Daily Times

Pakistan’s economy stands at a critical juncture, marred by fragile macroeconomic indicators, persistently low foreign direct investment (FDI), and entrenched structural inefficiencies. If I were to believe government-quoted statistics, a very rosy picture emerges. And finally, the inflation genie has been bottled up leading to interest rate reductions and boosting investor confidence. Similarly recent highlights, such as the Pakistan Stock Exchange’s recognition as the world’s best-performing stock market in 2024, showcase potential, but the absence of a cohesive and effective investment strategy continues to hinder sustainable economic growth.

Chronic economic instability remains a hallmark of Pakistan’s financial landscape. The country narrowly avoided defaulting on its external financing obligations in mid-2023, securing a $3 billion Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) to mitigate immediate risks. Yet, long-term challenges persist. FDI inflows-standing at $214 million in August 2024, up from $136 million in July-remain modest compared to regional peers like Vietnam and Bangladesh. High inflation, although reportedly under control, continues to erode purchasing power and deter investment, while a $75 million current account surplus in August 2024 offers only limited relief against deeper fiscal deficits and external debt burdens.

Investors frequently cite significant barriers to doing business in Pakistan, including complex and inconsistent regulations, weak enforcement of contracts and intellectual property rights, and frequent policy changes. Political instability and regional security concerns further exacerbate these issues, creating an unpredictable investment climate that deters both domestic and foreign stakeholders.

Pakistan can draw lessons from countries that have successfully leveraged FDI for growth. Vietnam’s export-oriented Special Economic Zones (SEZs), supported by political stability and infrastructure development, attract over $15 billion in annual FDI. Similarly, Bangladesh’s thriving textile sector, bolstered by trade agreements and value addition, contributes more than $40 billion annually to its economy. Turkey’s success with public-private partnerships (PPPs) in infrastructure, combined with sovereign guarantees, has made it a magnet for global investors. These examples underscore the importance of a clear and targeted investment strategy. A half-cooked investment strategy like the SIFC is not enough to withstand the internal and regional economic challenges.

A bipartisan economic agenda is essential to ensure policy continuity and stability.

To emulate these successes, Pakistan requires a multifaceted FDI strategy addressing structural challenges while capitalizing on its unique strengths. First, policy and governance reforms are imperative. A streamlined regulatory framework-including a digital one-window operation for investment approvals-can enhance transparency and efficiency. Strengthening the legal framework by enforcing intellectual property rights and establishing specialized commercial courts for dispute resolution is equally critical. A bipartisan economic agenda is essential to ensure policy continuity and stability.

Second, Pakistan must prioritize high-growth sectors. The ICT and technology sectors, with investments in IT hubs and training programs, can attract global tech companies. Renewable energy projects, supported by long-term power purchase agreements and sovereign guarantees, present significant opportunities. Similarly, the agriculture and mining sectors hold untapped potential, as exemplified by the Reko Diq project, which could position Pakistan as a mining destination. It is also important to reiterate that the team leading such projects must always consider Pakistan’s national interests first. Unlike the horrendous negotiation and agreement skills demonstrated during the Reko Diq saga.

Fiscal and monetary stability must underpin these initiatives. Negotiating better terms with creditors and exploring debt-to-investment swaps can alleviate debt burdens. Targeted subsidies and improved supply chains can help stabilize inflation while maintaining investor-friendly interest rates will further attract capital.

Investment incentives need to be recalibrated. Lowering the threshold for tax incentives under the Foreign Investment Promotion and Protection Act (FIPPA) to $200 million in priority sectors can widen the investment pool. Protections for qualified investments, including profit repatriation guarantees, must be expanded.

Strengthening domestic capital markets is also essential. Initial public offerings (IPOs) of state-owned enterprises can deepen the Pakistan Stock Exchange (PSX), while financial literacy programs and tax-advantaged savings accounts can attract retail investors. Additionally, regional and international collaboration is crucial. Expanding opportunities under the China-Pakistan Economic Corridor (CPEC) to non-Chinese investors, ensuring transparency, and negotiating preferential trade agreements with Gulf Cooperation Council (GCC) countries and the United States can bolster trade and investment.

With these measures, Pakistan could set ambitious yet achievable targets: annual FDI inflows of $5 billion by 2026, sustained GDP growth of 5-6% per year, the creation of three million high-value jobs in sectors like ICT and energy, and diversified exports exceeding $40 billion by 2027. However, time is of the essence. A proactive, transparent, and inclusive investment plan is not merely desirable but essential for Pakistan’s economic revival. By learning from global success stories and addressing domestic shortcomings, Pakistan can transform itself into a regional hub for investment and growth.

The writer is Foreign Research Associate, Centre of Excellence, China Pakistan Economic Corridor, Islamabad.