Weak institutions, inconsistent regulations, and an unpredictable political environment can make it challenging for countries to attract and retain foreign investors. Does this sound familiar? Foreign direct investment (FDI) in Pakistan has been weak and constrained, largely due to structural challenges and political and economic instability. FDI as a percentage of GDP remains below one percent, with foreign investments hovering between $1.5 billion and $2.5 billion over the last decade.
Monthly FDI figures in recent months have shown some improvement, but much of the growth is attributable to a low base. Recent data from the State Bank of Pakistan reveals that net flows during 1QFY25 stood at approximately $770 million. This represents a 48 percent increase compared to the same period in 1QFY24. FDI inflows for this period were notably strong at $1 billion, marking a 50 percent year-on-year increase, while outflows also rose by 58 percent to $231 million. In September 2024 alone, net FDI was $385 million.
China remained the largest investor in Pakistan during 1QFY25, accounting for 52 percent of the total net FDI. The sector attracting the most investment during this period was the power sector, followed by the financial services sector, and oil and gas exploration. Meanwhile, sectors that saw net divestment included mining and quarrying, transport equipment (automobile), and the transport sector.
Despite the reported growth, FDI in Pakistan remains sluggish and stagnant. The narrow focus of FDI inflows, both in sectoral and geographical terms, highlights a deeper issue. Recent investments have primarily been concentrated in sectors like power, oil and gas, and financial services, while critical areas such as export-oriented industries, technology transfer, and import substitution have been largely overlooked. Clearly, there is an urgent need to revamp the country’s investment strategy.
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