Pakistan’s improving external position and a somewhat stronger sovereign credit profile have yet to produce the investment response the country needs most for sustained economic growth: a meaningful increase in foreign direct investment.
The latest figures underline the disconnect. According to available estimates, net foreign direct investment declined by around 32 percent to $1.7 billion in FY26, despite an improvement in several macroeconomic indicators. The divergence raises an important question: if Pakistan’s macroeconomic position is becoming more stable, why are foreign investors still reluctant to commit greater amounts of capital to the country?
The question has become even more relevant following a recent meeting between a visiting International Monetary Fund delegation and office-bearers of the Overseas Investors Chamber of Commerce and Industry (OICCI), which represents multinational companies operating in Pakistan. The interaction highlighted an issue that policymakers have acknowledged repeatedly but have struggled to resolve: macroeconomic stabilisation is necessary to attract investment, but it is only the starting point.
For foreign investors, the actual business environment is shaped by what happens after capital enters the country. Regulatory and compliance requirements, taxation, energy availability, policy coordination and the predictability of government decisions all influence whether an investor expands operations, maintains existing investment or looks elsewhere for opportunities.
One of the clearest indications of the difficulties confronting foreign businesses came from another disclosure by the OICCI. Its member companies had around Rs102.8 billion in tax refunds pending as of August, comprising approximately Rs68 billion in income tax and Rs34.8 billion in sales tax.
For businesses, such amounts are not merely accounting entries. They represent working capital that could otherwise be used to maintain operations, purchase equipment, increase production, hire workers or finance expansion. When legitimate refunds remain unpaid for extended periods, companies are effectively deprived of funds that belong to them.
The issue becomes more serious because OICCI members include some of the country’s largest and most established multinational companies. These are not small businesses operating informally or companies without a significant history in Pakistan. If large foreign investors face prolonged delays in receiving legitimate tax refunds, the implications for the broader investment climate are difficult to ignore.
The government may continue to assure prospective investors that Pakistan is removing bottlenecks and improving the ease of doing business. But investors are likely to judge the environment by their actual experience rather than official assurances.
The refund issue is only one part of a much larger problem. Foreign companies operating in Pakistan have to assess the cumulative cost of doing business, including foreign exchange constraints that can complicate the repatriation of profits and dividends, frequent changes in tax and regulatory requirements, uncertainty over government policies, weaknesses in dispute resolution and concerns regarding the protection of intellectual property.
The quality of coordination among government institutions also matters. A process that requires approvals from several federal and provincial departments can become unnecessarily lengthy when agencies do not coordinate effectively. What may appear to be a routine administrative requirement to a government department can translate into substantial delays and additional costs for a business.
Such problems are particularly damaging in an environment where international investors have alternatives. Capital is mobile, and investors compare countries not only on the size of their markets but also on the predictability of regulations, availability of infrastructure, energy reliability, taxation and the ease with which profits can be transferred.
Energy remains another major concern. Pakistan’s recurring dependence on imported fuel has repeatedly exposed the economy to external shocks. The disruption surrounding the Iran-US conflict has once again highlighted the vulnerability created by dependence on imported energy.
The issue is not simply the availability of fuel during a crisis. Higher international prices immediately increase the import bill and raise transportation and production costs, while uncertainty over supplies can disrupt industrial activity. Pakistan has made repeated commitments to improving energy efficiency, conservation and the development of alternative sources, but the structural vulnerability remains.
The OICCI’s call for broadening the tax base during its meeting with the IMF delegation is equally significant. Foreign investors operating in the documented formal economy are already visible to the tax authorities. They file returns, maintain records and comply with regulatory requirements, yet many continue to wait for billions of rupees in refunds.
At the same time, substantial segments of the domestic economy remain either lightly taxed or outside the effective tax net. This creates a contradiction at the heart of Pakistan’s revenue strategy. A government seeking higher tax revenues cannot indefinitely depend on the same documented businesses for additional collections while failing to bring undertaxed sectors into the formal tax system.
Repeatedly increasing the burden on compliant companies can eventually weaken the very investment base that the country needs to expand.
The size of the OICCI refund backlog also raises a broader question: if a relatively limited group of major foreign-invested companies has more than Rs100 billion tied up in tax refunds, what is the total stock of refunds awaiting taxpayers across the country?
That figure would provide an important measure of the administrative efficiency of the Federal Board of Revenue. A tax system cannot be judged only by how much money it collects. Its credibility also depends on how efficiently it processes legitimate claims and honours its obligations to taxpayers.
This is particularly important as the government seeks to attract investment from Pakistani-American businesspeople and other overseas investors. Encouraging overseas Pakistanis and foreign companies to invest is understandably a policy priority, but investment decisions are ultimately determined by commercial considerations and confidence in institutions.
Pakistan cannot assume that foreign capital will come simply because the government asks investors to participate in the country’s economic development. Investors have choices, and those choices are increasingly global.
The country therefore needs to compete on the basis of a credible investment environment rather than investment conferences, assurances or incentive packages alone. Predictable policies, efficient regulatory institutions, reliable energy, a broader and fairer tax base, timely refunds, effective dispute resolution and protection of investment are all essential components of that environment.
Macroeconomic stability remains important because high inflation, external imbalances and exchange-rate instability can discourage investment. But stability is only the foundation. Investors ultimately need confidence that the rules will remain predictable, contracts and obligations will be respected, legitimate payments will not be unnecessarily delayed and government institutions will work with rather than against productive businesses.
The decline in FDI despite improvements in some macroeconomic indicators should therefore be treated as a warning rather than simply another statistic. Pakistan has spent considerable effort restoring external stability and rebuilding international confidence. The next challenge is to convert that stability into an environment in which investors actually want to commit capital for the long term.
The difference is crucial. It is relatively easy to invite investors to Pakistan. The harder task is to build an economic and institutional system that gives them sufficient confidence to stay, reinvest and expand.