Foreign Direct Investment (FDI) in Pakistan

According to UNCTAD’s 2021 World Investment Report, FDI inflows to Pakistan declined by 6 % to USD 2.1 billion, as a result of the global economic crisis triggered by the Covid-19 pandemic. The drop in investment, however, was cushioned by continued investment in the power generation and telecommunications industries. At the same time, the total stock of FDI stood at USD 35.7 billion at the end of 2020. 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, net FDI inflows increased 12% during the first five months (July-November) of the current fiscal year 2021-22 (reaching USD 797.7 million, resulting from an inflow of USD 1,185.4 million against an outflow of USD 387.7 million). In the same period, the Netherlands were the main investor (USD 153 million), followed by China (USD 149 million).

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 was ranked 108th out of 190 countries in World Bank’s latest Doing Business report, up by 28 positions from the previous edition. This was mainly a result of significant improvement in getting electricity and handling construction permits. In addition, from 2020 onwards, Pakistan has allowed companies to remit the proceeds of disinvestment to their foreign shareholders without prior approval from the State Bank.

What To Consider If You Invest In Pakistan

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.

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.