Zafar Iqbal
Numbers rarely lie, even when governments prefer that they would. The State Bank of Pakistan’s latest data delivers a verdict that no amount of official optimism can soften: Foreign Direct Investment collapsed by 51 percent in the July-January period of the current fiscal year, falling from USD 1,429 million to a damaging USD 694 million compared to the same period last year. This is not a blip or a seasonal anomaly. It is the continuation of a deteriorating pattern that reveals, with uncomfortable clarity, the growing distance between Pakistan’s investment narrative and Pakistan’s investment reality.
The Pakistan Bureau of Statistics had already flagged the alarm in its January 2026 Update and Outlook, recording a 43 percent decline in FDI for the July-December window — from USD 1,424.8 million to USD 808.1 million. Minor discrepancies between PBS and SBP figures aside, the direction is unambiguous. Foreign capital is retreating from Pakistan, and it is doing so at a pace that demands far more honest diagnosis than Islamabad has so far been willing to offer.
What makes this decline particularly troubling is that it is happening despite what the government presents as an unprecedented institutional commitment to attracting foreign investment. The Special Investment Facilitation Council, established with considerable fanfare, represents perhaps the most ambitious structural attempt Pakistan has made to signal investor-friendliness. It brings together the highest civilian and military leadership at both federal and provincial levels under a unified framework specifically designed to cut through bureaucratic obstruction and deliver seamless facilitation to prospective investors. On paper, the architecture is impressive. In practice, the capital is not coming.
Portfolio investment tells an equally dispiriting story. Foreign portfolio flows, which are typically sensitive to interest rate differentials and market confidence, moved from negative USD 221.8 million in July-December 2025 to negative USD 225.1 million in the same period this year. Pakistan offers a discount rate of 10.5 percent, roughly more than double the rates prevailing in China and India. By conventional logic, that should make Pakistan a magnet for yield-seeking portfolio investors. The fact that it is not suggests the risk premium attached to Pakistan’s economy is simply overpowering the interest rate incentive. Investors are pricing in something beyond the headline yield, and what they are pricing in is instability.
The government’s narrative attempts to compensate for these disappointing numbers by pointing to shifting geopolitical realities. The emergence of a multipolar world order, the growing international discomfort with unchecked Israeli military action backed by Washington, and the subsequent interest from key regional powers in cultivating security partnerships with Pakistan — the only nuclear-armed Muslim state — are cited as strategic advantages that should translate into investment flows. This reasoning conflates two fundamentally different categories of decision-making. A government that fears a security threat may well seek a defence partnership with Pakistan. That same government, or its private sector, will not automatically direct capital toward Pakistan simply because a security agreement exists. Investment decisions follow a separate logic entirely, one governed by risk perception, economic fundamentals, regulatory predictability, and institutional credibility. Security relationships and investment relationships are not the same thing, and treating them as interchangeable is a category error with serious policy consequences.
The deeper problem is that Pakistan’s economic fundamentals continue to undermine whatever confidence diplomatic choreography might generate. The country’s foreign exchange reserves stand at approximately USD 16 billion, a figure the government regularly cites as evidence of stabilisation. What it mentions less readily is that this sum is less than the annual interest payable on Pakistan’s accumulated external debt. More critically, over USD 12 billion of those reserves consist of rollovers from three friendly countries, renewed on an annual basis through diplomatic negotiation rather than earned through economic performance. The remaining reserves are similarly borrowed from multilateral institutions, bilateral partners, and commercial lenders. Pakistan’s reserve position is therefore not a sign of economic health but a testament to its vulnerability, dependent at every point on the continued goodwill of creditors and allies who could, under different circumstances, choose not to renew.
Pakistan carries a persistent trade deficit. Remittances from overseas workers have grown significantly and provide crucial foreign exchange earnings, but they are not sufficient to close the gap entirely. The economy relies structurally on inflows it does not earn through domestic productivity, which is precisely the kind of arrangement that rational foreign investors read as a warning sign rather than an opportunity.
Compounding all of this is the framework of economic management Pakistan has adopted under its International Monetary Fund programme. The contractionary monetary and fiscal policies agreed with the Fund are, by design, anti-growth in the short to medium term. They are intended to stabilise the macro picture, reduce fiscal imbalances, and bring inflation under control. These are legitimate objectives, but they are pursued at considerable cost to economic activity, domestic demand, and investor confidence. A shrinking economy does not attract expanding capital.
The energy sector continues to hemorrhage resources. Power distribution companies borrow vast sums to service the circular debt, a structural liability that is ultimately passed on to consumers through higher tariffs, raising the cost of doing business across every sector. The taxation system remains heavily reliant on indirect taxes whose burden falls disproportionately on lower-income groups, neither distributing economic participation fairly nor building the domestic consumer base that would make Pakistan’s market more attractive to investors seeking long-term returns.
Pakistan’s political environment has been chronically unstable, cycling through crises, judicial controversies, civil-military tensions, and institutional confrontations that make long-term planning — the foundation of serious investment — a precarious exercise. No investor committing capital for five or ten years can feel secure when the political ground shifts unpredictably beneath them.
The 51 percent decline in FDI is not a puzzle requiring exotic explanation. It is a rational response by global capital to a Pakistani economy that remains fragile, politically volatile, fiscally dependent, and structurally unreformed. Until Islamabad addresses these realities with genuine structural reform, meaningful reduction in the bloated current expenditure, and an honest reckoning with the distance between its stated ambitions and its actual economic condition, no amount of facilitation councils or high-level diplomatic engagement will reverse this trend. Foreign investors do not respond to architecture. They respond to fundamentals.
