Pakistan has the reserves, yet still lacks investor trust

Is Pakistan investable? Foreign exchange reserves have reached a record high and the debt-to-GDP ratio has fallen significantly over the past three years. Yet productive investment has not followed. Macroeconomic stability has improved, but investors remain wary of taxation, regulation and the predictability of policy. Those with powerful lobbies can negotiate their way through. The rest face the music.

Two sectoral policies illustrate the problem: refining and automobiles.

The refinery policy spent six years in deliberation under four ministers before its latest approval. Four refineries have now signed upgrade agreements, potentially unlocking billions of dollars in investment. Yet within weeks, the government changed the petrol-pricing mechanism, requiring refineries to surrender part of their windfall margins to provide relief to consumers.

The intervention is initially for 30 days, and there is a reasonable case for sharing extraordinary profits arising from the war. But there is also a question of policy credibility. Refining is a cyclical business. Today’s windfall can become tomorrow’s loss. Will the government compensate refiners when margins turn negative? More importantly, what assurance do investors have that the rules will remain unchanged once they commit capital to expensive upgrades?

The government wants modern refineries and lower fuel prices. It wants private capital to assume commercial risks while reserving the right to intervene when profits become politically inconvenient. It cannot have its cake and eat it.

The automobile industry offers another lesson. After prolonged deliberations and disagreements among manufacturers, the prime minister has approved the final draft of the Automotive Industry Policy 2026-31, which now awaits cabinet’s approval.

The policy promises greater competition, cheaper vehicles, localisation, exports and a transition towards electric mobility. These are desirable objectives. The difficulty lies in reconciling them. The government wants manufacturers to invest in new technologies and develop local supply chains. It also wants to reduce tariffs, make vehicles affordable and meet ambitious export targets. Meanwhile, heavy taxation continues to constrain the domestic market, limiting the economies of scale needed to compete internationally.

The proposed policy may be a step forward, but its success will depend less on announcing targets than on creating the conditions to achieve them. Pakistan cannot become an automotive export hub merely by instructing manufacturers to export.

There is also tension with the National Tariff Policy 2025-30. That document argues that Pakistan’s import tariffs are higher than those of regional competitors. Industry representatives challenge the comparison, pointing out that Pakistan’s basic customs duties are combined with additional and regulatory duties, while other countries’ are assessed largely on their simple tariffs. The methodological objection has merit. A like-for-like comparison is needed before drawing sweeping conclusions about competitiveness.

But the industry’s defence is not without problems either. Decades of protection have failed to produce a globally competitive automobile industry. Consumers have paid high prices for limited choices, while exports remain negligible.

Protection cannot become a permanent entitlement. Equally, withdrawing it without addressing expensive energy, weak infrastructure, limited scale and inadequate technological capabilities could damage domestic manufacturing without creating a competitive replacement.

The question is not whether tariffs should fall. It is how reforms should be sequenced, and whether investors can trust the government to follow that sequence.

Lobbying complicates matters further. Before 2016, the established automobile assemblers presented a largely united front and resisted change for decades. The arrival of new manufacturers and technologies has fractured that consensus. Different groups now seek different concessions, and policymaking has become a contest among competing interests.

The pattern extends well beyond automobiles. Retailers and traders have escaped meaningful taxation despite repeated attempts over decades. Fertiliser manufacturers have enjoyed exceptionally high returns on equity, yet have largely avoided the kind of extraordinary profit-sharing demands imposed on other sectors. Real estate continues to receive favourable treatment. Strong associations protect their members, while less organised businesses absorb the costs.

Privatisation presents another test of investor confidence. Fauji Fertiliser’s participation in the consortium that acquired PIA is noteworthy. It does not establish why individual investors chose their partners, but it raises a wider question about the value businesses place on political insulation in Pakistan.

Potential investors in power distribution companies have similar reasons to be cautious. K-Electric’s multi-year tariff was substantially revised following a regulatory review. The regulator must have the authority to correct its decisions, but investors also need confidence in the rules governing such revisions. If a long-term tariff determination offers limited certainty, the risk will find its way into the price bidders are prepared to pay.

The problem is not that businesses should be protected from competition, taxation or commercial losses. Nor is the private sector innocent of rent-seeking. Many established firms have grown comfortable behind tariff walls and regulatory concessions. The problem is that the state applies different standards to different businesses, often changing them after investments have been made.

This is what investors price. A higher risk premium is not merely a reflection of interest rates, exchange-rate expectations or sovereign credit ratings. It also reflects the possibility that a commercially successful investment will attract fresh taxation, regulatory intervention or political scrutiny.

The barriers are already formidable. Taxes are high and concentrated on the formal sector. Regulation is heavy and overlapping. Energy is expensive, ports are inefficient and skilled labour is scarce. None of these disadvantages is easily fixed. Policy predictability, however, is something the government can improve without spending billions.

Above all, fairness is missing. State institutions have an inherited suspicion of private profit, often treating successful businesses as beneficiaries of privilege rather than recognising the risks they undertake. The IMF and World Bank are right to question vested interests and excessive protection. But reform cannot mean replacing privileges for some businesses with arbitrary burdens on others.

The private sector responds to the incentives it faces. When rules are unpredictable, lobbying becomes a form of insurance. Those with access and influence survive. Those without either hesitate to invest. This creates a vicious circle in which political connections become more valuable than productivity.

Pakistan has rebuilt its reserves and improved its debt indicators. That is an achievement, but it is not an investment strategy. Capital does not arrive merely because the balance of payments looks healthier. It comes when investors believe that contracts will be honoured, profits will not be treated as offences and the rules will remain credible after the money has been committed.

The government has spent three years restoring macroeconomic stability. It must now restore trust. Without that, the reserves may keep growing, but productive investment will remain elusive.

Copyright Business Recorder, 2026