Karachi
Barriers to Foreign Investment
Pakistan’s inability to attract substantial foreign investment is not merely a result of external global challenges but a reflection of its own systemic shortcomings.
Pakistan’s efforts to attract foreign investment have often been framed as ambitious and transformative, yet they have largely failed to yield tangible results. Despite offering incentives such as tax exemptions, regulatory carve-outs, and relaxed legal frameworks, the country continues to lag behind its regional peers in securing significant foreign direct investment (FDI). The government’s approach, while outwardly proactive, seems to overlook the structural and systemic barriers that keep investors at bay. This disconnect between policy intent and on-ground realities reveals more profound flaws in Pakistan’s investment narrative and strategy, necessitating a critical reassessment of the measures taken and the challenges at hand.
One of the most glaring shortcomings is the government’s reliance on short-term fixes rather than addressing long-term structural issues. By focusing on incentives like tax holidays or relaxed regulations, policymakers attempt to mask deeper inefficiencies that fundamentally deter investment. For example, in 2022, Pakistan attracted FDI worth around $1.45 billion—a sharp decline from $2.56 billion in 2017. Comparatively, neighbouring India brought in $83.6 billion in 2022, recorded by various financial monitoring sources, and even Bangladesh outperformed with $3.4 billion. This disparity underscores how Pakistan’s piecemeal approach fails to compete with regional markets that provide a more predictable and stable investment environment. Tax exemptions may reduce upfront costs for businesses. Still, they fail to address inefficiencies in tax administration, where only around 1% of the population pays income tax – which is around 4% of the workforce. Investors are not merely looking for temporary cost savings; they seek stable and transparent systems that minimize risks over the life cycle of their investments. Pakistan’s failure to overhaul its institutional framework undermines the credibility of its incentives, making them appear as superficial stopgaps rather than genuine reforms.
The persistent political instability in Pakistan is another critical factor that complicates its investment landscape. Lately, political instability has set a trend of frequent government change, often amid contentious circumstances, and each new administration tends to discredit or reverse the policies of its predecessor. For instance, foreign investors have expressed frustration over the frequent changes in energy and infrastructure policies, two sectors heavily reliant on FDI. In the case of the China-Pakistan Economic Corridor (CPEC), project implementation delays and contract term disputes have highlighted how political instability disrupts long-term investments. This cyclical disruption creates an environment where investors find it difficult to trust the continuity of rules and regulations. Moreover, the state’s inability to maintain consistency extends to its enforcement of agreements. According to the World Bank’s Ease of Doing Business Index 2020, Pakistan ranked 156th on the enforcement contracts indicator– with only little notches improved compared to previous years – showing a slow trend of improvement.
Economic volatility further exacerbates Pakistan’s investment challenges. High inflation and frequent currency devaluations have significantly eroded investor confidence. In 2023, inflation soared to around 30%, one of the highest rates globally, while the Pakistani rupee depreciated by nearly 25% against the US dollar. Such macroeconomic instability creates uncertainty for businesses relying on stable input costs and predictable returns. A report by UNCTAD in 2021 highlighted that currency fluctuations were one of the top concerns for foreign investors in Pakistan, who often see profits wiped out during repatriation. Asian countries like Bangladesh and Vietnam have managed to maintain relative economic stability, enabling them to attract consistent FDI inflows even during global downturns.
The regulatory environment in Pakistan is equally problematic. Despite government rhetoric about reducing red tape, businesses face significant bureaucratic hurdles and inconsistent application of laws. In a survey conducted by the Overseas Investors Chamber of Commerce and Industry (OICCI) in 2022, 68% of respondents cited regulatory uncertainty as a major obstacle to doing business in Pakistan. Corruption further compounds this problem. According to Transparency International’s Corruption Perceptions Index 2022, Pakistan ranked 133rd out of 180 countries, signalling widespread governance issues. These inefficiencies inflate operational costs, delay project approvals, and foster an unpredictable business climate. For instance, foreign companies in Pakistan’s energy sector have repeatedly raised concerns about delays in regulatory approvals, which can take years to resolve. Such inefficiencies are untenable in a competitive global market where investors prioritize speed and transparency.
Energy shortages and infrastructure deficiencies also pose substantial risks to investment. Although Pakistan has made strides in addressing its energy crisis, with projects under CPEC adding significant capacity, frequent power outages remain a reality. Moreover, industries faced an average of 8–12 hours of load-shedding daily. This directly impacts sectors such as manufacturing, where energy reliability is crucial. Furthermore, Pakistan’s logistics infrastructure ranks poorly compared to regional competitors. For industries reliant on efficient supply chains, such as electronics and textiles, Pakistan’s shortcomings act as a significant deterrent.
According to the Ease of Doing Business Index 2020, it takes an average of 1,071 days to resolve a commercial dispute in Pakistan, compared to just 496 days in India.
The skilled labour gap in Pakistan further restricts its ability to attract sophisticated investments. While the country boasts a young workforce, its education system has not equipped workers with the skills demanded by modern industries. According to the Global Competitiveness Report 2023, Pakistan ranked 134th out of 141 countries in terms of workforce skills. This poses a significant challenge for sectors like technology and advanced manufacturing, which require specialized expertise. By comparison, India produces approximately 1.5 million engineering graduates annually, offering a robust talent pool for high-tech industries. Investors who require skilled labour are thus more likely to choose markets where they can access the expertise needed to operate efficiently.
Finally, inefficiencies within Pakistan’s judicial system undermine its attractiveness as an investment destination. The slow resolution of disputes and weak enforcement of contracts deter companies from committing to long-term projects. According to the Ease of Doing Business Index 2020, it takes an average of 1,071 days to resolve a commercial dispute in Pakistan, compared to just 496 days in India. This judicial inefficiency delays operations and increases the cost of doing business, as companies must allocate resources for prolonged legal battles. Without a robust legal framework, investors hesitate to risk their capital in a market where their rights may not be adequately protected.
In conclusion, Pakistan’s inability to attract substantial foreign investment is not merely a result of external global challenges but a reflection of its systemic shortcomings. While the government has made commendable efforts to offer incentives, these measures are insufficient in the face of deep-rooted structural issues. Political instability, economic volatility, regulatory inefficiency, and a lack of skilled labour collectively create an environment of uncertainty and risk. Countries like Bangladesh, Vietnam, and India have outpaced Pakistan by addressing these core challenges, offering investors more stable and predictable conditions. If Pakistan is serious about reversing its fortunes, it must move beyond superficial fixes and implement comprehensive reforms to create a competitive and sustainable investment ecosystem. Without these changes, the country risks remaining underperforming in a region brimming with opportunities.
The writer is a development practitioner. He has done Master’s in Governance, Development and Public Policy from the Institute of Development Studies, University of Sussex and has also earned his Master’s in Philosophy of Humanities from the IIS London. He can be reached at shakeelahmedshah@yahoo.com
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