Karachi: Chief reasons hindering FDI include persistent political and economic instability, high taxation levels, and inadequate infrastructure.
The State Bank of Pakistan (SBP), in its latest economic report, has identified several critical barriers impeding the flow of Foreign Direct Investment (FDI) into the country.
These structural issues continue to undermine investor confidence, making it difficult for Pakistan to attract and sustain long-term foreign investment, despite its advantageous geographical location and significant market potential.
The report sheds light on broader impediments to Foreign Private Investment, which includes both Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI).
For emerging economies like Pakistan, FDI is particularly valuable due to its long-term, developmental characteristics.
FDI not only supplies essential capital but also supports infrastructure development, generates employment, and introduces advanced technologies and global expertise, all of which enhance domestic productivity and competitiveness.
Moreover, FDI facilitates the integration of local businesses into international value chains and promotes economic diversification.
However, Pakistan’s performance in attracting FDI continues to lag behind regional peers.
This is despite having a sizeable population, strategic trade routes, and untapped potential in sectors such as agriculture, manufacturing, and services.
The report states that over the past decade, FDI inflows in Pakistan have averaged only around 1.0 percent of GDP annually, significantly lower than the Emerging Market and Developing Economies (EMDEs) average of 2.7 percent.
Fast-moving consumer goods
Notably, most of the FDI received has been concentrated in sectors like power, telecommunications, banking, and fast-moving consumer goods (FMCGs), which primarily cater to domestic demand rather than contributing to export growth or broader economic diversification.
The SBP identifies a combination of long-standing and emerging challenges that restrict investment inflows. Among them, the most pressing is political instability.
The frequent turnover of governments and shifts in policy direction contribute to economic uncertainty, which discourages foreign investors from committing to long-term projects.
Interruptions in economic reform programs during political transitions further deteriorate investor sentiment.
Legal and regulatory deficiencies also pose substantial hurdles.
The report emphasizes that weak rule of law, inconsistent enforcement of contracts, and unresolved issues surrounding property and intellectual property rights significantly increase operational risks for foreign investors.
Regulatory frameworks
Difficulties in registering businesses, obtaining permits, and complying with regulatory frameworks compound the problem, making Pakistan a less attractive destination for international capital.
Taxation is another major deterrent.
Pakistan’s corporate income tax rate is comparatively high when measured against peer countries, and frequent changes in tax laws contribute to unpredictability in the investment climate.
Additionally, the absence of sector-specific tax incentives further limits Pakistan’s appeal, especially in areas with high investment potential such as information technology, manufacturing, and renewable energy.
On the infrastructure front, Pakistan continues to face significant shortcomings. Underdeveloped transportation, energy, and communication systems restrict industrial productivity and raise the cost of doing business.
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Inefficiencies in port operations and logistics networks weaken export competitiveness.
Furthermore, Pakistan’s digital infrastructure lags behind comparable economies, limiting opportunities in the fast-growing digital and technology-driven sectors.
The SBP underscores that these challenges need to be addressed through comprehensive structural reforms.
Enhancing political and macroeconomic stability, reforming the legal and regulatory environment, streamlining tax policy, and investing in modern infrastructure are essential steps for reversing the downward trend in FDI.
Improving the ease of doing business, offering targeted tax incentives, and ensuring policy continuity are critical to restoring investor confidence and unlocking Pakistan’s investment potential.
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By implementing these reforms, Pakistan can create a more enabling environment for foreign investors, attract greater levels of long-term investment, and support sustainable economic growth through increased productivity, exports, and job creation.
