Zafar Iqbal
Grim economic signals continue to unsettle markets, with recent reports warning that Pakistan’s investment-to-GDP ratio could slip below 13 percent in FY26. Both domestic investment and foreign direct investment (FDI) are declining sharply, reaching levels not seen in decades. Such a slide would mark a fresh low for an already capital-starved economy, raising serious concerns about growth, employment, and long-term economic stability.
The warning is particularly stark given that the ratio had already fallen to 13.1 percent in FY24, the weakest performance in fifty years. A modest recovery in the following fiscal year has done little to restore confidence. The government’s measures to attract investment, including the much-publicized 2023 Investment Policy, have so far failed to create the environment or momentum necessary to bring capital back into the economy.
Domestic investors are increasingly sidelined, foreign investors are scaling back, and established international businesses are steadily exiting Pakistan. Even leading domestic groups, particularly in the textile sector, are shifting investments overseas. Energy costs, driven by perennial mismanagement of the power sector, remain punitive, and persistently high interest rates further squeeze industrial margins.
The Investment Policy of 2023 had set ambitious targets, including raising the investment ratio to 20 percent. Today, however, this goal seems more aspirational than achievable. The fundamentals required to attract serious capital — political stability, policy certainty, rule of law, and security — remain well below global standards, discouraging both local and foreign investors.
Adding to the strain is a tax system that actively deters investment. Minimum taxation on turnover regardless of profitability, multiple withholding tax rates at different stages of business, and effective rates in some cases reaching 60 percent make reinvestment unviable. Investors are increasingly deterred from expanding operations in Pakistan, while FDI flows are redirected to safer, more predictable environments.
Security concerns exacerbate economic pressures. Rising terrorism, volatile borders, and erratic governance create an atmosphere of uncertainty, further limiting investor confidence. Confrontational politics have only intensified instability. While opposition parties bear some responsibility, the ultimate duty to maintain a stable environment rests with the government. On this front, Pakistan’s rulers are falling short, undermining efforts to revive investment.
The 2023 Investment Policy had also established the Special Investment Facilitation Council (SIFC) as a one-stop body to resolve investment hurdles. The idea was to cut bureaucratic red tape, coordinate federal and provincial efforts, and improve the ease of doing business. In reality, the stagnation of investment reflects deeper structural issues that a single facilitation body cannot resolve.
Systemic inefficiencies, elite capture, and distortions in taxation are compounded by governance challenges. Effective reform requires far-reaching measures: overhauling the power sector to reduce crippling energy costs, broadening and rationalizing the tax base, and ensuring transparent, predictable policies. Without these reforms, the investment environment will remain hostile.
Political stability is equally essential. Investors require assurance that policies will not shift unpredictably due to political crises. The government must actively manage political tensions and demonstrate credible commitment to reform. Until that happens, both domestic and foreign capital will continue to exit, eroding the country’s economic prospects.
The consequences of continued stagnation are severe. A declining investment-to-GDP ratio affects growth, job creation, and fiscal sustainability. It also limits Pakistan’s ability to attract technology, create industrial clusters, and participate competitively in global supply chains. A failure to reverse this trend could set back economic development by years, undermining the livelihoods of millions.
In summary, Pakistan’s investment crisis is rooted in structural economic weaknesses, policy mismanagement, and political instability. The government’s 2023 Investment Policy, though well-intentioned, has failed to address the fundamental challenges investors face. High energy costs, punitive taxation, security concerns, and weak governance all combine to deter both domestic and foreign investment.
Reviving investment requires a comprehensive approach: systemic reforms in taxation and energy, credible political stability, and adherence to predictable policy frameworks. Without decisive action, the economy risks further capital flight, slower growth, and increased unemployment. The current trajectory highlights the urgent need for bold, coherent strategies that prioritize investor confidence while ensuring long-term economic stability.
The clock is ticking. Unless policymakers summon the political will to undertake wide-ranging reforms, Pakistan’s ambitious investment targets will remain out of reach, and the country’s economic future will continue to face uncertainty.
