FDI: credibility deficit

Pakistan continues to court foreign investors, but capital is voting with its feet. Overseas Investors Chamber of Commerce and Industry’s (OICCI’s) latest assessment exposes a widening disconnect between macroeconomic stabilisation, official investment ambitions, and the realities confronting investors.

The challenge is no longer simply attracting capital; it is convincing investors that Pakistan is a place where their capital can be committed, protected and profitably deployed over the long term.

The Overseas Investors Chamber of Commerce and Industry (OICCI), established in 1860 and the oldest chamber of South Asia, represents foreign investors and multinational companies operating in Pakistan. Its assessments carry particular significance because they reflect the experience of businesses already investing, operating and navigating the country’s economic environment.

OICCI’s latest Pakistan’s Quarterly FDI Pulse, August 2026, presents an uncomfortable assessment of Pakistan’s ability to attract foreign investment. The findings should serve as a wake-up call for policymakers who increasingly cite macroeconomic stabilisation as an evidence of economic recovery. The numbers, however, tell a different story.

Pakistan closed FY2026 with net foreign direct investment of USD 1.64 billion, down approximately 34 percent from USD 2.48 billion in FY2025. Gross inflows declined from USD 4.27 billion to USD 3.57 billion, while outflows increased from USD 1.79 billion to USD 1.93 billion - it is a disturbing trend. FDI remained below 0.4 percent of GDP. This happened despite a relatively stable exchange rate, easing inflation and continued IMF support. Clearly, macroeconomic stabilisation has not translated into a meaningful investment recovery.

The composition of FDI is equally revealing. Power attracted USD 958 million and financial services approximately USD 806 million. Together, they accounted for USD 1.76 billion, exceeding total net FDI for the year because withdrawals from other sectors offset their gains. Manufacturing recorded a net outflow of USD 6.1 million, while information technology attracted a modest USD 43.7 million.

Telecommunications witnessed net outflows of USD 456 million, while mining and quarrying also remained in negative territory. These figures indicate that investors are reluctant to commit fresh capital to sectors capable of generating exports, technology transfer, industrial capacity and sustainable employment.

The contrast becomes more striking when viewed regionally. South Asia attracted approximately USD 46 billion in FDI in 2025, of which India alone secured USD 38.9 billion, nearly 84 percent of the regional total. Pakistan accounted for barely 4 percent. Vietnam is attracting manufacturing investment integrated into global supply chains, Bangladesh is drawing capital into export-oriented and labour-intensive industries, while India has emerged as a major destination for technology, digital infrastructure and advanced manufacturing. Pakistan is losing ground in precisely those sectors where it needs to build competitiveness and has the potential to do so.

Pakistan’s dependence on a narrow investment base is another concern. China remained the largest individual source of net FDI, contributing USD 862 million, while Hong Kong added USD 339 million. Together, they accounted for approximately 73 percent of net FDI in FY2026. Chinese investment remains important, particularly in energy and infrastructure, but dependence on a limited number of sources exposes Pakistan to fluctuations in bilateral financing and investment priorities. More concerning is the contraction of non-Chinese investment, which fell to just USD 435 million - which is again a disturbing development.

There is another side to this picture. Foreign companies repatriated approximately USD 2.2 billion in profits and dividends. Profit repatriation is not inherently undesirable; it is a legitimate return on investment and an indication that established businesses remain profitable. The concern is the imbalance between earnings leaving the country and fresh capital entering it. Pakistan must attract new investors rather than depend increasingly on the continued presence and reinvestment of existing players.

What explains this reluctance? OICCI identifies familiar impediments: unpredictable taxation, frequent changes in tariffs and regulations, expensive energy, cumbersome approvals, weak contract enforcement and uncertainty over profit repatriation. These are not abstract policy concerns. They are everyday business realities.

Consider the government’s treatment of existing investors. OICCI reported approximately Rs103 billion in pending income and sales tax refunds as of June 2026. For companies already operating and contributing substantially to the economy, delayed refunds translate into trapped working capital and higher financing costs. What message does this send to a prospective investor considering a long-term commitment?

Pakistan’s investment promotion machinery has also failed to bridge the gap between announced opportunities and bankable projects. Special economic zones, one-window facilitation, the Special Investment Facilitation Council and repeated incentive packages have generated expectations, but implementation remains uneven. Investors do not commit billions on the strength of announcements. They assess the cost of doing business, regulatory consistency, availability of utilities, contract enforcement, market access and the ability to repatriate legitimate returns.

The government must move beyond the conventional approach of offering tax concessions and negotiating headline investment commitments. It needs a credible, long-term investment framework supported by consistent tax and tariff policies, competitive energy costs, efficient approvals, enforceable contracts and an independent regulatory environment. Equally important is the removal of bureaucratic overlap between federal and provincial authorities.

Pakistan has considerable potential in minerals, agriculture, food processing, pharmaceuticals, engineering, renewable energy and digital services. But potential is not investment, and an opportunity is not a project until it becomes commercially viable.

This brings the discussion to the conclusion that it is the measurable outcomes that count. The real test of an investment-friendly economy is the capital that actually arrives, the factories that are built, the jobs created, the exports generated, the revenue earned for the benefit of the investor in terms of profits and for the government in terms of taxes.

Copyright Business Recorder, 2026