Pakistan’s investors still waiting for a reason to believe

Pakistan’s macroeconomic turnaround over the past three years is real. Foreign exchange buffers have been rebuilt, sovereign ratings have improved, the debt burden has retreated from its crisis-era peak, and the risk of an immediate external rollover crisis has diminished considerably.

SBP’s reserves stood at about $21.4 billion by mid-September, while S&P upgraded Pakistan’s sovereign rating to B in July. By the conventional metrics of stabilisation, Islamabad has done much of the hard work.

What it has not done is convert stability into investment. Pakistan’s investment-to-GDP ratio was just 14.38 percent in FY26, while national savings were only 14.13 percent of GDP. Foreign direct investment told an even less flattering story, falling 34 percent to $1.64 billion during the year. These are not the numbers of an economy in which capital has rediscovered confidence. They are the numbers of an economy that has stopped falling but has not persuaded investors that it is safe to start climbing again.

Part of the problem is structural: Pakistan simply does not save enough to finance the investment rates required for sustained growth. But the more difficult problem is trust. Domestic and foreign investors remain reluctant to commit long-term capital to a formal economy where the rules governing taxation, regulation and returns can change faster than the investment itself can pay back. The issue is particularly acute in sectors requiring large upfront capital expenditure, long gestation periods and exposure to regulated prices.

The Special Investment Facilitation Council (SIFC) can accelerate approvals and resolve administrative bottlenecks. What it cannot do is manufacture credibility by decree. Investors are not merely pricing whether today’s government wants their capital; they are pricing whether tomorrow’s regulator, tax authority, court or government will honour the assumptions on which that capital was committed. Policy continuity matters more than policy enthusiasm, because an investment that makes sense under one set of rules can become worthless under another.

The K-Electric tariff dispute is an unusually clear illustration. Nepra originally determined KE’s average base tariff at Rs39.97 per unit under its seven-year multiyear tariff regime, before reducing it to Rs32.37 in October 2025 following review petitions filed by KE, the Power Division and other stakeholders. KE challenged the revised determination, but the Nepra Appellate Tribunal dismissed its appeals this month. The company says the revised tariff is not financially sustainable and has indicated that it may pursue further legal remedies. Whatever one’s view of the appropriate tariff, an almost 19 percent reduction in the regulatory revenue base after a lengthy tariff-setting exercise is precisely the sort of event long-duration investors have to price into their required returns.

The timing is particularly awkward because Pakistan is simultaneously asking private investors to buy its power distribution companies. FESCO, GEPCO and IESCO are already moving through the privatisation process, with the government offering investors management control and majority ownership. The Privatisation Commission itself acknowledges that the post-privatisation framework must provide commercial sustainability and regulatory predictability. That is the point. Regulatory predictability cannot be a special concession negotiated for each transaction; it has to be an attribute of the market itself.

Tax policy produces much the same problem. Businesses operating inside the formal economy increasingly feel that compliance makes them easier to tax, not safer to invest in. Refund delays remain capable of trapping exporter liquidity; even the FBR acknowledges that prolonged refund audits can create liquidity problems, while the Federal Tax Ombudsman recently identified systemic problems in the automated refund mechanism. A revenue authority under constant pressure to meet ambitious collection targets will naturally concentrate on taxpayers it can find. Unfortunately, those are also precisely the firms Pakistan needs to reinvest, formalise supply chains and create jobs.

The unevenness becomes clearer across sectors. Under the FY27 tax regime, withholding and advance tax collection on goods exports has been set at 1.25 percent of proceeds, while the concessionary rate for qualifying IT and IT-enabled services exporters remains 0.25 percent through tax year 2029. IT exporters have also received greater flexibility over foreign-currency retention and transaction processing. These may individually be defensible policies, but together they demonstrate something investors already understand: the state is perfectly capable of reducing friction when it decides a sector matters.

The outcomes are difficult to ignore. Merchandise exports fell 5.93 percent in FY26 to $30.14 billion, while services exports rose almost 19 percent to $10.04 billion and IT exports reached about $4.6 billion. Remittances, meanwhile, climbed to $41.6 billion. It would be too convenient to attribute those divergent trajectories entirely to tax and regulatory policy; global demand, commodity prices and sector-specific dynamics matter enormously. But neither should policymakers ignore the obvious lesson that economic activity responds to incentives, friction and confidence.

The deeper problem is therefore not simply that Pakistan taxes too much or regulates too heavily. It is that the burden is unpredictable and unevenly distributed. Compliant taxpayers face increasingly aggressive extraction while large parts of the domestic economy remain lightly documented; regulated businesses can spend years negotiating frameworks whose economics may subsequently be reopened; and investors are repeatedly offered bespoke assurances where durable institutions should have sufficed.

That model can produce stability because stability requires control: control imports, manage demand, raise taxes, accumulate reserves and keep financing lines open. Growth requires something harder. It requires private capital to believe that the return it earns five or ten years from now will not be rewritten halfway through the investment cycle.

Macroeconomic stability was the necessary condition, and Pakistan has largely restored it. The next phase depends on fairness, predictability and institutions whose decisions carry enough credibility that investors do not need a fresh government guarantee every time they write a cheque. Until that changes, Pakistan may remain stable without becoming investable — and investors will continue waiting for a reason to believe.

Copyright Business Recorder, 2026