Zafar Iqbal
The numbers are stark and they tell a story the government has been reluctant to acknowledge. Foreign Direct Investment into Pakistan has fallen by 51 percent in the first seven months of the current fiscal year, dropping from USD 1,429 million in July-January 2024-25 to a mere USD 694 million in the same period this year. This is not a blip or a seasonal fluctuation. It is a trend that has been building, and the latest data from the State Bank of Pakistan simply confirms what many economists have long feared.
The picture was already troubling before this latest release. The Pakistan Bureau of Statistics, in its January 2026 Update and Outlook, had recorded a 43 percent decline in FDI for the July-December period alone, from USD 1,424.8 million to USD 808.1 million. The slight discrepancy between PBS and SBP figures is a minor statistical footnote. The broader message is the same: foreign capital is retreating from Pakistan at an accelerating pace.
What makes this collapse particularly alarming is that it is happening alongside equally disturbing movement in portfolio investment. Foreign portfolio flows, already in negative territory, fell further from negative USD 221.8 million to negative USD 225.1 million over the same July-December comparison period. This is happening despite Pakistan maintaining one of the highest discount rates in the entire region, currently at 10.5 percent. For context, both China and India operate at less than half that rate. A high discount rate is typically a powerful magnet for portfolio investors seeking yield. That it is failing to attract capital in Pakistan’s case speaks volumes about how deep the confidence crisis actually runs, regardless of whatever optimistic commentary occasionally surfaces about the domestic stock exchange.
The central question must be asked directly: why is investment declining when the state has visibly and energetically committed itself to attracting it? The Special Investment Facilitation Council was established with considerable fanfare, bringing together the highest civilian and military leadership at both federal and provincial levels, all oriented toward removing obstacles and rolling out the red carpet for foreign investors. Pakistan’s evolving geopolitical position has added another dimension, with the country’s status as the sole nuclear Muslim state drawing renewed security interest from regional players recalibrating their alignments in a multipolar world.
The answer is both simple and uncomfortable. Investment decisions are not made on the basis of security calculations. Governments may sign strategic partnerships and defence cooperation agreements for reasons entirely disconnected from economics. But a private investor, whether foreign or domestic, makes decisions based on one thing above all others: the risk-return calculation. And on that calculation, Pakistan continues to fall short.
Political instability remains a persistent variable that investors cannot price away. But it is economic fragility that sits at the heart of the problem. Pakistan’s foreign exchange reserves stand at approximately USD 16 billion, a figure that sounds reasonable until it is examined more carefully. That total is less than the annual interest obligation on the country’s accumulated external debt. More than USD 12 billion of those reserves consist of rollover deposits from three friendly countries, renewed on an annual basis through diplomatic arrangements rather than earned through economic performance. The remainder has also been borrowed, from multilateral institutions, bilateral lenders, and commercial sources. These are not reserves in any meaningful sense of the word. They are borrowed time.
The trade deficit persists, partially masked by remittance inflows from the Pakistani diaspora, but those remittances are not a substitute for a productive, export-oriented economy generating its own foreign exchange. They are a social safety valve, not a development strategy.
The policy framework within which all of this is unfolding compounds the problem further. The government is implementing severely contractionary monetary and fiscal policies under its IMF programme. These policies were designed to stabilise the macroeconomic situation, and to some degree they have succeeded in that narrow objective. But stabilisation is not growth, and anti-inflationary contraction is not investment attraction. The power sector continues to haemorrhage resources, borrowing heavily to retire circular debt while passing the interest burden directly onto consumers through elevated tariffs. The tax system remains structurally regressive, leaning on indirect taxes whose burden falls disproportionately on ordinary citizens rather than on those with the capacity to pay.
What is absent from the current policy architecture is equally telling. There is no serious programme of structural reform that would address the deep inefficiencies keeping the cost of doing business in Pakistan prohibitively high. There is no credible plan to reduce the current expenditure that crowds out productive investment in public goods and infrastructure. The SIFC, for all its institutional novelty and high-level representation, cannot compensate for an economy whose fundamentals remain fragile and whose policy environment remains hostile to sustained growth.
Foreign investors are not irrational actors. They read the same data that economists do. They see an economy dependent on rollovers, burdened by circular debt, running on indirect taxation, and governed by policies that compress demand rather than stimulate production. Security relationships and diplomatic goodwill open doors to conversations. They do not close investment deals.
Until Pakistan undertakes the structural reforms necessary to genuinely reduce risk, lower the cost of doing business, build credible and independent institutions, and shift the tax and expenditure mix toward equity and growth, the FDI trajectory will continue its downward path. The 51 percent decline is not a surprise. It is a verdict.
