A recent World Bank study, ‘Foreign Direct Investment in Retreat: Policies to Turn the Tide’, highlights a concerning decline in foreign direct investment (FDI) inflows to emerging and developing economies, which have reached their lowest levels since 2005.
Globally, the FDI-to-GDP ratios for these economies have diminished from approximately 5.0 per cent in 2008 to alarmingly low levels around 2.0 per cent in recent years.
Pakistan, which relies heavily on FDI and external financing to address significant infrastructure deficits, stimulate exports, create employment opportunities and mitigate the impacts of climate change, is particularly affected by this global trend. The report indicates that four out of six Emerging Market and Developing Economies (EMDE) regions have experienced a continuous decline in FDI, with nearly 60 per cent of EMDEs reflecting lower FDI-to-GDP ratios in the period from 2012 to 2023 compared to 2000 to 2011.
This decline exacerbates Pakistan’s well-documented economic vulnerabilities, characterised by chronic current account deficits, an unsustainable external debt burden, and periodic balance-of-payments crises. As of December 2023, Pakistan’s external debt had risen to $131 billion, with Chinese financing constituting over $68 billion through a network of more than 400 projects initiated since 2000. CPEC has raised concerns due to escalating debt repayments amidst unclear debt-equity arrangements and substantial interest obligations. With debt servicing alone consuming approximately $30 billion annually, Pakistan is at significant risk of falling into a debt trap. The drastic reduction in foreign exchange reserves, plummeting to a low of $4.1 billion in June 2023 before rebounding to $13.15 billion by early 2024, shows the country’s structural volatility.
Despite stabilisation measures, Pakistan faces nearly $6 billion in scheduled payments before June 2025, alongside a current-account deficit of $269 million during the same timeframe. The ongoing inflationary pressures, with double-digit price growth anticipated in 2024 and monthly year-over-year rates peaking at 29 per cent, further complicate economic forecasting.
Nevertheless, 2024 has presented indications of macroeconomic adjustment. The IMF approved a new loan worth $7 billion in September 2024, contingent on implementing structural reforms and disciplined fiscal measures. Credit rating agencies, including Fitch and Moody’s, have responded positively, raising Pakistan’s outlook to ‘CCC+’ and ‘Caa2’, respectively. These upgrades follow a significant 450-basis-point reduction in policy rates since mid-2024 and a moderation in inflation, with consumer prices declining from near 30 per cent to below 13 per cent by early 2024.
Domestic investment, measured as a share of GDP, remains at a fifty-year low. However, the newly established Special Investment Facilitation Council (SIFC), designed to stimulate investment and streamline regulatory processes, has achieved mixed but predominantly incremental results. Its initiation led to a 10 per cent increase in exports to $30.64 billion during FY2024, while foreign inflows to local government bond markets amounted to $875 million, among the highest in Asia. Pakistan’s stock market also experienced a remarkable 73 per cent surge, making it the best-performing exchange globally in 2024, buoyed by IMF reserves, currency stabilisation and moderated inflation.
Despite these positive developments, the gains remain fragile. The robust financial momentum of the SIFC masks deeper structural issues. Pakistan continues to depend on short-term mechanisms such as IMF assistance, sovereign bond offerings and temporary investment pledges rather than pursuing sustainable macroeconomic reforms. The SIFC’s reactive strategy neglects essential long-term policy realities, as regulatory unpredictability, inadequate institutional quality, inconsistent tax and tariff frameworks and sectoral distortions persist unaddressed.
Key sectors, including energy, infrastructure, manufacturing and agriculture, remain hindered by inefficiencies. The World Bank’s global guidance emphasises that sustained FDI necessitates incentives for engagement and substantial improvements in governance, legal certainty, competitive market conditions and human capital development. These foundational aspects have historically been weak within Pakistan’s economic framework.
The World Bank articulates a comprehensive three-pronged strategy for revitalising FDI in emerging markets and developing economies (EMDEs): enhancing attractiveness, maximising domestic benefits and promoting global cooperation. When adapting this framework to the context of Pakistan, a multifaceted roadmap emerges.
To begin with, significant improvements in institutional strengthening and rule of law are essential. This includes enhancing transparency and consistency in investment regulations, facilitating effective dispute resolution, ensuring robust contractual enforcement and strengthening anti-corruption mechanisms. Implementing a streamlined, e-governance-driven investment regime would alleviate bureaucratic challenges and counteract the arbitrary policymaking that currently discourages foreign investors.
