According to the latest figures released by the State Bank of Pakistan, foreign direct investment (FDI) declined by a sharp 43 percent during July–December 2025. This represents a further deterioration compared to data released earlier by the Finance Division in its monthly report for December, which showed FDI of USD 927.4 million during July–November 2025, against USD 1,242.4 million in the comparable period of the previous year — a decline of 34 percent.
Portfolio investment also remained deeply negative, registering minus USD 613.8 million during July–November 2025, compared to a positive USD 148.7 million in the same period of 2024, highlighting sustained capital outflows.
Questions are therefore rightly being asked about why this trend persists, particularly when memoranda of understanding worth nearly USD 25 billion have reportedly been signed between Pakistan and various countries over the past three years. Foreign Direct Investment is widely regarded as a lifeline for developing economies, as it brings not only capital but also technology transfer, employment generation, managerial expertise, and access to global markets. Despite its strategic geographic location, abundant human resources, and a large domestic consumer market, Pakistan continues to struggle in attracting meaningful, diversified, and sustained FDI inflows. By contrast, regional peers such as India and Bangladesh have been far more successful in drawing foreign investment. This persistent shortfall raises a fundamental and troubling question: why is foreign investment increasingly bypassing Pakistan?
One of the primary reasons is chronic political instability. Frequent changes in government, abrupt policy reversals, and confrontational politics create an environment of uncertainty for investors, who are generally risk-averse and value predictability above all else. Long-term investments, particularly in manufacturing and infrastructure, require confidence that the rules of the game will not change midway—something Pakistan has consistently failed to guarantee over many years.
Closely linked to political instability is policy inconsistency. Economic policies in Pakistan often shift with every new administration, and sometimes even within the same government. Sudden changes in tax regimes, import-export regulations, and investment incentives seriously undermine investor confidence and increase perceived risk. In contrast, countries that attract steady FDI flows maintain policy continuity regardless of political transitions.
Macroeconomic instability is another major deterrent. Persistently high inflation, recurring balance-of-payments crises, rapid currency depreciation, and repeated reliance on IMF bailout programs signal deep-rooted structural weaknesses in the economy. For foreign investors, these indicators translate into heightened financial risk, exchange-rate uncertainty, and unpredictable returns on investment.
Additionally, energy shortages and infrastructure bottlenecks continue to inflate the cost of doing business. Although some progress has been made in recent years, unreliable power supply, high energy tariffs, inadequate transport networks, and logistical inefficiencies discourage manufacturing, export-oriented, and value-added investments.
Pakistan’s complex and cumbersome regulatory environment further compounds the problem. Excessive bureaucracy, overlapping authorities, unclear mandates, and time-consuming approval processes make it difficult for foreign firms to operate effectively and efficiently. Weak contract enforcement mechanisms and slow judicial processes also raise serious concerns about legal protection and timely dispute resolution.
Moreover, corruption and broader governance challenges remain persistent obstacles. Perceptions of corruption, lack of transparency, and discretionary decision-making increase operational costs and deter investors who seek a level playing field. Coupled with a generally negative international image, Pakistan is often viewed as a high-risk destination, regardless of its immense untapped potential.
Needless to say, on the external front Pakistan faces a formidable challenge, and the time has come to adopt meaningful remedial measures to improve the situation. Reversing the current negative trend requires far more than short-term incentives or ad hoc announcements. Pakistan must focus on deep structural reforms and building long-term credibility. Political stability and cross-party consensus on core economic policies are essential to restoring investor confidence. Simplifying regulations through digitization, transparency, and effective one-window operations can significantly improve the ease of doing business.
Strengthening macroeconomic fundamentals by controlling inflation, reducing fiscal and current-account deficits, and ensuring exchange-rate stability is equally critical. Strategic investments in energy, transport, and industrial infrastructure—particularly through fully functional Special Economic Zones—can enhance competitiveness. Targeted incentives for priority sectors, tax holidays, and credible guarantees for profit repatriation can help attract initial investors. Leveraging diaspora networks and regional ties through focused outreach to Pakistani communities abroad and neighboring markets could also yield positive results.
Equally important is improving law and order, protecting property rights, and ensuring swift contract enforcement through specialized commercial courts. It has been observed that in many instances foreign investors have had to resort to international arbitration to resolve disputes, which acts as a serious deterrent for prospective investors. In this context, the Special Investment Facilitation Council can play an important role by taking timely cognizance of complaints and failures to respond to the concerns of existing foreign investors. At the same time, Pakistan must engage in proactive economic diplomacy to improve its global image and effectively highlight investment opportunities in sectors such as information technology, renewable energy, agriculture, and value-added manufacturing.
Pakistan’s failure to attract adequate FDI is not due to a lack of resources or opportunity, but rather to persistent governance, policy, and credibility shortcomings. With sustained reforms, political maturity, and a firm commitment to economic stability, Pakistan can still reposition itself as a credible and attractive destination for foreign investment. It is indeed a race against time, and Pakistan cannot afford to lose this race.