Despite persistent efforts, foreign investment has not been flowing into Pakistan in the required quantity, underscoring deep-rooted structural and policy challenges.
According to the State Bank of Pakistan (SBP), during the July–November period, foreign direct investment (FDI) inflows totalled USD 1,474.2 million, a sharp decline from USD 2,151.9 million recorded in the corresponding period of the previous year. More recently, the government has signed memoranda of understanding (MoUs) worth over USD 25 billion; however, these commitments have yet to be translated into binding contracts or tangible inflows, raising questions about their practical impact on the economy.
SBP data further reveal an alarming trend in the first five months of fiscal year 2025–26. Total Foreign Investment plunged by 77 percent to just USD 314 million, compared to USD 1.391 billion in the same period of FY25. During this time, Foreign Direct Investment also declined by 25 percent to USD 927.4 million, down from USD 1.24 billion a year earlier. Foreign Portfolio Investment, meanwhile, experienced net outflows over several months, contributing significantly to the overall contraction in total foreign investment. These figures collectively point to a deteriorating investment climate that continues to erode investor confidence.
The reasons for this decline are not far to seek. Both local and foreign investors consistently highlight a range of persistent problems, including inconsistencies in tax regulations, legal loopholes, procedural hurdles and an excessively complex tax system. Based on current trends, experts estimate that the investment-to-GDP ratio may fall below 13 percent during FY26, as both domestic investment and FDI sink to levels not witnessed in recent decades. It may be recalled that this ratio had already fallen to 13.1 percent in FY24, marking the weakest performance in 50 years. Available figures clearly indicate that domestic investors remain hesitant, foreign investors are pulling back, and established foreign business entities are increasingly exiting the country. This situation carries serious implications for economic growth, employment generation and long-term macroeconomic stability.
Evidently, the authorities concerned have failed to create the enabling environment required to attract and retain capital. Capital, by its very nature, is risk-averse and gravitates toward environments that offer political stability, policy certainty, rule of law and physical security. In Pakistan’s prevailing policy and security landscape, these essential fundamentals are largely absent. As a result, investor sentiment remains subdued despite official assurances and promotional efforts.
Worryingly, recent months have witnessed the exit of several multinational corporations, alongside the relocation of well-known Pakistani textile groups to other countries in order to escape unaffordable energy costs and persistently high interest rates. Manufacturing units and business groups are particularly discouraged by a regime of graded taxation on turnover regardless of profitability, multiple withholding tax rates applied at various stages of business transactions, and effective tax rates that in some cases approach as high as 60 percent. Taken together, these factors have pushed the tax burden to levels that discourage reinvestment within the country while simultaneously driving away foreign direct investment.
Compounding these economic challenges is the deteriorating security situation, marked by rising terrorism, volatile borders and incompetent governance across multiple spheres. It is therefore not difficult to understand why investors remain reluctant to commit long-term capital. Political instability further darkens the economic outlook. While the primary responsibility in this regard lies with the government, the opposition also cannot be absolved of its share of responsibility in perpetuating uncertainty and discord.
The establishment of the Special Investment Facilitation Council (SIFC) under the 2023 Investment Policy was initially welcomed with optimism. It was hoped that this powerful, centralized body would remove investment-related hurdles by acting as a one-stop facilitator, cutting bureaucratic red tape, improving the ease of doing business, and coordinating federal and provincial efforts to foster a more favourable investment climate. However, these expectations have largely remained unfulfilled, primarily because attracting investment involves far more than simply expediting files or issuing executive orders.
Pakistan faces intricate and deeply entrenched structural issues that demand comprehensive and far-reaching reforms to break the cycle of stagnation that continues to bedevil the investment climate. These challenges include the stranglehold of elite classes over key sectors of the economy, distortions in the taxation system, and a wide range of systemic inefficiencies. Frequent changes in government lead to abrupt shifts in taxation, incentives and regulations, making long-term planning virtually impossible for investors. High public debt, repeated currency devaluations and ongoing IMF programmes contribute to economic volatility, further discouraging potential investors.
Additionally, complex, slow and opaque approval processes for land acquisition, permits and licenses create significant friction and costly delays. Insufficient and expensive energy supplies, particularly high electricity tariffs, along with underdeveloped infrastructure, further undermine competitiveness. Perceived security risks, especially in major economic hubs such as Karachi, act as a strong deterrent. Inconsistent tax policies, sudden tax hikes and complicated regulatory frameworks make it increasingly difficult for businesses to operate profitably. Moreover, declining integration with global supply chains and an overreliance on low-technology products reduce Pakistan’s appeal compared to regional competitors. In essence, investors seek predictability and stability—conditions that Pakistan is currently failing to provide.
It is therefore time to shed the inertia of the past and undertake long-overdue reforms. These should include broadening the tax base, making the tax regime fairer, more transparent and equitable, overhauling the power sector to reduce prohibitively high energy costs, and addressing wider governance failures. Such reforms are beyond the capacity of organizations like the SIFC, which operate through a top-down approach and lack the ability to address the intricate governance challenges spread across various economic sectors. What is required instead is a holistic, sustained and coordinated strategy, ideally overseen by a full-time inter-ministerial body headed by the prime minister himself, to restore investor confidence and place the economy on a durable growth path.