FOREIGN investment is a crucial catalyst for economic growth and development, as it facilitates the influx of capital, technology and expertise into a host country. In this regard, revitalizing investment is crucial for Pakistan to address its economic challenges, enhance stability and close critical gaps in its financial framework. Pakistan has witnessed a small surge in foreign investment with various international companies and countries showing keen interest in the country’s growing economy. However, Pakistan is still not sufficiently immune to hurdles that are creating bottlenecks for foreign direct investment and domestic savings. Global financial support to Pakistan in terms of foreign investment has continued to plummet even as the country struggles with economic recovery. The foreign inflows declined by 60 percent to USD 1.308 billion in the first quarter of 2024-25, thanks to subdued foreign investment, especially from Pakistan’s major supporters- China, Saudi Arabia and the UAE.
Pakistan is on the brink of sovereign default as foreign investment has been on decline for the past few years. In 2021, it shrank about 21 percent while it dropped by 32 percent the next year. The year 2023 registered a fall of 25 percent. Current government is struggling to raise funds from the international market by issuing bonds due to lower ratings. “Despite our attempts and hiring firms to facilitate Panda bond issuance in China, we have yet to achieve this goal,” said currency market specialist Atif Ahmed. In August 2024, foreign investors withdrew USD 103.5 million from Pakistan’s domestic bonds. Also, the stakes of foreign investors in the Pakistan Stock Exchange (PSX) reduced to mere 3.7 percent in 2024 from 28.7 percent in 2-17.
The investment-to-GDP ratio in Pakistan has fallen to 13.1 percent— lowest in 50 years. It is almost half of the average 25 percent in developing countries. The worst investment ratio could not be prevented even after the special and dedicated efforts taken by the Special Investment Facilitation Council (FIFC). SFIC is a specialized body run by military and civilian officials to spur investment and growth in Pakistan. The reason behind low investment may remain the not-so-good perception, rules and regulations for foreign investors in Pakistan, said Dr Nadia Tahir, Lahore-based economist and a Cambridge scholar. “Pakistan is a huge consumer market, but the buying capacity is low. Investors look for market size, a stable and safe environment, lax tax policies for repatriation of funds, high prospective yields and consistency in investment policies,” she said.
The net outflow of foreign investment has reached a peak in Pakistan which has added to foreign investors’ concerns over the uncertainty in Pakistan. Notably, the remittances from overseas Pakistani workers have a higher share in the foreign inflow than the total exports of the country. “The situation is alarming for Pakistan. The outflow reflects the erosion of confidence of foreign investors,” said a senior analyst. Pakistan has the lowest saving and domestic investment ratios which have led to the external sector crisis, Islamabad government acknowledged. Pakistan is trapped in the low-saving, low-investment cycle which has inhibited its growth and foreign investment, as per the Pakistan Institute of Development Economics. “Pakistan has experienced macroeconomic instability since the early seventies. Because of the country’s persistent macroeconomic uncertainty, savings and private investment have been discouraged, resulting in low aggregate investment and volatile output levels,” it said.
Pakistani Prime Minister Shehbaz Sharif has been actively seeking foreign investment, focusing on fostering stronger economic ties with friendly Gulf countries. He has engaged in high-level discussions to encourage significant financial support from Saudi Arabia and the UAE, both of whom have been long-standing allies and major investors in Pakistan’s economy. These efforts aim to attract capital that can stabilize Pakistan’s financial situation, support critical infrastructure projects and foster sustainable growth. By prioritizing these strategic partnerships, Pakistan hopes to lay the foundation for a resilient economy, bolstered by robust international collaboration and investment. Dr Tahir said Pakistan lagged in all indicators that attract foreign investment. While terrorism did not hurt local businesses, factors such as governance challenges, regulatory unpredictability and occasional currency volatility have contributed heavily to poorer foreign investment. A contemporary newspaper of Pakistan said Prime Minister Sharif’s efforts of touring countries for investment would be fruitless unless the governance focus was on crucial structural and policy reforms in areas that directly affected investors.
Additionally, political instability and issues with the fundamental aspects of Pakistan’s economy are obstructing foreign inflow. The bottom line is that to make Pakistan more attractive to investors, there must be a period of political and economic stability along with positive relations with neighbours to attract investment from neighbours. The government initiatives which aim at improving the investment landscape and fostering sustainable growth should include key measures such as structural reforms, governance enhancements and efforts to bolster investor confidence. By cultivating a stable, transparent and investor-friendly environment, Pakistan needs to attract the foreign investment needed to support economic recovery, ensuring the country’s potential as a key investment destination.
—The writer is Educator at SELD, Sindh.
