While Foreign Direct Investment (FDI) has been seen as a key driver of economic growth, infrastructure development, and job creation, the Pakistan Business Council (PBC) has criticized Pakistan’s approach as unfocused and overly reliant on FDI aimed at exploiting local markets rather than enhancing exports.

Historically, Pakistan has attracted market-seeking FDI, primarily serving its domestic consumer base. Although multinational companies in Pakistan have contributed to tax revenues and improved labor productivity by bringing global best practices, they do not export from Pakistan as their primary goal is to serve the local market.

FDI has brought capital to Pakistan but also significant outflows. Over the past decade, net FDI averaged $2 billion annually, with $3 billion in inflows and around $1 billion leaving due to disinvestment and loan repayments.

After adjusting for profit repatriation, effective FDI was just $1.4 billion annually, with approximately $600 million repatriated each year. Repatriation of profits often exceeded 50% of net FDI, sometimes surpassing 100%, except in FY23 when controls were imposed due to low foreign reserves. These outflows resumed in FY24 as restrictions eased.

For foreign investors, especially in key sectors like energy, infrastructure, and technology, Pakistan often offers sovereign guarantees and incentives like tax breaks to attract FDI.

The government honors these commitments to maintain its reputation, giving foreign investors more favorable terms.

Local investors, however, feel their contracts are less rigorously honored. For instance, recent power purchase agreement renegotiations primarily targeted local investors.

The state tends to renegotiate with local players during financial or political pressure, while foreign investors are treated more cautiously to avoid international arbitration and reputational risks.

Many local investors seek foreign partners for added security, believing contracts are more likely to be upheld. For a fair investment climate, Pakistan must offer equal treatment, legal protections, and incentives to both local and foreign investors, fostering balanced and sustainable economic growth.

High import tariffs on finished goods, combined with high energy costs, mean multinational companies (MNCs) can compete locally but not globally. This focus on the domestic market has led to short-term gains but has not resulted in sustained, broad-based economic growth.

Significant FDI inflows have been offset by large outflows as foreign investors repatriate profits, draining Pakistan’s foreign reserves and limiting reinvestment in the local market.

Persistent challenges such as lack of investor trust, restricted private sector lending, ineffective government-to-government (G2G) investments, poor governance, bureaucratic red tape, weak rule of law, corruption, and unfavorable tax regimes create an unattractive business climate.

Instances like the cancellation of power agreements and the Reko Diq fiasco have damaged investor trust, increasing perceived investment risks.

Aspiring investors often shy away due to delays in obtaining approvals or unexpected requirements, making Pakistan’s system too cumbersome and preventing successful deal closures.

Additionally, the weak justice system offers limited recourse for investors, affecting their confidence in enforcing contracts and securing intellectual property.

Compared to regional peers like India, Vietnam, and Bangladesh, Pakistan’s FDI inflows have lagged, with the country’s investment-to-GDP ratio remaining the lowest. Regional competitors have adopted reforms and maintained stability, attracting efficiency-seeking FDI, particularly in manufacturing and export-oriented sectors.

G2G transactions in Pakistan often face delays, cost overruns, and policy shifts. Reliance on loans rather than FDI and a lack of transparency have limited their success. In sectors like agriculture, G2G deals with the Middle East need careful management to avoid risks to food security and water scarcity.

Collaboration with the private sector or through public-private partnerships (PPP) tends to generate better results by providing capital, expertise, and market access while developing local supply chains.

The World Bank describes efficiency-seeking FDI as export-oriented, generating foreign exchange without the risk of crowding out the local private sector.

Despite cheap labor, Pakistan has struggled to attract efficiency-seeking investors. Policymakers need to understand that, in addition to inexpensive labor, a skilled workforce and high productivity in industries like manufacturing are essential for leveraging efficiency-driven investment.

This type of investment can help a country boost technological advancement, research and development (R&D), and export diversification.

PBC highlights that FDI should focus on export-oriented and import-substitution industries and sectors where local investors lack knowledge or access to foreign capital, such as mining and petrochemicals.

These investments, leveraging Pakistan’s lower labor costs, natural resources, and large domestic market, would integrate the country into global value chains and create positive spillovers for domestic industries by boosting innovation and productivity.

In conclusion, PBC calls for a recalibrated approach to FDI, advocating for targeted policy reforms that attract efficiency-seeking FDI and foster export-led growth. The organization emphasizes the need for Pakistan to move away from the mindset that all FDI is beneficial and directs future FDI towards investments that positively impact the external account within a reasonable period.