The investment slump

The investment figures for 2024-25 released by the Pakistan Bureau of Statistics (PBS) portray a truly dismal picture. They reveal a sharp downward trend in the level of investment as a % of the GDP.

The investment figures include 1.7 percent of the GDP as the build-up of inventories in the economy. The overall level of investment is reported at 13.7 percent of the GDP in 2024-25. Therefore, the level of fixed capital formation is only 12 percent.

There has been a visible long-term trend of decline in the level of fixed capital formation as % of the GDP. As far back as 2008-09 it was almost 16 percent of the GDP. By 2015-16 it had fallen to 14.2 percent of the GDP and now it stands at 12 percent of the GDP. There is a minor recovery from the level of 11.4 percent of the GDP in 2023-24, when investors faced the highest-ever level of interest rates.

There is need also to identify the trends respectively in private and public investment. The latter consists of development spending by the federal and provincial governments and investment in expansion of capacity by the State-Owned Enterprises (SOEs).

The level of private investment has fallen from almost 12 percent of the GDP in 2008-09 to 9 percent of the GDP in 2024-25. A sharper downward trend is visible in public investment. It has declined from 4 percent of the GDP in 2008-09 to 2.9 percent of the GDP. In fact, there was a year, 2017-18, when it rose to a peak of 4.7 percent of the GDP.

The sharper declining trend in public investment has led to a big change in the composition of investment in the economy. The respective shares of public and private investment are 76 percent and 24 percent in 2024-25. Earlier, in 2008-09 they were 67 percent and 33 percent.

There has been only a very modest growth in the overall level of investment at constant prices. In fact, total investment was Rs 5534 billion, at 2015-16 prices, in 2017-18. It now stands at Rs 4524 billion, at 2015-16 prices, in 2024-25. There has, therefore, been a fall of over 18% in real terms since the peak level in 2017-18.

The fall in the absolute level of investment is more pronounced in public investment. It has declined by over 36 percent in relation to the level in 2017-18. The corresponding fall in private investment is 10 percent.

The low level of investment in Pakistan is clearly manifest when a comparison is made with other South Asian countries. Data on these economies is available in the World Bank database. The level of gross fixed capital formation ranges from 20 percent of the GDP in Sri Lanka to over 31 percent of the GDP in Bangladesh, as compared to 12 percent of the GDP in Pakistan.

This comparison highlights one of the fundamental reasons for the low GDP growth rate of Pakistan’s economy. It has averaged only 2.7 percent from 2019-20 to 2023-24. The growth rate of the economy of Bangladesh during these years has been 5.5 percent.

There is need also to look at the sectoral composition of both private and public investment. There have been very big changes in the level of private investment at constant prices in different sectors of the national economy.

Believe it or not, the level of private investment in real terms in the large-scale manufacturing sector in 2024-25 was even lower by 10 percent in comparison to the level 25 years ago in 1999-2000. This is a visible manifestation of the retreat of the private sector from industry due to the extremely high tax burden, quantum jump in costs of energy inputs, restrictions on the volume of imported inputs and high borrowing costs with limited access to bank credit.

The other surprising revelation from the long-term investment series prepared by the PBS is the apparent boom in real estate investment, which has increasingly substituted for investment in manufacturing. This is clearly indicated by the fact that in 2024-25 the level of investment in real estate was 71 percent more than private investment in manufacturing. Earlier in 1999-2000, private investment in manufacturing was 70 percent above the level of private investment in real estate.

This fundamental change in the composition of private investment conveys clear signals about the required changes in policies. The lack of investment in industry rules out effectively the likelihood of achieving sizeable export-led growth, as envisaged, from example, in the URAAN plan.

There will be a need for both the federal and provincial governments to focus on wide-ranging taxation of property values, capital gains and income. Today, the overall incidence of taxes on property is 0.3% of the GDP, as compared to 3.6% of the GDP in the case of large-scale manufacturing

Any augmentation of revenues from property should be used at least partly for providing tax relief to industry. A similar approach should also be adopted with respect to increased taxation of the agricultural and wholesale and retail trade sectors.

Turning to the level and composition of public investment, there has been, as highlighted earlier, a quantum fall as percentage of the GDP. It was 4.7 percent of the GDP in 2017-18 and new stands at 2.9 percent of the GDP.

The level of investment since 2017-18, at constant prices, has collapsed by 62 percent in the case of SOEs and by 28 percent in the case of development outlays by the federal and provincial governments. The SOEs have been restrained by low profitability and limited access to credit.

PBS has also highlighted one more negative trend. The level of investment at constant prices by the public sector, especially the provincial governments, in education and health has fallen sharply by over 50 percent since 2017-18. It is not surprising that Pakistan continues to see little improvement in the literacy rate and in life expectancy.

There has been one compelling macroeconomic imperative which has led to a not-so-positive attitude towards investment in the economy. This is evidenced by the extremely high interest rates and faster depreciation of the rupee in recent years.

This imperative is to narrow down the investment-savings gap. A larger gap implies pressure on the external balance of payments through a larger current account deficit and consequently increases the risk of a drawdown on reserves.

The investment-savings gap was as high as 5.4 percent of the GDP in 2017-18 when we had the peak in the level of investment in the economy. Through resort to restrictive policies the gap was brought down to 0.5 percent of the GDP in 2023-24. Last year, national savings have actually exceeded the level of investment by 0.3 percent of the GDP.

Given the presence of Pakistan in an IMF programme, there will continue to be a need to manage the investment-savings gap. The approach should be to follow a balanced set of policies, especially with regard to the sectoral distribution of the tax burden. Further, there should be an appropriate mix of policies between the interest rates and the exchange rate.

Finally, the ‘crowding out’ of the private sector from bank credit due to excessive borrowing by the federal government by flotation of bonds has to be significantly reduced. This is to enable greater financing of private investment and thereby take the economy gradually out of the path of very low GDP growth rate of between 2.5 percent to 3.5 percent, closer to 5 percent in the next few years.

Copyright Business Recorder, 2025