Global flows of foreign direct investment (FDI) will be under severe pressure this year as a result of the COVID-19 pandemic. These vital resources are expected to fall sharply from 2019 levels of $1.5 trillion, dropping well below the trough reached during the global financial crisis and undoing the already lackluster growth in international investment over the past decade. Flows to developing countries will be hit especially hard, as export-oriented and commodity-linked investments are among the most seriously affected.’
Overall, even if the privatization aspect is put aside, the impact of covid-19 in terms of FDI, much needed employment opportunities, and built-up in reserves and with it stability to currency that FDI could provide, and which is much needed given the country is struggling on all these counts for many years now, the outlook for FDI brings little hope. This is all the more disturbing, given countries, especially mostly highly indebted developing countries like Pakistan, are also facing negative pressures in terms of exports and remittances, in the wake of recessionary trends taking hold globally
According to the Report, that trough after the Global Financial Crisis (2009) was at $1.2 trillion, but the situation is expected to be much worse for 2020 and 2021, whereby ‘The COVID-19 crisis will cause a dramatic drop in foreign direct investment (FDI) in 2020 and 2021. It will have an immediate negative impact in 2020, with a further deterioration in 2021. Global FDI flows are forecast to decrease by up to 40 per cent in 2020, from their 2019 value of $1.54 trillion. This would bring FDI below $1 trillion for the first time since 2005. FDI is projected to decrease by a further 5 to 10 per cent in 2021. In relative terms the projected fall is expected to be worse than the one experienced in the two years following the global financial crisis. At their lowest level ($1.2 trillion) then, in 2009, global FDI flows were some $300 billion higher than the bottom of the 2020 forecast. The downturn caused by the pandemic follows several years of negative or stagnant growth; as such it compounds a longer-term declining trend. The expected level of global FDI flows in 2021 would represent a 60 per cent decline since 2015, from $2 trillion to less than $900 billion.’
Furthermore, the Report highlights that the outlook for FDI beyond 2021 also looks ‘highly uncertain’ whereby ‘A U-shaped trajectory, with a recovery of FDI to its pre-crisis trend line before 2022, is possible but only at the upper bound of the expectations. Economic and geopolitical uncertainty look set to dominate the investment landscape in the medium term. At the lower bound of the forecast, further stagnation in 2022 will leave the value of global FDI well below the 2019 level.’ One wonders then why Pakistan would be looking to enter the process of privatization, given the grim nature of prospects of FDI in the short- to medium term. Perhaps, a better option for the government, even if it is convinced to privatize SOEs, is to improve the status of SOEs during the medium term, and then open up for discussions in this direction.
Overall, even if the privatization aspect is put aside, the impact of covid-19 in terms of FDI, much needed employment opportunities, and built-up in reserves and with it stability to currency that FDI could provide, and which is much needed given the country is struggling on all these counts for many years now, the outlook for FDI brings little hope. This is all the more disturbing, given countries, especially mostly highly indebted developing countries like Pakistan, are also facing negative pressures in terms of exports and remittances, in the wake of recessionary trends taking hold globally.
Moreover, the situation sets in quite a reversal from 2019, when after a number of years, FDI inflows in Pakistan had somewhat reached a relatively higher level. According to the Report ‘In Pakistan, FDI recovered in 2019, growing 28 percent to $2.2 billion after a deep fall of 30 percent in 2018 as the country faced balance-of-payment challenges. The growth was driven by equity investments in the energy, financial, and textiles industries, with major investors from China and the United Kingdom.’
The Report highlights that given the negative impact of the pandemic on FDI possibilities, Brazil has decided to take a step back for its earlier planning in this regard. This should serve as a good example for those reportedly pushing for privatization in Pakistan at this point in time. According to the Report ‘Brazil registered a 20 percent increase [in FDI in 2019] to $72 billion, with investors attracted by the oil and gas extraction and electricity industries. Economic conditions appeared to improve in the country, and a wide-ranging privatization program was launched in July as part of the administration’s efforts to relaunch the economy. During the first nine months of 2019, the Government raised about $20 billion through privatizations and divestments, $1.4 billion in payments for rights to operate infrastructure and about $3 billion in “sales of natural assets,” consisting mainly of the State-controlled Petrobras oil exploration areas… For 2020 the Government was expecting to be able to sell another $35 billion of assets; however, as the coronavirus pandemic is tipping the economy back into recession, the volatility associated with the crisis has worsened the selling conditions, pushing the authorities to postpone most of the announced share sales. Similarly, transactions waiting for regulatory approval have been halted.’
