Pakistan's foreign-investment slump has deepened despite greater macroeconomic stability, with net foreign direct investment falling 34 percent to USD1.64 billion in FY26 as security concerns, policy uncertainty and rising capital withdrawals continue to undermine the country's attempt to persuade overseas investors to make long-term commitments.
The deterioration is striking on both sides of the ledger. Gross FDI inflows declined by 16.4 percent to USD3.57 billion from USD4.27 billion, while outflows rose by 7.8 percent to USD1.93 billion from USD1.79 billion. Pakistan therefore attracted less fresh capital even as more existing investment was withdrawn. June provided a particularly bleak finish to the fiscal year. Net FDI was only USD13.5 million, with USD294.4 million of incoming investment almost entirely cancelled out by USD280.9 million of outflows. Although monthly figures can fluctuate sharply, repeated withdrawals have prevented a sustained recovery from taking hold. Security is increasingly part of that investment equation. The Overseas Investors Chamber of Commerce and Industry's Security Survey 2026 found that 71 percent of leading foreign-investor companies ranked security among their three most pressing business concerns. For businesses committing factories, technology, infrastructure and employees for years rather than trading financial assets that can be sold quickly, such risks carry particular weight.
The concern is especially acute in Karachi, Pakistan's commercial centre, where the OICCI survey highlighted worries about deteriorating law and order. Security challenges also persist in parts of Balochistan and Khyber Pakhtunkhwa. Given Karachi's importance to industrial production, exports, banking and tax collection, weakening confidence in the city can reverberate through the wider economy. The costs are not confined to crime or terrorism themselves. Businesses may face higher insurance premiums, greater spending on private security, logistical disruption and difficulties persuading expatriate executives or foreign technical specialists to work in the country. Production interruptions and additional supply-chain expenses further erode competitiveness.
Nor do investors make such decisions solely on the basis of immediate profitability. Multinational boards, shareholders, insurers and environmental, social and governance frameworks increasingly scrutinise risks to employees. Projects that appear commercially attractive can therefore be postponed when the perceived security environment falls below acceptable standards.
This complicates Pakistan's efforts to revive foreign investment through the Special Investment Facilitation Council, privatisation, tax reforms and incentives aimed at particular sectors. Such measures may improve the prospective returns from an investment, but their effectiveness remains constrained when businesses remain uncertain about the safety of their people, assets and supply chains.
The composition of FDI offers another reason for concern. China remained Pakistan's largest source during FY26, but its net investment dropped to USD862 million from USD1.20 billion in FY25. Investment from Hong Kong declined to USD339.4 million from USD470 million, while flows from the United Arab Emirates fell to USD235.9 million from USD294.3 million. Those three sources together accounted for nearly 88 percent of Pakistan's net FDI, leaving the country heavily dependent on a small group of investors. Improvements in investment from Switzerland, Britain, Kuwait and Japan were insufficient to compensate for weaker flows from larger sources and withdrawals elsewhere.
Some of the outflows were substantial. The United States recorded a net withdrawal of USD156 million over FY26 and Norway USD364.7 million. In June alone, the American net outflow reached USD164.5 million, exceeding the combined USD90.6 million received from China, Hong Kong and the UAE that month.
Pakistan's performance also looks weak against both its own history and its regional competitors. Annual net FDI exceeded USD5 billion around FY07 and FY08, compared with roughly USD1.6 billion now. The Lahore Chamber of Commerce and Industry said Indonesia attracted about USD22 billion, Vietnam USD20 billion and Malaysia USD16 billion, compared with Pakistan's approximately USD1.64 billion. LCCI President Faheem-ur-Rehman Saigol argued that long-term economic policies and continuity were needed to attract sustainable investment. He also called for greater investment in skills, productivity and competitiveness, stronger exports and reduced import expenditure, placing foreign investment within the broader challenge of generating sustainable economic growth.
Security, however, is only one obstacle. Greater macroeconomic stability may have reduced the threat of an immediate crisis, but investors also require predictable taxation, reliable energy, smooth repatriation of profits, enforcement of contracts and a clear long-term economic direction. Pakistan continues to struggle with several of these requirements. The consequences extend beyond the amount of capital entering the country. Foreign investment can bring technology, management expertise, integration into global value chains, employment and export competitiveness. Pakistan's domestic savings alone are described as insufficient to finance the industrial expansion, infrastructure, technological upgrading and export diversification required for sustained growth.
Pakistan retains attractions for international investors, including a large consumer market, competitive labour costs and opportunities in energy, mining, agriculture, information technology, healthcare and manufacturing. But those advantages have yet to translate into foreign investment on anything like the scale achieved by some regional economies. Improving the investment climate will therefore require more than fiscal inducements. The security challenge involves law-enforcement and intelligence agencies as well as provincial governments, courts, local administrations, transport authorities and municipal bodies. Urban policing, protection of industrial areas, secure transport corridors, cyber security, faster justice and effective crisis management all form part of the environment in which foreign businesses assess risk.
Perception matters, too. International investors can respond to prominent security incidents as readily as to longer-term statistics, meaning a small number of high-profile events can undermine years of improvement. Transparent communication and sustained confidence-building therefore matter alongside operational security. FY26 ultimately offered little evidence that Pakistan's FDI drought is ending. Inflows fell, withdrawals increased and the final month of the year produced almost no net investment. Security concerns add another layer of risk to longstanding complaints about policy consistency and the business environment. For Pakistan, the investment equation has become increasingly unforgiving: commercial opportunities may attract foreign interest, but without greater security and predictability, much of that interest risks remaining capital that never arrives.