Foreign investment in Pakistan

The inflows of foreign investment in Pakistan have been extremely variable in nature. An analysis of the data from 1999-2000 onwards reveals pronounced cycles in the inflows. There was a full cycle from 1999-2000 to 2011-12.

As the economy achieved buoyancy with GDP growth rate of 3 percent in 1999-2000 to 8 percent in 2004-05, the inflow of foreign investment rose substantially from only USD 543 million in 1999-2000 to USD 6,959 million in 2006-07. Thereafter, the inflow declined sharply with the fall in the GDP growth rate to 3 percent to only USD 760 million by 2011-12.

A second cycle of inflows is observed up to 2022-23. They grew rapidly as the GDP growth rate improved up to 6 percent in 2017-18. A peak of USD 4,990 million was achieved, facilitated by investment by Chinese companies in electricity generation.

However, there has been a drop after 2019-20, reaching almost a twenty-year low level of USD 342 million in 2022-23. This was the year when Pakistan came perilously close to a default and the SBP had to stop the profit and dividend repatriation. There has only been a modest recovery in 2023-24 and 2024-25.

The size of the multinational presence in economic activities in Pakistan is significant. For example, the OICCI has 208 member companies from 30 countries. Almost half a million workers are employed in the foreign manufacturing companies. The contribution to tax revenues is sizeable of over one-fifths of the total tax revenues. New foreign investment in Pakistan is over 10 percent of total private investment in good years.

Two conclusions are very clear. First, foreign direct investment in Pakistan is extremely sensitive to the state of the economy. A GDP growth rate of at least 5 percent is necessary to motivate foreign investors to significantly enter the Pakistan economy with productive ventures.

Second, risk factors play a major role. The external vulnerability of the economy in 2022-23 and the restriction on profit repatriation will continue to exert a negative impact till such time as the foreign exchange reserves significantly exceed the minimum requirement of import cover of three months.

The negative developments have led not only to a substantial decline in inflows of foreign investment but have also led to the exit of existing multinational companies from Pakistan.

The latest exit is of Proctor and Gamble, one of the world’s largest consumer goods companies.

Since 2022 many other companies have exited from Pakistan. These include Shell, Microsoft, PARCO, Telenor, Uber, Bayer and Pfizer. These companies had significant presence in one of three sectors; namely, oil and gas, food/consumer products and pharmaceuticals.

The exits are the consequence of a number of negative factors. With the GDP growth rate down to an average of only 1.8 percent since 2021-22 to 2024-25, there has been a severe stagnation in the volume of sales both of domestic and multinational companies. In fact, according to the financial data on the corporate sector, profit margins as a percentage of sales have fallen sharply since 2022 from 9.1 percent to only 1.3 percent in 2024.

The tax burden on the corporate sector has also risen substantially. The large-scale manufacturing sector and the banking sector face tax rates which imply a tax burden of almost four times that on the rest of the economy. These are the two sectors with a substantial presence of multinational companies.

The OICCI had made a strong case for rationalization of 39 percent corporate tax rate and 18 percent sales tax rate prior to the budget of 2025-26. Expatriate professionals working in Pakistan also face an extremely high personal tax burden.

There is also a growing frustration about the transaction and other costs of doing business in Pakistan. This is the consequence with overregulation of business practices and large-scale corruption associated, for example, with tax payments.

On top of all this, there is the risk and vulnerability associated with the relatively low foreign exchange reserves and Pakistan’s continuing performance in the on-going External Finance Facility of the IMF. The outlook for the size of the current account in the balance of payments has worsened after the floods. External financing requirements will increase and put pressure on foreign exchange reserves.

The outlook is also one of some instability in the value of the currency. Further, there have been times in recent years when physical restrictions have been imposed on imports of inputs. The industry most adversely hit by these restrictions is automobiles, with a strong presence of multinational companies.

There is truly a risk that more foreign companies in Pakistan will shift to a third-party distribution model, whereby costs of local operations are avoided while keeping its products in the market. Needless to say, this will put pressure on the level of imports and contribute further to a worsening of the balance of payments position.

There are other factors also which are affecting existing multinational companies in Pakistan and potential foreign investors. These include, first, the extremely high energy costs of electricity and gas in Pakistan. Second, there are risks associated with the security situation and regional conflicts. Also, investment in the mining sector will require prior investment in physical infrastructure, especially transport.

The time has come indeed for the economic ministries in the federal government to convene a process of dialogue with the representative bodies like the OICCI, Pakistan Business Council and the local Federations. A comprehensive plan must be prepared to facilitate operations, rationalise tax liabilities and the adoption of measures to reduce risk perceptions.

A fundamental reform required is the broad-basing of the tax system to reduce the burden on large-scale manufacturing and banking, with more effective taxation of large agricultural incomes, wholesale and retail trade and property.

There is finally a need to recognize that unless Pakistan comes out of the low GDP growth rate of 2 percent to 3 percent, the prospects for large net foreign investment inflows into Pakistan are low. This will contribute to a continuation of low economic growth in the country and lack of competitive edge in the absence of technology transfers.

Copyright Business Recorder, 2025