Foreign direct investment (FDI) in Pakistan

FDI in Figures

According to UNCTAD's 2022 World Investment Report, FDI inflows to Pakistan stood at USD 2.1 billion in 2021, stable compared to one year earlier. In the same period, the total stock of FDI reached USD 32.9 billion, around 9.5% of the country’s GDP. The financial sector is the primary recipient of FDI in Pakistan, followed by the chemicals industry and construction. In regards to countries, China is by far the biggest investor in Pakistan; however, recently, the United Kingdom, South Korea and Japan have stepped up their investments. According to the latest data released by the State Bank of Pakistan, the country attracted FDI amounting to USD 1.86 billion in FY 2022, resulting from USD 2.622 billion in inflows as against an outflow of USD 754.7 million. Despite dropping by 29% due to a slowdown in China-Pakistan Economic Corridor (CPEC) related projects, Chinese investment was still the most consistent, accounting for about USD 531.6 million, followed by the U.S. (USD 249.6 million) and Switzerland (USD 146 million). Most FDIs were directed towards the energy (USD 737 million), financial services (USD 405 million), and oil and gas (USD 195 million) sectors.

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 also hinder investments. 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 country ranks 87th out of 132 in the 2022 Global Innovation Index and 140th out of 180 in the Corruption Perception Index. Furthermore, Pakistan ranks 73rd out of 82 countries in the Economist Business Environment ranking.

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.