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.

By Shakeel Ahmed Shah | December 2024


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.

Read More