The inflow of FDI into Pakistan has always been meagre and much below expectation. The latest figures show a declining trend. According to the State Bank of Pakistan (SBP), net FDI for the month stood at $194 million, marking a 37 percent decline compared to May 2024, when it had reached $307 million. The dip has naturally raised concern over investor confidence in the face of current economic challenges.
Over the first eleven months of FY25 (11MFY25), the country attracted $1.979 billion in net FDI, a 7.5 percent decrease from the $2.142 billion recorded during the same period in FY24. The monthly net FDI trend from May 2024 to May 2025 shows a volatile pattern. While gross inflows during 11MFY25 remained relatively resilient at $2.893 billion (compared to $2.922 billion in 11MFY24), the increase in outflows—rising to $914 million from $780 million—eroded the overall net gains.
It is relevant to mention here that foreign private investment comprises Foreign Portfolio Investment (FPI) and FDI. Emerging economies, like Pakistan, prefer to attract FDI, which is of long-term and developmental nature. FDI offers numerous advantages such as providing much-needed capital, facilitating infrastructure development, and creating job opportunities in host countries. FDI often brings advanced technologies and expertise that enhance productivity and force competition in the domestic market. However, FDI inflow into Pakistan continues to trail behind the regional countries, despite its strategic location, and immense economic potential.
In Pakistan, the power sector attracts the largest FDI inflows. It attracted $945 million in gross inflows and recorded $562.8 million in net FDI over 11MFY25, though this was lower than the $613.2 million in the same period last year. Within the power sector, hydel power remained the top sub-segment, with $405.2 million in net inflows. Financial businesses received $628.9 million in net FDI, up from $570.4 million in 11MFY24, while oil and gas exploration saw net inflows of $320.8 million, marginally lower than the $326 million seen last year. The communications sector reported a net outflow of $69.1 million, largely due to significant repatriation from the telecom sector. China is Pakistan’s largest investor, with $790.4 million in net inflows during 11MFY25—up from $598.6 million last year. The United Kingdom, Hong Kong, and Switzerland followed with inflows ranging from $178 million to $229 million.
Experts identify political and economic instability, high taxation and inadequate infrastructure as major obstacles to attracting foreign direct investment in the country. These fundamental issues continue to erode investor confidence, making it difficult for the country to attract and retain long-term international capital despite its strategic location and market potential.
According to a recent report by the SBP, there are serious impediments to the inflow of Foreign Private Investment in Pakistan, including the security environment, legal system, property rights, and law and order are other crucial factors in attracting Foreign Direct Investment (FDI) and it is essential to address these issues to attract foreign investment in the country. Additional factors are political and economic instability, high taxation rates and lack of adequate infrastructure. Frequent changes in government and policies discourage investors seeking long-term interests in the economy. Pakistan scores low in the ease of doing business index, specifically due to difficulties in registering businesses, securing permits, and enforcement of contracts and intellectual property rights. Additionally, high costs of complying with local regulations discourage foreign companies from entering the Pakistani markets.
Pakistan’s tax rates are high, especially the corporate income tax compared to other countries. Frequent changes in tax policies create uncertainty. The absence of tax incentives for foreign investors in critical sectors reduces the country’s competitiveness in global markets. On the infrastructure side, Pakistan’s transport, energy, and communication networks are underdeveloped, hindering industrial growth and operational efficiency. Inefficiencies at ports and in logistics also affect export competitiveness. Similarly, Pakistan also ranks low on digital infrastructure vis-a-vis peer countries.
In Pakistan, FDI has hovered at about 1.0 percent of GDP per year in the last decade, which is less than half of the Emerging Market and Developing Economies (EMDEs) average of 2.7 percent on average, per year. The government is working to attract foreign investors by establishing the Special Investment Facilitation Council for this purpose. However, the results have remained almost negligible.
Increasing Foreign Direct Investment (FDI) into Pakistan requires a comprehensive, consistent, and investor-friendly policy framework. To improve political and economic stability, we need to ensure policy continuity regardless of government changes, strengthen democratic institutions and rule of law, and maintain stable macroeconomic indicators. Secondly, there is an urgent need to develop infrastructure and industrial zones under the CPEC with investor incentives, and improve transport and energy reliability. At the same time, for investors one-window operation should be launched and investor protection laws should be enforced to ease dispute resolution.