Why FDI remains elusive

EDITORIAL: Pakistan’s improving external position and better sovereign credit profile have yet to translate into the one indicator that matters greatly for future growth: stronger foreign direct investment.

The latest figures are particularly telling. According to some estimates, net FDI fell by around 32 percent to $1.7 billion in FY26 even as macroeconomic conditions improved. This disconnect should prompt some uncomfortable questions about what Pakistan is actually doing to make itself an attractive investment destination.

Those concerns were underscored this week when a visiting IMF delegation met the office-bearers of Overseas Investors Chamber of Commerce and Industry (OICCI), which represents multinational companies operating in Pakistan. The message was clear: macroeconomic stabilisation is necessary, but not enough.

Investors continue to face regulatory and compliance burdens, weak policy coordination, energy constraints, taxation problems and uncertainty over business rules.

The most glaring illustration of the environment foreign investors operate in came in another OICCI disclosure: member companies had around Rs102.8 billion in pending tax refunds as of August, including Rs68 billion in income tax and Rs34.8 billion in sales tax, tying up working capital needed for operations, expansion, and future investment.

It is difficult to reconcile this reality with repeated government assurances that Pakistan is working to remove bottlenecks to FDI.

The reality, however, is different. OICCI members are not obscure, fly-by-night businesses whose refund claims can be dismissed on grounds of incomplete documentation or procedural deficiencies; they include some of Pakistan’s largest and longest-established foreign investors. If legitimate refunds owed to such companies remain stuck for prolonged periods, what message does that send to a prospective investor? The problem, in fact, is not just limited to refunds. Foreign investors assess the cumulative cost and uncertainty of operating in Pakistan, from foreign exchange constraints that can delay profit and dividend repatriation to inconsistent taxation, regulatory changes, weak dispute resolution, inadequate intellectual property protection and poor coordination across levels of government.

Some of these problems are particularly difficult to justify because they are within the authorities’ capacity to address. Poor federal-provincial coordination can turn routine approvals into protracted processes, adding uncertainty and cost for businesses. So, too, can the long-running failure to address Pakistan’s energy vulnerabilities.

The precarious fuel-import position, particularly amidst disruption surrounding the Iran-US conflict has again exposed the risks of an economy that has done little to improve energy conservation or reduce its dependence on imported fuel.

Furthermore, the OICCI’s call for a broader tax base during the meeting with the IMF delegation goes to the heart of another contradiction in Pakistan’s investment climate. Its members operate in the formal economy, file returns and pay taxes, yet wait for billions in legitimate refunds while large swathes of the economy remain undertaxed or outside the tax net altogether.

Repeatedly increasing the burden on documented, compliant businesses is neither a sustainable revenue strategy nor a recipe for making formal investment more attractive.

The scale of the refund problem raises another uncomfortable question: if a few hundred foreign investor companies alone have over Rs100 billion tied up in refunds, how large is the total stock of refunds awaiting taxpayers nationwide? The answer would offer a sobering measure of the FBR’s administrative shortcomings. This matters as the prime minister seeks investment from Pakistani-American businesspeople during his US visit. Asking investors to put money into Pakistan is easy; creating conditions that make them want to is considerably harder. No country is entitled to assume that foreign capital will choose it.

Pakistan is competing with other destinations and must offer investors something more persuasive than promises: predictable policies, efficient institutions, reliable energy, fair taxation, protection of investment and, above all, confidence that the state will honour its obligations.

Copyright Business Recorder, 2026