Foreign direct investment (FDI) in Pakistan

FDI in Figures

According to UNCTAD's World Investment Report 2024, FDI inflows to Pakistan stood at USD 1.81 billion in 2022, up by 24.3% year-on-year. At the end of the same period, the total stock of FDI reached USD 28.61 billion, around 8.5% of the country’s GDP. Figures from the Board of Investment show that, in the period 2011-12 to November 2024, the power sector was the primary recipient of FDI in Pakistan (29.7% of the total), followed by oil & gas (17.9%), financial business (15.2%), communication (it & telecom) (3.6%), trade (3.0%), transport (2.1%), chemicals (2.0%), construction (2.0%), and textiles (1.2%), while other sectors accounted for the remaining 23,2%. In regards to countries, China is by far the biggest investor in Pakistan (27%), ahead of the UK (12.9%), Hong Kong (11.3%), the U.S. (9.3%), and Switzerland (5.8%). According to the latest data from the State Bank of Pakistan (SBP), the country experienced a rise in inward FDI in the first half of FY 2024-25, with inflows reaching USD 1.33 billion, up from USD 1.1 billion in the same period of the previous fiscal year. Investments from mainland China totalled USD 535.5 million, reflecting a 48.2% increase from USD 361.5 million in the first half of FY 2023-24 and accounting for approximately 42.9% of Pakistan’s total inward FDI.

The potential attractiveness of Pakistan for investment remains lower than neighbouring India but equal to Sri Lanka and Bangladesh. Pakistan's attractiveness improves, albeit very slowly, against a backdrop of a challenging security environment, electricity shortages, and a burdensome investment climate that hinders investments, including complex and inconsistent regulations, insufficient protection of intellectual property rights, and constantly changing taxation policies. Pakistan maintains investment screening mechanisms for inbound foreign investment on the basis of national security. Foreign investors (except Indian and Israeli citizens/businesses) can establish, own, operate, and dispose of interests in most types of businesses in Pakistan, except those involved in arms and ammunition; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol. Pakistan allows companies to remit the proceeds of disinvestment to their foreign shareholders without prior approval from the State Bank. The government’s investment policy offers the same incentives, concessions, and facilities for industrial development to both domestic and foreign investors. While some incentives are included in the federal budget, the government primarily relies on Statutory Regulatory Orders (SROs) – ad hoc measures introduced through executive orders – for industry-specific incentives. Pakistan ranks 91st among the 133 economies on the Global Innovation Index 2024, 135th out of 180 in the Corruption Perception Index, and 150th out of 184 countries on the latest Index of Economic Freedom.

What to consider if you invest in Pakistan

Strong Points

Pakistan's main strengths for attracting FDI are:

• A huge domestic market with a population of 216 million (World Bank, latest data available), a decreasing level of poverty, a stronger middle class and vibrant demographics.
• An inexpensive and abundant workforce.
• High GDP growth in recent years.
• In recent years, the government has pursued an FDI attraction policy with numerous privatisations, the guarantee of equal treatment between foreign and local investors and a whole series of tax incentives. It has also made some necessary efforts in terms of economic reform.
• The country has financial and logistical support from the United States and the IMF.
• The Law on Special Economic Zones creates an industrial hub with liberal incentives and facilitation services for investors to minimize the cost of doing business.

Weak Points

Some of the main obstacles to attracting FDI to Pakistan include:

• Low fiscal resources (13% of GDP) due to the continuing importance of the informal economy (40% of GDP and 60% of employment)
• High exchange rate vulnerability and inflationary risk
• High vulnerability to natural disasters and their negative impact on the country's agriculture
• Weak manufacturing (20% of GDP) and export base, weak sectoral diversification
• Difficult business environment: the country is ranked among the least pro-business economies in the world with its 108th place in the World Bank's 2020 Ease of Doing Business rankings
• Inadequate education (40% illiterate) and healthcare
• Low per capita income and high poverty levels
• Domestic and regional security risks

Government Measures to Motivate or Restrict FDI

The Pakistani government is carrying out an active foreign investment promotion policy and has taken several economic liberalisation measures to make the country more attractive. Pakistan offers tax incentives for the establishment of industrial units in certain specific sectors: energy, ports, highways, electronics and software.

The Government has also set up special export-oriented zones called export-processing zones (EPZs), in order to encourage foreign investment. Some of the incentives offered to EPZ investors include exemptions from all federal, provincial and municipal taxes for export-destined production, exemptions from all taxes and duties on equipment, machinery and materials and access to Export Processing Zone Authority "one window” services.

The government also offers incentives to Export-Oriented Units, which are stand-alone industrial units allowed to operate anywhere in the country but have to export 100% of their production.

However, the government has set ceilings for certain strategic sectors (such as agriculture) and certain social sectors. In addition, foreign investment in some sectors is forbidden for national security reasons.

A multi-year FDI strategy is being developed by the Pakistani government. Its goal is to progressively increase FDI from USD 2.8 billion in FY 2019-20 to USD 7.4 billion in FY 2022-23.