Net foreign direct investment (FDI) into Pakistan remains stubbornly low despite the country’s sizable market, strategic location, and considerable investment potential.

According to the State Bank of Pakistan, net FDI during July–October 2025 fell to $747.7 million — a sharp 26 per cent decline from $1.01 billion in the same period last year. This downturn reflects more than temporary headwinds; it highlights deep structural impediments that continue to divert long-term foreign capital away from Pakistan.

Political volatility and policy inconsistency remain the biggest deterrents. Large investors — particularly those in real estate, agribusiness, manufacturing, and logistics — depend on predictable policy environments and multi-year visibility. Yet Pakistan’s landscape is marked by abrupt changes in taxation, inconsistent incentives across federal and provincial levels, and recurring uncertainty associated with government transitions.

Regulatory complexity adds another layer of friction. Pakistan’s approval processes are multilayered and fragmented, requiring foreign investors to navigate federal, provincial, and municipal bureaucracies. Procedures that take weeks in competing economies routinely take months — or even years — in Pakistan. Investors repeatedly cite slow approvals for land acquisition, opaque construction permitting, inconsistent industrial licensing rules, and unpredictable provincial regulations.

These delays inflate transaction costs and raise risk perception, especially when regional competitors such as Vietnam, Bangladesh, and the United Arab Emirates offer streamlined one-window systems that Pakistan has yet to operationalise.

Despite immense potential, governance, policy and procedural flaws that are difficult to navigate create barriers for foreign investors

Land governance represents one of the most serious structural weaknesses. Pakistan lacks a unified digital land registry, reliable record-keeping, and efficient dispute-resolution systems. Overlapping claims, unclear titles, stay orders, and slow-moving courts keep investors on edge, particularly in real estate, agritech, warehousing, and logistics. For foreign firms, uncertainty over land ownership is not merely an inconvenience; it is a deal-breaker.

Last month, during the visit of Prince Mansour Bin Muhammad Al Saud, the Association of Builders and Developers and the Saudi-Pak Business Council signed a Memorandum of Understanding to encourage Saudi investment in our real estate and construction sector.

It is yet to be seen whether the recent drive to demolish illegal and dangerous construction and recover land from land grabbers in Karachi could pave the way for Saudi investors keen to partner on projects where land has a clear title and is free of encroachments.

Moreover, Pakistan’s agricultural potential is immense, yet structural inefficiencies deter global agribusiness companies from investing. Post-harvest losses account for at least one-fourth of the crops due to inadequate cold storage, outdated transport networks, poor handling practices, and a lack of modern logistics.

Energy remains another major bottleneck. Pakistan’s long-standing electricity constraints — high tariffs, unreliable supply, and legacy contractual obligations — continue to hurt industrial competitiveness.

Even after recent reductions, industrial tariffs remain high. Expensive and inconsistent power erodes profit margins and discourages manufacturing-led FDI, pushing Pakistan further behind regional competitors like Bangladesh and Vietnam.

Skills and productivity gaps compound the challenge. Pakistan’s workforce is large but insufficiently prepared for modern industrial and agricultural systems. Weak technical training, outdated vocational curricula, and limited industry-academia linkages prevent foreign technologies from delivering optimal returns.

Structural issues in key sectors further discourage investment. On the one hand, agriculture suffers from fragmented landholdings, resistance to corporate farming, inefficient water usage, outdated seed varieties, and weak extension services. On the other hand, real estate faces speculative pricing, inconsistent zoning regulations, poor building standards, and unreliable municipal enforcement. These weaknesses shrink the universe of credible, scalable investment opportunities.

Pakistan also struggles to retain investors once they arrive. Foreign firms often report inadequate institutional support, slow dispute resolution, partnership frictions, and day-to-day bureaucratic hurdles. This weakens reinvestment flows — one of the strongest indicators of a healthy investment climate.

Reversing all this requires a holistic reform agenda — complicated but not impossible under Pakistan’s current hybrid governance model, apparently institutionalised through the 27th amendment. The key question is whether this structure can deliver the necessary reforms.

Policy consistency and long-term economic direction are central. The hybrid setup, with its centralised decision-making, theoretically allows clearer economic coordination and the ability to pursue multi-year roadmaps. Yet this civil-military hybrid system may remain vulnerable to legitimacy constraints, shifting alliances, political storms and backstage negotiations that can disrupt policy continuity.

Digital land governance and judicial strengthening are equally critical. The state’s institutional machinery — especially where strong digital systems exist — could accelerate long-delayed land reforms. Yet entrenched provincial elites, powerful real-estate lobbies, and politicised bureaucracies remain major barriers even to a hybrid regime. Judicial reforms, meanwhile, require autonomy rather than centralisation — an area where a hybrid structure may fall short.

Finally, skill development could benefit from central coordination through the National Vocational and Technical Training Commission and military-run technical institutions. But education remains a provincial subject, and the constitutional attempt to bring it under federal control for this purpose is not so easy, given the provinces’ concerns and reservations.

Published in Dawn, The Business and Finance Weekly, November 24th, 2025