Pakistan’s telecom sector has been a key part of the country’s economy, bringing in significant foreign investments and driving technological progress. This growth has improved connectivity, promoted digital inclusion, and supported economic development. However, over the past two years, Foreign Direct Investment (FDI) in the telecom sector has seen a sharp decline. it is considered a troubling trend for an industry that relies heavily on foreign capital for expansion and innovation as , it plays a crucial role in fueling economic development and strengthening infrastructure.
What is Foreign Direct Investment (FDI)?
Foreign Direct Investment (FDI) refers to when a company or individual from one country invests in a business in another country, aiming to have a lasting interest and significant influence over that business. This can happen in several ways:
Starting a New Venture (Greenfield Investment): This involves building a new business or facility from scratch in the foreign country. For example, in 2004 Telenor Group, a Norwegian multinational, entered the Pakistani market by establishing Telenor Pakistan as a wholly owned subsidiary. This Greenfield investment involved building new infrastructure and operations from scratch, leading to the company’s commercial launch in 2005.
Mergers and Acquisitions: Here, a company buys or merges with an existing foreign company to gain control. This approach allows quick access to new markets and resources. Warid Telecom, initially launched in 2005 by the Abu Dhabi Group, merged with Mobilink (now Jazz) in 2015. This merger combined Warid’s LTE services with Mobilink’s extensive 3G network, enhancing service offerings and expanding market reach.
Joint Ventures: In this case, a foreign company partners with a local firm, sharing ownership and control. This collaboration combines local market knowledge with the foreign company’s expertise. Wi-tribe Pakistan was established as a joint venture between Qatar Telecom (Qtel) and Saudi Arabia’s A.A. Turki Group of Companies (ATCO). The company officially launched its WiMAX services in Pakistan in 2009, initially operating in Karachi, Islamabad, Lahore, and Rawalpindi. It has now later upgraded to 4.5G LTE-A services, marking significant advancements in the country’s broadband landscape.
FDI Inflows and Outflows
- FDI Inflows: These are investments made by foreign entities into the domestic economy. For example, when a multinational corporation builds infrastructure in Pakistan, the funds invested are considered FDI inflows.
- FDI Outflows: These represent investments made by domestic entities into foreign economies. For instance, if a Pakistani company establishes a subsidiary abroad, the capital invested is categorized as FDI outflows.
Implications of Higher FDI Outflows than Inflows
When a country experiences higher FDI outflows than inflows, it indicates that domestic investors are investing more abroad than foreign investors are investing domestically. This scenario can have several implications:
- Capital Flight: Significant outflows may suggest that domestic investors lack confidence in the local economy, seeking better opportunities elsewhere.
- Reduced Domestic Investment: Lower inflows can lead to decreased funding for local businesses, potentially hindering economic growth and job creation.
- Balance of Payments Impact: A negative net FDI position can affect the country’s balance of payments, influencing exchange rates and foreign reserves.
Effects of Negative FDI on the Economy
Negative FDI, where outflows exceed inflows, can adversely affect the economy:
- Economic Growth: Reduced foreign investment can slow down economic expansion, as there is less capital available for business development and infrastructure projects.
- Employment: Lower investment levels can lead to fewer job opportunities, increasing unemployment rates.
- Technological Advancement: FDI often brings new technologies and expertise. A decline in FDI can limit access to these advancements, affecting productivity and competitiveness.
- Currency Depreciation: Persistent negative FDI can lead to depreciation of the national currency, making imports more expensive and potentially leading to inflation.
FDI Decline in Telecom sector of Pakistan
Now that you understand what FDI is and what it means for businesses and nation’s economy let’s investigate the situation of FDI in telecom sector of Pakistan.
2018-19: The telecom sector attracted $235.5 million in FDI inflows, but outflows amounted to $77.6 million, resulting in net FDI of $157.9 million.
2019-20 (Peak Year): This year saw the highest FDI inflows at $763.3 million, mainly due to spectrum auctions and infrastructure investments. However, outflows also peaked at $622.5 million, leaving net FDI at $140.8 million.
2020-21: FDI inflows declined sharply to $204.3 million, with outflows of $167.5 million, leaving a modest net FDI of $36.8 million.
2021-22: A further decline is visible with $174.9 million in inflows and $197.6 million in outflows, resulting in negative net FDI of $23 million—marking the first time in the graph where outflows exceeded inflows.
2022-23 (Worst Year): The situation worsened with inflows of only $57.7 million and outflows of $279.9 million, making net FDI a staggering -$222 million. This highlights a significant investor exodus from the sector.
The data shows a consistent downward trend in telecom FDI, with outflows exceeding inflows in recent years, indicating declining investor confidence. The stark reversal from net positive to negative FDI suggests that foreign investors are pulling out their capital rather than reinvesting, which poses a serious threat to the sector’s growth and Pakistan’s digital transformation efforts. This should serve as a wake-up call for the government and take swift actions to restore investors’ confidence.
Reason behind Telecom FDI Decline
Several factors have contributed to the decline in Foreign Direct Investment (FDI) in Pakistan’s telecom sector:
- Dollar Dilemma: A Major Financial Strain
One of the key challenges faced by Pakistan’s telecom sector is the dollar-denominated payment structure. Telecom operators earn revenue in Pakistani Rupees, but they are required to pay hefty spectrum license fees, renewal charges, and equipment imports in US dollars. Over the past two years, the rupee has depreciated by nearly 86% against the dollar, significantly increasing operators’ financial burdens.
