Immovable property

EDITORIAL: According to a report carried by this newspaper recently, withholding tax collection by FBR from immovable property increased by 57 percent in the last fiscal year. Not only that, but to spur investment in the real estate sector the government in the budget for FY27 reduced the rate of advance tax on purchase of property by as much as 50 percent.

Experts, rightly attribute this inexplicable concession to a sharp rise in real estate prices and activity all over the country. In certain pockets of Karachi prices of plots have increased manifold over the past six months.

This inflow of money may reflect reverse capital flight from the Middle East—particularly the UAE—amid the US-Iran war, whose tremors have been felt across the region. Initially, the usual outflow of money from Pakistan appeared to have slowed.

More recently, some funds parked abroad may have also returned, as suggested by stronger remittance inflows and increased dollar supplies from exchange companies.

The news is encouraging as it is helping build forex reserves and improve the liquidity in the domestic market. However, there is a risk that this money is being channelled into unproductive assets primarily vacant plots in various localities, creating price bubbles without generating meaningful economic activity.

The funds are clearly not flowing into the stock market, as this asset class is not only considered riskier and requires active management, but it also offers limited upside now that the market has peaked. Real estate, by comparison, provides an easier avenue for parking funds, with the added advantage of fewer documentation requirements.

The worrisome part is that there is no interest in investing in real businesses—be it manufacturing or services. Pakistan’s investment-to-GDP ratio is hovering around its lowest levels, and the government is failing to attract investment despite attaining macroeconomic stability.

The Finance Minister should be questioned for failing to anticipate a reversal in capital flight and for not providing the right incentives to channel these funds into industrial sectors or other productive avenues.

The core issues are excessive taxation and slack in the industrial sector. Furthermore, the government is failing to provide a level playing field, as regulatory and taxation hurdles keep investment at bay. Consequently, our manufacturing base is losing competitiveness across multiple areas, and concrete efforts to improve the situation are entirely missing.

While some money enters the country through the Hundi-Hawala system, it may not be clean enough to be invested in documented sectors. Moreover, even when capital is documented, the fear of the tax authority deters investors from committing to formal sectors.

The government is reportedly studying the creation of an investment fund for overseas Pakistanis to finance USD 6.5 billion in Public-Private Partnership (PPP) projects; while this is a case of “better late than never,” the Finance Ministry should have anticipated this trend and introduced out-of-the-box solutions to bring this capital into the formal sector much earlier.

Our banks should also be questioned as to why they are not striving to retain this extraordinary flow within the banking sector to finance economic activity in the formal economy. It was not long ago, in 1998, when the PML(N) government froze the foreign currency accounts of resident citizens after our nuclear tests.

Shaukat Tareen, the then-president of Habib Bank Limited (HBL), immediately announced a scheme of substantial, expensive prizes to be awarded every month through lucky draws to the bank’s depositors. Other banks soon followed suit. This measure ensured that the massive rupee liquidity created by the freezing of dollar accounts remained within the banking system, rather than being channelled into unproductive sectors of the economy.

Nonetheless, it is not too late. The money keeps coming, and the flow is likely to continue, as the war is by no means over and the medium-term outlook for the Gulf region is bearish. The government, the Central Bank, and commercial banks should have a clear strategy for attracting capital into formal sectors or, at the very least, luring investors into government securities.

The government is always in need of financing, which is currently crowding out the private sector. Attracting foreign liquidity into government securities will allow the financial system’s liquidity to move toward productive assets.

The point is that there is an ongoing opportunity to attract capital into the country while retaining money that would normally flow out. The government, especially the Finance Ministry, should wake up and work on channelling this liquidity into the right avenues before it is too late.

Copyright Business Recorder, 2026