KARACHI: The State Bank of Pakistan (SBP) has identified 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.
The SBP, in its recent report on economy, has highlighted the impediments to Foreign Private Investment in Pakistan. According to report, security situation, legal system, property rights, and law & order situation are other crucial factors in attracting inward Foreign Direct Investment (FDI) and it is essential to address these issues to attract foreign investment in the country.
Foreign private investment comprises of Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI). Emerging economies, like Pakistan, prefer to attract FDI, which is of long-term and developmental nature.
Jul-Mar FDI up 14pc to $1.644bn YoY
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.
Additionally, these investments can provide local companies with access to international markets and bring diversification in the economy. However, FDI in Pakistan continues to trail behind the regional countries, despite a sizable market, strategic location, and untapped potential across various sectors.
In Pakistan, the report mentioned that, FDI has remained at about 1.0 percent of GDP per year (on average) 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.
A large share of FDI in recent decades has been concentrated in power, banking, telecom, and FMCGs, primarily serving domestic demand rather than boosting exports. Other private inflows have remained weak, lagging behind GDP growth and development needs, reducing Pakistan’s capacity to finance even a moderate current account deficit of 2-3 percent of GDP.
According to the SBP, the relevant literature points to several factors inhibiting investment flows to Pakistan including political and economic instability, high taxation and lack of adequate infrastructure.
The report said that frequent changes in government and policies discourage investors seeking long-term interests in the economy. This is particularly reflected by prevailing high economic policy uncertainty. Moreover, any disruption in economic reform process due to political transition also weakens investor confidence.
Earlier studies in this regard have highlighted that overall ease of doing business in Pakistan remains a challenge, specifically due to difficulties in registering businesses, securing permits, and enforcement of contracts and intellectual property rights. Additionally, high cost of complying with local regulations discourage foreign companies from entering the Pakistani markets.
In addition, Pakistan’s high tax rates, especially the corporate income tax compared to peer countries, along with frequent changes in tax policies, create uncertainty and deter long-term planning. Additionally, the absence of tax incentives for foreign investors in critical sectors reduces the country’s competitiveness in global markets.
On 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.
Copyright Business Recorder, 2025
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