In February 2025, Pakistan experienced a notable decline in Foreign Direct Investment (FDI), with inflows dropping to $131 million from $194 million in January 2025. This downturn is particularly concerning when compared to the previous fiscal year’s performance, where FDI inflows were more robust during the same period.
During the first eight months of FY25 (July 2024 to February 2025), Pakistan’s net FDI inflows reached approximately $1.6 billion. China emerged as the largest investor, contributing $662 million, followed by Hong Kong with $160 million. The United Kingdom and the United States also made significant investments, amounting to $167 million and $68 million, respectively. These figures underscore the continued interest of foreign investors in Pakistan’s market, particularly from China.
The sectors attracting the most FDI during this period were the power sector, financial services, oil and gas exploration, and electronics. The power sector alone received substantial investments, reflecting the critical need for energy infrastructure development in the country. Financial services also saw significant inflows, indicating a growing confidence in Pakistan’s banking and financial institutions.
Several factors have contributed to the recent decline in FDI:
Despite improvements in certain areas, Pakistan continues to grapple with security challenges that deter potential investors. For instance, a recent insurgent attack in Balochistan resulted in the hijacking of the Jaffar Express train, leading to the tragic loss of 26 lives and a hostage crisis involving 339 passengers. Such incidents highlight the persistent security risks in the region and can significantly undermine investor confidence.
Issues such as bureaucratic inefficiencies, corruption, and lack of transparency have long plagued Pakistan’s administrative framework. These challenges create an unpredictable business environment, making it difficult for investors to navigate regulatory processes and ensure the protection of their investments. The growing influence of the military in economic affairs has raised concerns about the equitable distribution of resources and the potential sidelining of civilian institutions. While the military’s involvement aims to attract investment and drive development, critics argue that it may privilege military interests over national needs, potentially distracting from counterterrorism efforts and increasing societal unrest.
Frequent changes in economic policies under Prime Minister Shehbaz Sharif’s government have created uncertainty, discouraging long-term investments. For example, the government’s unilateral approach to renegotiating contracts with independent wind and solar power producers has been criticized by international financial institutions. Eight development finance institutions, including the World Bank’s International Finance Corporation and the Asian Development Bank, have expressed concerns that such actions could damage investor confidence and hinder the sector’s long-term development.
Macroeconomic challenges, including inflation and currency volatility, have made Pakistan a less attractive destination for FDI. The central bank’s recent decision to pause its series of rate cuts, leaving the interest rate at 12%, reflects concerns over currency stability and the trade deficit. While future rate cuts are anticipated, economists emphasize the need for complementary economic reforms, including tax reforms, privatization, and ensuring the viability of the energy sector, to achieve sustainable growth.
Despite ongoing efforts, Pakistan’s infrastructure development has not kept pace with the needs of a growing economy. The International Finance Corporation (IFC) has recognized this gap and is significantly increasing its investments in Pakistan, particularly in large infrastructure projects. The IFC aims to unlock $2 billion annually over the next decade for Pakistan, focusing on critical sectors such as agriculture, infrastructure, finance, and digital technologies. This move is expected to enhance Pakistan’s capacity to attract and retain foreign investment.
M Abdul Aleem, Secretary General of the Overseas Investors Chamber of Commerce and Industry (OICCI), has emphasized that the volume of FDI inflows has remained significantly lower than 1% of GDP. He noted that “Pakistan has the potential to attract FDIs of at least 3% of GDP considering its growing population and economy.” Aleem also highlighted that the recent FDI inflows suggest foreign investors have mainly allocated funds to sustain existing projects rather than initiating new ones. Economists have expressed concerns over the declining trend in FDI, warning that it could hamper economic growth and job creation. They stress the need for structural reforms to improve the investment climate and restore investor confidence.
In conclusion, the steep decline in FDI in February 2025 serves as a wake-up call for Pakistan to address underlying issues such as security concerns, governance challenges, policy inconsistencies, economic instability, and infrastructure deficiencies. By implementing comprehensive reforms and fostering a stable investment environment, Pakistan can attract sustained foreign investment, which is crucial for its economic development.
The views expressed in this article are the author’s own and do not necessarily reflect Coverpage’s editorial stance.