For example, license renewal fees from 2019 were set at $450 million each for major telecom operators like Jazz, Telenor, and Zong. The actual amount they have to pay has skyrocketed in rupee terms due to currency depreciation, making it harder for companies to invest in network upgrades or expansion projects. on top of that, telecom operators need to import equipment like towers, servers, and optical fiber; all payments are made in dollars that further amplifys their costs.
The mobile operators have been requesting the government to introduce local currency-based payment structures for regulatory fees or provide government-backed subsidies to ease the financial strain on telecom companies, but the government has been showing reluctance to these suggestions. The primary reason for this reluctance is the government’s perception of auctions and license renewal fees as a key source of revenue generation rather than prioritizing the provision of high-quality telecom services to the country.
- Unstable Regulatory Environment
Inconsistent policies and regulatory uncertainties have created a less favorable investment climate. The telecom industry in Pakistan is heavily taxed, which constrains operators’ ability to invest in new technologies and upgrade their networks. The government imposes a General Sales Tax (GST) on telecom services alongside substantial import duties on essential equipment. Recently, the GSMA urged the government to eliminate the 15% Advance Income Tax (AIT) on telecom services and the 19.5% sales tax on mobile services, arguing that these taxes restrict digital access, particularly for low-income households.
- Persistent Security Concerns
Ongoing security issues have heightened the risks perceived among potential investors. In regions like Balochistan, insurgencies have led to more than 2,000 deaths in the western provinces where Pakistan is keen on tapping into mineral and gas reserves. Such instability raises concerns about the safety of investments and the continuity of business operations, leading investors to seek more secure environments.
In addition to that, internet shutdowns have become common in the country. In a latest report, Pakistan has become the 3rd nation with most internet downs in year 2024. The situation in sensitive areas like Balochistan is even worse where internet shut down sometimes goes on for months. Whereas, in AJK and Gilgit-Baltistan the internet speed is pathetic due to internet throttling and absence of major telecom players.
- Infrastructure Challenges
The high costs associated with infrastructure development, especially for emerging technologies like 5G, pose significant financial burdens on telecom operators. Over 60% of Pakistan’s population resides in rural areas, where high-speed connectivity is sparse, and telecom operators face significant financial burdens in deploying the necessary infrastructure. The cost of implementing infrastructure for better service is huge whereas current regulations lack incentives for infrastructure sharing between telecom operators, resulting in escalated costs which operators do not afford in current circumstances.
Impact of FDI Decline
The decline in the telecom sector FDI hasn’t only hurt the sector itself but has also had wider repercussions, affecting various segments of the national economy.
Decreasing FDI means reduced investments in the telecom sector that translates into slower technological growth. This is the reason why in 2022, when PTA planned to auction additional 3G/4G spectrum to enhance mobile broadband services, the auction was halted due to a lack of interest from major telecom operators.
The financial strain on operators has created challenges in upgrading infrastructure and expanding services, affecting service quality and coverage. This in turn has impeded digital transformation efforts, affecting various industries reliant on robust digital infrastructure.
Without adequate investment, the telecom infrastructure has struggled to keep up with increasing demand, resulting in network congestion and reduced service quality. The absence of funding has delayed the rollout of advanced technologies like 5G, limiting the sector’s growth and competitiveness. The telecom sector’s decline affects not only connectivity but also hampers digital transformation efforts across various industries, impacting overall economic development.
Is Government Inaction to Blame?
The Pakistani government’s handling of the declining Foreign Direct Investment (FDI) in the telecom sector has been less than stellar, with several pressing issues left unaddressed. The Minister of State for Information Technology and Telecommunication, Shaza Fatima Khawaja admitted that no investments have been made in telecom infrastructure over the past three years, but no efforts have been made to turn this around. Instead of tackling these challenges head-on, government’s focus has been on internet restrictions and tighter controls over digital platforms. Such measures have led to significant internet disruptions, causing businesses to suffer and casting a shadow over the investment climate.
The telecom industry in Pakistan is burdened with a heavy tax regime, including a 34.5% tax on services and a 29% corporate income tax, along with additional super taxes. This results in more than half of the sector’s earnings being directed to the government, hindering investment and growth. Moreover, licensing fees tied to the US dollar have made financial planning a nightmare, especially with the rupee’s depreciation.
Operational costs are soaring, thanks to rising fuel and electricity prices, putting additional strain on telecom companies. Whereas the lack of incentives for telecom operators to share infrastructure has led to redundant investments, slowing down the sector’s growth, particularly in rural areas.
Industry leaders have expressed concerns over sudden internet shutdowns, throttling, and app blockages, which deter investors. Jazz CEO Aamir Ibrahim remarked that while the government is planning a 5G auction for April 2025, “4G for all is better than 5G for a few.” He urged the authorities to address the underutilization of spectrum and introduce policies to raise Average Revenue Per User (ARPU) to global averages.
The government’s failure to address these critical issues has not only deterred potential investors but also undermined the sector’s ability to serve the nation’s digital needs effectively. Immediate and strategic interventions are required to revitalize the telecom industry and restore investor confidence.
I would suggest that the government should establish a dedicated body solely focused on identifying and addressing the sector’s challenges. However, the existence of numerous committees with the same mandate has shown little progress. The Universal Service Fund (USF) was created exclusively to enhance telecom infrastructure and services but in 2016, USF resources were diverted to build a stadium in Sialkot, while in 2013-14, approximately Rs60 billion from the fund was redirected to settle circular debt. Ironically, back in 2013-2016 the current ruling party was in power with its misplaced priorities. With a minister lacking telecom and technology expertise, hopes for a comprehensive and coordinated government approach to revive the sector seem to be fading. However, you never know — sometimes the weakest link ends up making the greatest difference.