The State Bank of Pakistan (SBP) has identified key challenges hindering the country’s ability to attract foreign direct investment (FDI), including political and economic instability, high taxation, and inadequate infrastructure.
These persistent issues are eroding investor confidence, making it difficult for Pakistan to secure long-term international capital, despite its market potential and strategic location.
In its latest economic report, the SBP highlighted the impediments to foreign private investment in Pakistan. The report pointed out that the country’s security situation, legal system, property rights, and law and order issues are significant barriers to foreign investment.
Addressing these factors is seen as crucial for attracting and retaining FDI, which is vital for economic growth and development.
The report emphasized that while FDI can bring much-needed capital, create jobs, and enhance productivity through advanced technologies, Pakistan has struggled to capture significant foreign investment. Over the past decade, FDI has averaged just 1.0% of GDP per year, which is less than half of the average for Emerging Market and Developing Economies (EMDEs) at 2.7%.
The majority of FDI inflows in recent years have been concentrated in sectors such as power, banking, telecommunications, and fast-moving consumer goods (FMCGs), primarily serving domestic demand rather than boosting exports. This trend has limited the broader economic impact of FDI, reducing Pakistan’s ability to finance its current account deficit, which typically ranges between 2-3% of GDP.
The SBP’s report pointed to several factors that continue to deter investment, including political and economic instability, a burdensome tax regime, and infrastructure shortcomings. Frequent changes in government and policies create uncertainty for investors seeking long-term stability.
Additionally, disruptions in the economic reform process, especially during political transitions, further diminish investor confidence.
Pakistan also struggles with an unfavorable business climate, particularly in areas like business registration, securing permits, and enforcing contracts and intellectual property rights. High compliance costs, coupled with frequent changes in tax policies, discourage foreign companies from entering the market. Furthermore, the lack of tax incentives for foreign investors in key sectors undermines Pakistan’s competitiveness in global markets.
On the infrastructure front, Pakistan’s underdeveloped transport, energy, and communication networks limit industrial growth and reduce operational efficiency. Inefficiencies at ports and logistics further hamper export competitiveness, while Pakistan’s digital infrastructure lags behind that of its regional peers, creating additional challenges for businesses seeking to operate in the country.
