Zafar Iqbal
Grim economic signals are now arriving with worrying regularity, and few are more alarming than the latest warnings about Pakistan’s collapsing investment levels. Recent reports suggest that the investment-to-GDP ratio may fall below 13 percent in FY26, driven by a sharp slowdown in both domestic investment and foreign direct investment. If this happens, it will mark yet another historic low for an economy that has long struggled with capital scarcity and weak investor confidence.
This warning is particularly troubling because the investment ratio had already fallen to 13.1 percent in FY24, the weakest performance in half a century. At the time, that figure triggered serious debate among policymakers, economists, and business leaders. While a modest recovery appeared in the following year, it is now clear that the measures adopted by the government have failed to address the underlying problems. Investor confidence has not returned. Domestic investors remain cautious, foreign investors are retreating, and several long-established multinational companies are steadily exiting the market.
The implications of this decline are severe. Investment is the engine of economic growth. Without sustained capital formation, productivity stagnates, job creation slows, and long-term economic stability comes under threat. A falling investment ratio signals not just short-term stress but a deeper structural weakness that undermines the country’s future growth prospects.
At the heart of this failure lies the much-publicised Investment Policy of 2023. When it was announced, the policy promised to reverse years of decline and place Pakistan on a higher growth path. Its most ambitious target was to raise the investment-to-GDP ratio to 20 percent. Today, that goal no longer appears ambitious or optimistic. It appears unrealistic. The policy has failed to generate momentum, failed to reassure investors, and failed to change the risk perception surrounding Pakistan’s economy.
The reasons for this failure are neither hidden nor complicated. Capital, by its nature, avoids uncertainty. Investors seek environments that offer political stability, predictable policies, strong legal protections, and reasonable security. Unfortunately, Pakistan continues to fall short on all these counts. The political environment remains volatile, policy decisions are often reversed or inconsistently implemented, and concerns about law and order persist. In such circumstances, expecting a surge in investment is unrealistic.
Domestic investors, who should ideally be the backbone of economic growth, are increasingly unwilling to expand capacity or reinvest profits. Many prefer to hold cash, invest in real estate, or move capital abroad rather than commit funds to productive sectors. This hesitation reflects a lack of trust in economic management and a fear that sudden policy changes, tax shocks, or energy price hikes could wipe out returns.
Foreign investors face similar concerns, compounded by currency volatility and difficulties in repatriating profits. As a result, foreign direct investment has fallen to levels not seen in decades. Even more concerning is the steady exit of established foreign firms that had operated in Pakistan for years. These companies understand the local market and have already absorbed initial entry costs. When such firms choose to leave, it sends a powerful negative signal to global investors.
The textile sector offers a clear illustration of this trend. Several leading Pakistani textile groups have shifted new investment to other countries, particularly in regions offering cheaper and more reliable energy. In Pakistan, energy costs remain punishingly high, largely due to chronic mismanagement of the power sector. Capacity payments, inefficient distribution companies, and poorly negotiated contracts have pushed electricity prices to levels that make industrial production uncompetitive.
High interest rates have further squeezed businesses. While tight monetary policy may be justified to control inflation, its prolonged continuation has made borrowing prohibitively expensive. For investors, this combination of high energy costs and high financing costs makes long-term investment financially unattractive.
The tax system adds another layer of discouragement. Pakistan’s taxation structure relies heavily on minimum taxes imposed on turnover, regardless of whether a business is profitable. Multiple withholding taxes apply at various stages of production and trade, increasing compliance costs and tying up working capital. In some cases, the combined tax burden approaches 60 percent, a level that actively discourages reinvestment and pushes firms toward informality or relocation.
Such a tax regime sends a clear message to investors: growth and expansion will be penalised, not rewarded. It also undermines the very objective of broadening the tax base, as businesses seek ways to reduce exposure rather than scale up operations.
Beyond economic policy, broader security and governance issues continue to weigh heavily on investor sentiment. Rising incidents of terrorism, instability along borders, and uneven enforcement of law all increase perceived risk. Investors do not require perfection, but they do require a basic sense of safety and predictability. When headlines regularly highlight security concerns and administrative dysfunction, caution becomes the rational response.
Political instability has further compounded these challenges. Confrontational politics, prolonged disputes, and a climate of constant tension have created an environment in which long-term planning becomes difficult. While opposition parties have certainly contributed to political polarisation, the primary responsibility for stability lies with the government. Maintaining calm, building consensus, and ensuring continuity of policy are essential functions of governance. On this front, the government’s performance has been weak.
The creation of the Special Investment Facilitation Council under the 2023 Investment Policy was meant to address these concerns. The idea was to establish a single, powerful body that could cut through red tape, coordinate between federal and provincial authorities, and provide investors with a one-window solution. Expectations were high that SIFC would streamline decision-making and accelerate project approvals.
However, the experience so far suggests that institutional rearrangements alone cannot overcome deep structural problems. Investment stagnation is not simply the result of bureaucratic delays. It reflects an economy shaped by elite capture, policy distortions, and long-standing inefficiencies. These problems cannot be solved by facilitation alone.
Real reform requires difficult choices. Broadening the tax base means bringing powerful sectors into the net and reducing reliance on punitive taxation of compliant businesses. Power sector reform requires confronting entrenched interests and renegotiating costly arrangements. Improving governance demands strengthening institutions, ensuring rule of law, and reducing arbitrary decision-making. Political stability requires dialogue, restraint, and respect for democratic norms.
None of these reforms are easy. All of them carry political costs. But without them, Pakistan’s investment crisis will only deepen. No investor, domestic or foreign, will commit long-term capital in an environment defined by uncertainty, high costs, and weak institutions.
The continued decline in the investment-to-GDP ratio is not just an economic statistic. It is a warning sign. It reflects lost opportunities, unrealised potential, and a growing gap between policy promises and economic reality. Unless the country’s leadership demonstrates the will and capacity to implement comprehensive reforms, investment revival will remain out of reach.
In the absence of such change, targets like a 20 percent investment ratio will continue to exist only on paper. The economy will limp along, growth will remain fragile, and employment opportunities will fall short of what a young and growing population desperately needs. Reversing this trajectory is still possible, but time is running out, and the cost of inaction is rising with each passing year.
