Foreign Direct Investment (FDI) is often considered a crucial indicator of a nation’s economic health, reflecting its attractiveness to global investors. As the fiscal year 2025 (FY25) begins, Pakistan has seen a notable rise in monthly FDI. However, the underlying dynamics of these inflows reveal a deeper, more concerning reality that has been ignored for a long time.
The start of FY25 has seen a rise in monthly FDI. The latest data from the State Bank of Pakistan shows that the country received a total of $136.3 million in net foreign direct investment (FDI) in July 2024, marking an increase of 64 percent year-on-year compared to July 2023. The annual FDI for FY24 stood at $1.9 billion, up by 17 percent year-on-year.
Despite the reported growth, foreign direct investment in Pakistan remains weak and lackluster—still far from the peak levels seen in the early 2000s or even during the more modest peak between 2014-15. This points to a much more serious issue, which is not just the low level of foreign investment but also the stagnant rate of inflows, which remains confined to a limited number of countries and sectors.
According to theories that explain the types of FDI in different countries, these inflows in Pakistan primarily represent investments by companies looking to meet domestic demand for consumer goods, retail, energy, telecommunications, and other import-driven sectors. There is little investment in areas that could bolster the country’s exports, encourage technology transfer, or promote import substitution— except in a few rare cases. This trend is evident from the sector-wise and country-wise breakdown of net inflows, where FDI over the years has been concentrated in sectors like oil and gas, telecommunications, financial services, and the power sector. The power sector has been the leading recipient of FDI over the past six to seven years.
The power sector continued to attract the most FDI in July 2024, accounting for 46 percent of net inflows. This trend has remained consistent over the years, with the power sector comprising 42 percent of the total FDI.
Stagnation in foreign investor diversity is also a concern, with China (including Hong Kong) contributing a large portion of the total FDI into the country. In FY24, FDI from China made up 30 percent of the total, while other key investors, including the US, UK, and a few others, have shown little to no significant growth, leaving Pakistan’s overall FDI at alarmingly low levels.
Pakistan’s approach to attracting FDI requires a fundamental overhaul. Not all FDI is beneficial, but relying on a few countries or sectors will not drive the nation forward. Much of the issue stems from the country’s overall investment climate, which, when compared to other countries in the region, might not be attractive to investors. To secure a more robust economic future, it must broaden its focus, improve its investment environment, and diversify the sectors and sources of FDI. Without these reforms and other necessary changes for the economy, the country risks continuing its cycle of slow growth and limited economic progress.