Pakistan’s FDI puzzle

M Abdul Aleem

Publishing date: 06 January 2026

Published in: Business Recorder

Pakistan’s economy appears to be moving towards a more stable footing. Inflation has notably eased since the peak of 38 percent in 2023, the exchange rate has steadied, and the government’s engagement with international financial institutions has reassured many observers that the worst of the macroeconomic turbulence may be behind us.

According to OICCI’s Perception and Investment Survey 2025, over 70 percent of foreign investors are willing to recommend Pakistan for future FDI, a sign of renewed confidence in the country’s economic potential with the country’s risk profile also improving where high-risk perception has fallen from 54 percent to 44 percent, and medium-risk perception has risen to 51 percent.

Yet, despite this apparent improvement, investment, both domestic and foreign, continues to lag particularly when Pakistan should be attracting at least 3 percent of GDP in FDI annually to support sustainable growth, industrial expansion, and long-term economic resilience.

The question that needs an answer is: why are investors still hesitant?

The reality is that economic stability alone is not enough to convince investors. For both local and foreign businesses, perception matters as much as policy. As per OICCI’s latest Perception and Investment Survey, 82 percent of investors believe that negative perceptions about Pakistan significantly influence investment decisions. Unfortunately, the country’s image as an investment destination continues to suffer from recurring episodes of uncertainty. Each time a negative headline surfaces such as the IMF seeking clarity over an $11 billion trade data gap, the controversy surrounding K-Electric’s revised tariff decision, or geopolitical uncertainty, it unnecessarily affects investor confidence and undermines the credibility painstakingly built through economic reforms.

For international investors, such developments are major red flags. They raise doubts not only about governance but also about transparency and data reliability. In today’s interconnected world, perceptions can spread quickly and influence decisions far beyond our borders. To address this challenge, the government must now complement economic reforms with a structured and proactive global communication strategy aimed at improving Pakistan’s image.

The recent exit of some multinational companies (MNCs) is a case in point. These departures sparked debates in many circles, but they should not come as a surprise. MNCs do not make such decisions overnight. Their strategies are informed by long-term analyses, performance trends, and country risk assessments. The sharp currency depreciation during 2022–23, following several earlier devaluations, has significantly eroded Pakistan’s market size in dollar terms. From a global perspective, every devaluation of Pakistani rupee makes the country a less attractive market compared to peers in the region.

To put it simply, what may look like growth in rupees often translates into stagnation or decline in dollars as MNCs assess markets in dollar terms. When combined with other concerns such as policy inconsistency, heavy taxation, and complex regulatory frameworks, the decision to continue operations becomes decreasingly attractive.

In addition, international investors evaluate broader indicators: where the country stands on key international indices like the B-Ready index, how predictable its tax and regulatory systems are, and whether intellectual property rights are effectively protected. Unfortunately, Pakistan’s performance in these areas remains below expectations. For investors who plan decades ahead, policy unpredictability is among the biggest deterrents.

None of this is to deny that the government has made genuine efforts to improve the business environment. Initiatives such as the Special Investment Facilitation Council (SIFC), fiscal reforms, and efforts to digitize regulatory processes are steps in the right direction. However, the challenge lies in implementation and continuity. Policies must remain consistent beyond political cycles, and decisions should not fluctuate with changing circumstances or leadership.

Taxation policies and rates must be revisited to align with Pakistan’s investment ambitions and regional competitiveness. We are encouraged by the recent statement in the print media outlining the government’s vision to rationalize income tax rates, improve the ease of doing business, and position Pakistan as an industrial hub driven by job creation, export enhancement, and import substitution. However, this vision cannot be realized without addressing long-standing distortions that are actively discouraging investment. A key example is the refinery sector, where unresolved taxation issues, particularly the inability to claim input tax adjustments because petroleum products are not treated as taxable supplies, have stalled projects worth billions of dollars.

There also needs to be a deliberate move away from excessive regulatory controls towards a more market-driven environment. Allowing prices to be shaped by supply and demandrather than rigid administrative interventions is essential for creating a healthy, competitive economy. The pharmaceutical sector is a clear example: years of over-regulation constrained its growth, yet the recent steps taken under the SIFC to ease pricing controls have shown how even limited deregulation can restore stability and improve sector performance. This experience reinforces a broader lesson: when the government steps back from unnecessary oversight and focuses instead on enabling fair competition, both local and foreign investors gain the confidence to expand, innovate, and contribute more meaningfully to the economy.

The path forward is clear but requires discipline, policy consistency, institutional strengthening, and a credible commitment to reforms. Long-term stability cannot be achieved through ad hoc measures; it requires sustained governance and predictable policy frameworks.

Pakistan’s regional trade remains severely constrained, largely due to geopolitical tensions and difficult relations with some neighboring countries. Despite being situated at the crossroads of South Asia, Central Asia, and the Middle East, one of the world’s most strategically valuable trade corridors, Pakistan is unable to fully benefit from its geography. Hostile or strained ties with key neighbours have restricted market access, disrupted trade routes, and limited the flow of goods across borders. As a result, Pakistan’s share of regional trade remains among the lowest in Asia, depriving the economy of billions of dollars in potential exports, scale efficiencies, and supply-chain integration.

Having said that, Pakistan has all the ingredients for success. A young and dynamic population, a growing consumer base, and a strategic location at the crossroads of major trade routes. What it needs is the confidence of its investors, both local and international. That confidence will come not through promises, but through actions that demonstrate reliability, transparency, and fairness.

Macroeconomic stability is a vital first step, but it is only the beginning. For Pakistan to convert stability into sustainable growth, it must focus on consistency, credibility, and competition. These are the pillars that will determine whether investors view Pakistan as a temporary opportunity or a long-term partner in growth.