Confidence, not capital

EDITORIAL: Recently, the Prime Minister said what every economist, banker, and CEO has been saying for years: the private sector must lead Pakistan’s growth story. He is right. But like most reform speeches in this country, he is only half right. Mobilising investment is easy. Keeping confidence is hard.

For a country of 240 million people, Pakistan’s investment-to-GDP ratio is not just low; it is embarrassingly low. At below 15 percent, it ranks among the weakest in the world. The World Bank estimates that peer lower-middle-income economies average around 25 percent, while regional cohorts in South and East Asia comfortably exceed 30 percent. Those are the ratios that sustain productivity, job creation, and export competitiveness. Ours sustains nothing.

That much is well understood. What policymakers never admit is why private investment is so persistently anaemic.

The problem is not a lack of liquidity or even opportunities. It is the cumulative punishment of capital through overtaxation, inconsistency, and betrayal in execution of announced policies and assurances. When corporate income taxes, after accounting for super taxes, the Workers’ Profit Participation Fund, assorted levies, and repatriation taxes, exceed 40 percent, it leaves little oxygen for retained earnings. And before businesses invest fresh capital, they reinvest what they earn. It is a sequence as old as capitalism.

And yet, Pakistan has mobilised investment when it had to. The two years in the past decade when the investment ratio breached 15 percent were FY18 and FY22, both expansionary cycles.

The first was powered by CPEC and a credit boom; the second by post-Covid stimulus and SBP’s TERF facility. In both, policy alignment temporarily restored faith. But just as quickly, policy reversal killed it. Three years after the balance-of-payments crisis, SBP data shows industrial capacity utilisation still stuck below 70 percent.

Corporate working-capital borrowing, in real terms, remains below FY22 peaks. The Large-Scale Manufacturing index is locked in its third consecutive year of negative growth. Many sectors have not recovered to their FY17 and FY18 “peak prosperity” volumes.

So how does one convince private investors to build new capacity when the last expansion still lies idle? When the same state that pleaded for investment later rewrote contracts, retroactively exorbitantly taxed profits, and turned incentives into penalties?

The IPPs (independent power producers) learned it the hard way. The exporters who benefited from temporary TERF liquidity learned it again through super taxes and windfall levies. Every cycle ends with the same message: do not trust the state.

Confidence, not capital, is Pakistan’s scarcest commodity. Multinationals have read the message loud and clear. Nearly a dozen global firms have exited over the past three years. Annual FDI now averages less than what Pakistanis working in the Gulf remit in a single month.

Energy tariffs are the highest in the region, even before factoring in the cost of interruptions. And since industrial policy ultimately hinges on energy affordability and reliability, that means Pakistan has neither.

Whatever investment still happens is private capital quietly de-linking from the grid: captive solar, off-grid storage, private logistics, and private water. These are not signals of economic modernisation; they are in fact symptoms of systemic retreat. The formal sector is hedging against the very state that claims to facilitate it.

Even institutions created to “facilitate” private investment now behave like gatekeepers. The Special Investment Facilitation Council (SIFC) was conceived to fast-track decisions and remove bureaucratic friction. Instead, it has too often become a blunt instrument, muscling local investors, micro-managing licences, and turning facilitation into enforcement. That is not a confidence-building measure. That is central planning wearing a new garb.

The sanctity of contracts, a principle as old as markets, has been violated repeatedly over the last decade. From power producers to exporters, from telecom operators to miners, every major investor has a story of broken commitments. This pattern is not incidental; it is institutional. And until it changes, no amount of seminars, summits, or foreign tours will attract sustainable capital.

Now the state is once again desperate for foreign investment. The old playbook is back: special incentives, tax holidays, exemptions, and sweetheart deals for “strategic” sectors like mining. It may bring short-term inflows, but history says it will also bring long-term headaches. Every freebie today becomes a fiscal time bomb tomorrow. The cycle is as predictable as it is exhausting.

Failed privatisation attempts, from PIA to DISCOs, should make the point painfully clear. Investment cannot be attracted through words alone. It follows credibility, not rhetoric. The government’s inability to close even one major transaction after years of promises reveals the depth of the trust deficit.

At this point, the state has a structural credibility problem. Its policies change faster than investors can revise their spreadsheets. Its laws are applied selectively. Its regulators act politically. And its institutions speak at cross purposes. Unless this is fixed, the best the government can hope for is another short-lived burst of investment, fuelled by subsidies, guarantees, or external pressure, before it unravels again.

We have seen this movie too many times. Pakistan does not suffer from a shortage of capital; it suffers from a shortage of belief. And until the state stops punishing belief with betrayal, no amount of cheerleading will bring the private sector back on stage.

Copyright Business Recorder, 2025