EDITORIAL: The government continues to emphasise foreign direct investment (FDI) as a cornerstone of economic revival. However, at the same time, the tax authority is extracting disproportionate revenue from the formal corporate sector to meet ambitious targets, with little focus on broadening the tax base.
A recent manifestation of this approach, for example, is the judgement by the Federal Constitutional Court, which upheld the retrospective application of the super tax. This may help the FBR raise around Rs300 billion to cover this year’s shortfall without a mini-budget. However, the critical question remains: how can FDI be attracted to the formal corporate sector when the highest court in the land has held that taxes and policies can be applied/changed retroactively?
This is one of the key reasons why the government continues to struggle in attracting investment despite achieving macroeconomic stability and benefiting from geopolitical tailwinds. FDI has declined by 43 percent to USD 809 million from an already low base, making it the third lowest level as a percentage of GDP over the past 20 years. The imposition of backdated levies is detrimental to investor confidence, especially when justified as an exercise of sovereign power. The government and regulators need to rethink their strategy and recognise that large formal-sector investments are the primary gateway for substantial FDI inflows.
As tax rates rise, incentives to conceal sales increase. This partly explains why large business groups are expanding into retail and real estate, opening malls, and focusing on domestic markets. One of the largest textile exporters has openly stated that it has no plans to invest further in export-oriented businesses, while expanding its domestic retail footprint and exploring import-substitution ventures. Retail investments can enable partial sales concealment and cash generation, which can be moved abroad through informal channels such as hundi-hawala or crypto instruments—an emerging trend. As a result, foreign investors step back. Unsurprisingly, several multinational firms in pharmaceuticals, FMCG, and other sectors are exiting the market.
It is important to note that government spokespersons often argue that this is healthy, citing mergers and acquisitions and domestic buyers stepping in. While this may partly be true, a deeper trend is visible: many acquisitions are driven by trapped liquidity—formal cash that cannot be remitted due to implicit restrictions. In some cases, sellers, however, still have legal avenues to move funds abroad. A critical priority is to provide investors with confidence to bring capital into the country, reinvest profits locally, and commit to formal businesses. This requires resolving the taxation puzzle. While the government rightly seeks fiscal consolidation and debt reduction, the focus should be on expanding the tax base rather than squeezing those already heavily taxed.
READ MORE: FDI plunges by 43.3% in July-December of current fiscal year
Other bottlenecks include declining competitiveness due to government inefficiencies, particularly in the energy sector, and constraints on capital mobility. Whenever crises emerge, the SBP (State Bank of Pakistan) imposes restrictions on capital flows. Reversing these restrictions requires fresh inflows and reserve accumulation, yet Pakistan’s foreign exchange reserves have historically covered only three to four months of imports even in the best periods. These constraints prevent the economy from moving beyond the stability phase. Without a credible growth narrative, investment remains elusive. This explains why, despite a historic rally in the stock market, net foreign portfolio investment remains negative.
It is, therefore, about time the government corrected its policies on multiple fronts. Without decisive reforms, investment will remain subdued. While the SBP is optimistic about building reserves to record levels this year, the government must address the energy sector through privatisation of DISCOs and ensure tax equity in the upcoming budget. Otherwise, the quest for a higher FDI will always remain elusive.
Copyright Business Recorder, 2026
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