FDI in Pakistan: Optimism amid constraints

Business Recorder

3 days ago

Foreign Direct Investment (FDI) has long been a weak link in Pakistan's economic progress. While there has been no substantial improvement in inflows—annual FDI has remained below $2 billion on average—the State Bank of Pakistan's latest State of the Economy report presents a cautiously optimistic view of FDI trends and prospects.
According to the central bank, the current FDI landscape and outlook reflect several key dynamics. The report notes significant investment inflows primarily in sectors such as power (hydel and coal), financial services (including microfinance and investment banks), and oil and gas exploration. However, it also acknowledges that these inflows remain heavily concentrated in traditional sectors, with China continuing to play a significant role—particularly in power generation infrastructure and consumer electronics. While the report highlights that major FDI sources include the Middle East, the UK, the US, and Hong Kong—targeting long-term growth sectors like renewable energy and consumer electronics manufacturing—monthly SBP data does not reflect noticeable spikes in overall inflows. Similarly, while the ICT sector is portrayed as a bright spot due to consistent growth and supportive policy measures, FDI into the sector remains small in real terms.
Despite these positive developments, challenges persist. The central bank's half-yearly report underlines the need to diversify FDI beyond conventional sectors. It also points to increasing profit repatriation, which places pressure on the financial account, and highlights that official loan disbursements continue to fall short of commitments—further constraining financial inflows.
The central bank links sustainable FDI inflows to long-term improvements in competitiveness, particularly those rooted in productivity, policy stability, and institutional quality – something that has been missing in Pakistan. The document advocates a strategic shift from short-term cost advantages to deeper reforms that create an enabling environment for high-quality, diversified, and durable foreign investment.
Looking ahead, the SBP maintains a cautiously optimistic stance on FDI. The ICT sector, buoyed by ongoing support from the government and central bank, is expected to maintain its growth trajectory, contributing to export expansion and attracting global investment. Infrastructure development, especially in renewable energy and power transmission, is likely to continue drawing interest from strategic partners such as China. Moreover, improved macroeconomic stability, declining global interest rates, and more favourable global financial conditions could support greater FDI inflows in the short to medium term. That said, risks tied to global economic trends, domestic political stability, policy continuity, and external debt repayment obligations remain significant.
In a recent engagement with international investors, the Governor of the State Bank presented a more upbeat picture of Pakistan's macroeconomic outlook. Investors were told that the outlook for FDI is positive, driven by prudent monetary policy, consistent fiscal consolidation, and improving inflation dynamics. The Governor emphasized the strengthening of foreign exchange reserves without reliance on additional external debt—highlighting this as a key marker of sustainable fiscal management. He also pointed to the gradual recovery in GDP growth and recent upgrades by international credit rating agencies as signs of renewed investor confidence. With a continued focus on structural reforms aimed at fostering long-term economic stability, the Governor portrayed a scenario in which ongoing economic improvements, stronger external accounts, reduced debt burdens, and international recognition enhance Pakistan's prospects for attracting and sustaining FDI in the near to medium term.
However, a closer comparison of the SBP report and the Governor's remarks reveals notable some differences in tone and emphasis. While the Governor's statement highlights the build-up of external buffers independent of external debt—casting debt sustainability in a favourable light—the SBP report takes a more measured view. It directly addresses the financial pressures arising from reduced official inflows and significant external debt repayment obligations. Although these perspectives are not inherently contradictory, they differ in tone and depth. The SBP report presents a balanced assessment, acknowledging both strengths and vulnerabilities, while the Governor's remarks are more optimistic, focusing on macroeconomic gains and reform momentum.