By Naveed Rafaqat Ahmad
In June 2025, a World Bank report delivered a stark warning: global foreign direct investment (FDI) to developing countries has plunged to its lowest point in two decades. Clocking in at approximately US $435 billion in 2023, this flow now represents just 2.3% of GDP, a sharp contraction from pre-COVID levels. Equally alarming, nearly 70% of this capital is now concentrated in just ten countries, bypassing dozens of emerging economies—most notably, Pakistan. This structural shift in global capital allocation reflects not only macroeconomic risk aversion among investors but also a deeper pattern of institutional differentiation—where countries with stronger governance, policy continuity, and infrastructure readiness are absorbing a disproportionate share of shrinking global capital.
For Pakistan, the global FDI downturn is not just another external headwind—it is a systemic economic threat with implications for growth, employment, and foreign exchange stability. From 1995 to 2019, empirical studies by the World Bank and UNCTAD show that a 10% increase in FDI inflows corresponded to a 0.3% rise in GDP across developing countries—but in countries with robust institutional frameworks, the growth impact reached up to 0.8%. In the absence of institutional strength—such as predictable regulatory regimes, dispute resolution, transparency in taxation, and political stability—FDI loses its multiplier effect. Pakistan, which continues to struggle with these structural weaknesses, is especially vulnerable to the current global investment squeeze.
On paper, the FDI outlook in Pakistan for FY 2024–25 appears mixed but superficially positive. Between July 2024 and January 2025, Pakistan recorded a 56% increase in FDI, primarily from China, the UK, and Hong Kong. These inflows were directed toward energy, mineral exploration, and infrastructure, especially through project-linked funding under bilateral arrangements. While this growth is commendable, it masks an underlying fragility: these capital injections were largely one-time investments tied to already committed projects. They are not a reflection of sustained confidence in Pakistan’s investment climate.
Meanwhile, foreign portfolio investment (FPI)—considered a litmus test for investor sentiment—collapsed. From July 2024 to March 2025, Pakistan saw FPI outflows of over US$269 million, a 514% drop. These figures reveal a paradox: while project-based FDI flows into specific sectors (primarily under G2G deals), financial capital is fleeing due to concerns over currency stability, governance, and profit repatriation. This decoupling underscores that Pakistan remains highly vulnerable to volatility and perception risk.
The global FDI contraction and Pakistan’s patchy investment profile together create a compound challenge. First, the loss of steady capital inflows undermines industrial development, limits job creation, and weakens technological diffusion—three of the most commonly cited benefits of FDI. Pakistan, still grappling with under-industrialization and low manufacturing productivity, needs sustainable foreign investment to enhance competitiveness. Second, exchange rate and external account pressures are intensifying. With a large external debt burden (over US$87 billion) and just US$9.4 billion in foreign exchange reserves (as of May 2025), Pakistan relies on inflows from remittances, exports, and FDI to maintain current account stability. While a temporary surplus of US$1.9 billion (July–April FY 2025) exists, it is fragile. Declining FDI, if not offset by increased exports or concessional inflows, could quickly push the balance back into deficit—especially amid rising oil import bills and delayed disbursements from international financial institutions.
The drop in global FDI feeds into unemployment and productivity stagnation. In sectors such as construction, mining, and manufacturing, FDI plays a critical role in machinery imports, skills transfer, and ecosystem development. When capital flows shrink or shift to just a few pre-approved mega projects, broader sectoral linkages weaken, leading to a narrow and exclusionary development pattern. At the strategic level, Pakistan’s dependence on bilateral FDI, especially from a few states (notably China and Gulf partners), exposes it to geopolitical leverage. In a time of shifting global alliances and rising protectionism, economic diversification is not just a financial goal—it is a national security imperative.
There are several interconnected reasons for the global FDI pullback. Geopolitical fragmentation and de-risking, the rise in U.S.–China tensions, post-COVID supply chain realignments, and conflict in Ukraine and the Middle East have made investors wary of frontier and fragile markets. High interest rates in developed economies mean investors are favoring developed-market yields over high-risk emerging-market ventures. Increasingly, investors are prioritizing green energy and low-carbon investments. Pakistan, with its fossil-heavy energy profile and slow ESG adoption, is losing out on climate-aligned capital. Finally, delays in regulatory approvals, inconsistent tax regimes, litigation risks, and political instability deter long-term investment.
All these global factors are magnified in Pakistan due to domestic constraints. FDI is not merely “flowing elsewhere”—it is actively avoiding jurisdictions perceived as high-risk with weak dispute resolution, slow bureaucracies, and erratic policymaking. Pakistan’s specific challenges include a lack of investment facilitation infrastructure. The Board of Investment (BoI) has long suffered from weak coordination, minimal aftercare services, and a reactive rather than proactive investor engagement model. Delays in tax refunds and profit repatriation have caused several multinationals to face hurdles in repatriating dividends and receiving tax rebates, eroding their trust in the system. There is also an absence of a credible industrial policy. While initiatives like the Special Investment Facilitation Council (SIFC) aim to streamline investment, long-term sectoral roadmaps remain absent. Inadequate judicial enforcement means commercial disputes linger for years, and the lack of alternative dispute resolution (ADR) mechanisms increases the cost of doing business. Finally, Pakistan’s inability to integrate green metrics into its financial architecture limits access to ESG-compliant investors and sovereign climate funds.
Despite the bleak global picture, Pakistan has space to maneuver—if it is willing to confront structural limitations and adopt bold, forward-looking reforms. First, institutional reforms and legal certainty must be fast-tracked to guarantee investors basic protections: equal treatment, dispute resolution, and policy predictability. Enforcing bilateral investment treaties and reactivating international arbitration mechanisms are essential to restore credibility. Second, not all sectors have equal risk-reward profiles. Pakistan should prioritize 3–5 sectors—such as IT services, agro-tech, renewable energy, logistics, and textiles with value-addition—and offer tailored packages including tax incentives, plug-and-play infrastructure, and regulatory fast-tracking. Third, with traditional OECD FDI flows shrinking, Pakistan should pivot toward countries actively investing abroad: Saudi Arabia, the UAE, Malaysia, and Singapore. Bilateral investment treaties, diaspora engagement, and Islamic finance instruments can support this pivot.
Pakistan must also develop a unified green investment strategy. This includes listing green bonds on local exchanges, launching climate-linked blended finance vehicles, and integrating ESG compliance into national development frameworks. The Roshan Digital Account and Pakistan Banao Certificates have shown the potential of diaspora capital. These should be expanded to include equity-linked investment options, real estate REITs, and SME equity crowdfunding. Pakistan can follow models like Egypt’s or Indonesia’s by creating a sovereign investment fund to co-invest with global partners, manage strategic assets, and de-risk FDI in volatile sectors. No investment policy can succeed without cross-party agreement. Pakistan must build a multi-year national economic framework backed by all major parties—similar to India’s 1991 reforms consensus—to guarantee stability across electoral cycles.
Pakistan’s future economic trajectory will increasingly be shaped not just by how much capital it can attract, but by the quality, resilience, and purpose of that capital. The era of passive capital inflows is ending. The global FDI contraction is a warning that the rules of investment attraction have changed. The choice facing Pakistan is stark: it can continue relying on episodic mega projects and hope for bailouts in times of crisis, or it can rewire its institutional DNA to compete for long-term, sustainable capital in a crowded global field. The second path is harder—but it is the only one that leads to lasting prosperity.
The writer, a chartered accountant and certified business analyst, is serving as the additional director general, Punjab Sahulat Bazaars Authority