Achieving macroeconomic stability and currency predictability remains paramount. Continued fiscal discipline, particularly under the auspices of the IMF, is critical. Efforts to reduce budget deficits, normalise monetary policy and rebuild reserve buffers to a target of $20 billion would send strong signals of confidence to potential investors. A carefully managed and predictable exchange rate policy would further assuage concerns regarding abrupt currency devaluations.
Regarding trade and investment liberalisation, Pakistan should reevaluate existing restrictions on FDI, particularly in the finance, energy, telecommunications and logistics sectors. Re-engaging in bilateral investment treaties, simplifying joint venture frameworks and expanding privileges within free trade zones are viable strategies to attract both public and private capital. Sectoral upgrading with linkages is also crucial. Beyond merely enticing prominent investments, FDI must foster the growth of domestic industries. Instituting mandated local content requirements, initiating supplier development programmes, enhancing vocational training and offering research and development incentives, especially in renewable energy, high-value agriculture, export-oriented manufacturing and digital services, will enhance the benefits of investment spillovers.
Effective domestic resource mobilisation and sovereign fund deployment are essential. The government must judiciously realign the Pakistan Sovereign Wealth Fund (PSWF), established in 2023 and capitalised with Rs2.3 trillion (approximately $8 billion) worth of profitable state-owned enterprise equity. While the IMF has expressed concerns regarding its governance structure, effective deployment of public–private partnerships in the energy, logistics, and mining sectors could attract capital from the
Gulf states and private institutional investors. Enhancing transparency and compliance with anti-money laundering regulations will further bolster credibility.
For Pakistan to secure substantial FDI gains, immediate stabilisation must evolve into sustained governance and structural reforms over the next 12 to 24 months. Key challenges to monitor include political instability, the risk of populist policy reversals, currency devaluation and sporadic security incidents – all of which could undermine investor confidence.
Pakistan’s macroeconomic conditions are at a critical juncture. The decline in FDI is not an isolated phenomenon; it is indicative of systemic deficiencies that have been exacerbated by global trends. Nonetheless, the country is not devoid of potential for recovery. Evidence suggests that Pakistan has begun to gain momentum, characterised by a reliable rescue package, stock and bond inflows and the initial signs of FDI recovery.
The forthcoming challenge lies in translating this momentum into enduring structural renewal. Should Pakistan successfully implement the World Bank’s three-pronged policy strategy anchored in macroeconomic stability, institutional strengthening and strategic global cooperation, it can shift towards sustainable, investment-led growth.
This transformation would necessitate disciplined fiscal, monetary and exchange rate policies, a transparent investment framework that upholds the rule of law; a bold reimagining of major projects such as CPEC and KPEC to optimise domestic benefits and sovereign equity rather than accruing debt; effective mobilisation of domestic institutional capital through the Pakistan Sovereign Wealth Fund (PSWF) and reformed state-owned enterprises (SOEs); as well as targeted trade liberalization and investment law reforms to regain access to Gulf, Asian and Western FDI.
If Pakistan successfully navigates this transition, FDI could approach 3-4 per cent of GDP. Although this would still fall short of the peaks observed, it would signify a substantial improvement from current lows. Such inflows could finance critical infrastructure, support export expansion, and promote sustainable employment opportunities. The alternative recurrent crises are unsustainable.
As highlighted by the World Bank, FDI is not a guaranteed advantage; it necessitates a convergence of investor confidence, regulatory stability, and global engagement. Pakistan’s trajectory since 2022 resembles a turbulent rollercoaster, marked by abrupt shocks, emergency interventions, macroeconomic recalibrations, and cautious optimism. What remains absent is a durable transformation.
If political leaders, technocrats and society as a whole commit to the arduous task of overcoming political cycles, entrenched interests and capacity constraints, Pakistan can transform FDI challenges into an opportunity for developmental renaissance. The stakes are considerable: bridging the infrastructure deficit, alleviating poverty and steering a population of 240 million towards innovation and prosperity.
Pakistan finds itself at a crossroads in today’s volatile global and domestic landscape. A reformist agenda aligned with the World Bank’s pragmatic guidance presents a pathway toward recovery and a lasting economic redefinition. The decisive question remains: will Pakistan seize this opportunity?
The writer is a trade facilitation expert, working with the federal government of Pakistan.