OPINION: Trapped cash, foreign dreams, and a shrinking entrepreneurial core

In any economy, the lion’s share of investment typically originates from the domestic private sector, with foreign direct investment (FDI) often trailing behind as a follower rather than a leader. This holds because local entrepreneurs possess intimate knowledge of market conditions, regulatory landscapes, and risk profiles, enabling them to allocate capital more efficiently than outsiders.

In Pakistan, however, government authorities are grappling with an even more fundamental challenge: attracting investment from their own citizens.

The Privatization Commission, for instance, faces demands from domestic entrepreneurs that mirror those typically voiced by foreigners: stringent guarantees on returns, legal protections, and operational autonomy, underscoring a profound erosion of confidence in the home market.

Consider the recent reluctance among potential buyers of power distribution companies. Groups once eager to acquire these assets are now rebuffing the Privatization Commission, arguing that sustainable investment cannot thrive under duress or “at gunpoint.” Instead, they insist on dictating their own terms, as evidenced by one consortium bidding for Pakistan International Airlines (PIA), which demands arbitration rights in London under the English law, a clause that hedges against domestic judicial uncertainties and currency risks.

Such stipulations reflect a classic economic response to perceived institutional weaknesses: investors seek to minimize exposure to policy volatility, which in Pakistan has historically included abrupt regulatory changes and enforcement inconsistencies that inflate transaction costs and deter long-term commitments.

This shift in mindset among Pakistan’s big business families is palpable. Where once the affluent might purchase foreign real estate merely to park illicit or excess wealth, often a hedge against inflation or political instability. They now aspire to build income-generating assets abroad.

Some are establishing manufacturing facilities in more stable environments, while others venture into car rentals or service-oriented enterprises. This evolution aligns with economic theory on capital allocation: in a globalized world, capital flows to jurisdictions offering higher after-tax returns, lower operational frictions, and stronger property rights protections. Pakistan’s high taxation and energy prices exacerbate this, as they distort incentives by raising marginal costs and reducing net profitability, prompting a rational reallocation of resources outward.

Yet, this outward drift is contagious and multifaceted. Over decades, the demonization of profit-making in Pakistan, through populist rhetoric, aggressive audits, and wealth taxes has fostered a hostile environment for entrepreneurship, akin to the “original sin” problem in emerging markets where governments inadvertently accelerate capital flight by stigmatizing success.

Concurrently, these same business groups are snapping up assets at home, revealing a nuanced strategy. One prominent businessman, recently declared non-resident status to avoid taxes, acquired an agro-based company at a premium. In another case, a tycoon sold his cement business but pivoted to automobile assembly.

The common thread? Sellers often structure deals to repatriate capital via foreign financing repaid offshore or through Special Convertible Rupee Accounts (SCRAs) that facilitates repatriation while buyers deploy “trapped” liquidity within Pakistan.

Pakistan’s implicit capital controls lie at the heart of this dynamic. Outflows exceeding US$5 million require government approval, which is seldom granted, channeling funds through inefficient grey markets or outright evasion.

Such controls, while intended to stabilize the balance of payments, create distortions reminiscent of those analyzed in models of financial repression: they inflate domestic interest rates, discourage savings, and trap capital in low-yield assets such as bank deposits, government securities, or mutual funds. With inflation eroding real returns, Pakistan’s CPI has hovered around 10-20 percent in recent years; these cash-rich groups, particularly in sectors such as cement, are compelled to acquire earning assets at inflated valuations. For instance twice the market price, to preserve wealth.

This logic also illuminates why local conglomerates are absorbing businesses from exiting foreign firms, rather than fresh inflows materializing. FDI in Pakistan has plummeted, from $2.6 billion in 2018 to under $1 billion recently, as per World Bank data, as multinationals repatriate amid regulatory hurdles and economic headwinds.

Locals, meanwhile, siphon capital out incrementally, over-invoicing imports to retain margins in offshore trading entities or under-invoicing exports to accumulate abroad, building foreign nests where post-tax returns outpace Pakistan’s. These tactics exploit trade mis-invoicing, a global phenomenon estimated by the IMF to drain $1 trillion annually from developing economies, further weakening Pakistan’s current account and reserves.

The government appears cognizant of this exodus, with the Prime Minister advocating lower income and sales tax rates to stem human and financial capital flight, a policy nod to supply-side economics, where reduced marginal rates can broaden the tax base and stimulate investment. Yet once entrepreneurs commit to foreign markets, reversal is elusive; path dependence sets in, much like industrial consumers in Pakistan’s energy sector who, having invested in off-grid solar and other avenues amid high tariffs, resist returning despite rate cuts.

Pakistan cannot readily compete with Dubai’s near-zero income tax, streamlined visas, and business-friendly ecosystem, where setup costs are offset by superior infrastructure and rule of law, yielding returns often two to three times higher after adjusting for risk.

Copyright Business Recorder, 2025