Pakistan’s economy has stopped falling, but foreign capital has not yet returned. According to State Bank of Pakistan (SBP) data, foreign private investment, combining direct and portfolio flows, fell from $2.47bn in 2023-24 to $1.75bn in 2024-25 and then to $1.04bn in 2025-26, a cumulative drop of 58%. Foreign direct investment (FDI) fell to about $1.64bn, while portfolio flows went from an inflow of $119m to an outflow of $594m. August brought some relief, with net FDI of $315.9m, the highest monthly figure in two years. The question is whether that marks a recovery or just a brief improvement.
The weakness is broad. Inflows from China, Hong Kong and Switzerland, three of the biggest sources, fell by 28%, 37% and 7% respectively in 2025-26. At about 0.4% of GDP, Pakistan’s FDI equals Bangladesh’s but is far below Egypt’s 4.2%, Malaysia’s 3.7%, Thailand’s 3.3% and Indonesia’s 1.5%. Pakistan also accounts for a small share of its main investors’ foreign spending: about 0.4% of China’s outward private investment and 1.1% of Hong Kong’s. China’s share was much higher a decade ago, when it was financing Pakistan’s power plants.
Earlier peaks show what is now missing. In 2017-18 total foreign inflows reached almost $5bn, or 1.5% of GDP, comprising $2.8bn of direct investment and $2.2bn of portfolio investment. That year GDP grew by more than 6%, reserves had reached $17.5bn the previous year, and total investment had risen to 17% of GDP. In 2020-21, when growth was also close to 6%, inflows totalled $4.6bn. Since then, the country came close to default in 2022-23 and suffered more than $30bn of flood damage. Growth has averaged only 2.3% since, and domestic private investment fell to 12.7% of GDP in 2025-26.
Other problems have added to the economic slump. A former federal minister identifies the resurgence of terrorism as the most damaging factor, holding back projects such as the Reko Diq mine in Balochistan. Multinational companies including Procter and Gamble, ICI and Shell have left the country, which he argues has discouraged other potential investors.
Even so, the macroeconomic recovery is real. The SBP’s reserves had risen to about $21.4bn by mid-September, and SandP upgraded Pakistan’s sovereign rating to B in July. But investment was only 14.38% of GDP in FY26 and national savings 14.13%. One analysis concludes that Pakistan has stopped declining but has not convinced investors that it is safe to commit long-term capital.
The main problem is trust. The Special Investment Facilitation Council (SIFC) can speed up approvals, but it cannot quickly create credibility. Investors want to know whether future regulators, tax officials, courts and governments will honour the terms on which they invest. The dispute over K-Electric’s tariff illustrates the risk. The regulator, NEPRA, initially set the utility’s average base tariff at Rs39.97 per unit under a seven-year regime, then cut it to Rs32.37 in October 2025 after review petitions. The appellate tribunal rejected K-Electric’s appeals this month. The company says the new tariff is financially unsustainable and may pursue further legal action.
The timing is unfortunate because the government is trying to sell majority stakes and management control in three power distributors: FESCO, GEPCO and IESCO. The Privatisation Commission acknowledges that buyers will need regulatory predictability. Critics argue that predictability has to be a general feature of the market rather than a special assurance offered to each buyer.
Tax policy raises similar concerns. Firms in the formal economy feel that compliance mainly makes them easier for the tax authorities to target. The tax authority itself acknowledges that long refund audits can strain companies’ cash flow, and the Federal Tax Ombudsman has identified systemic problems in automated refunds. Under the FY27 regime, goods exporters pay advance tax of 1.25% on their proceeds, while qualifying IT exporters pay 0.25% until tax year 2029. In FY26 merchandise exports fell by 5.93% to $30.14bn, while services exports rose by almost 19% to $10.04bn. Global demand also played a role, but analysts argue that the contrast shows the state can reduce burdens when it chooses to.
The most recent data are somewhat more encouraging. Net FDI in the first two months of FY27 rose by 24.1% to $494.5m. Gross inflows increased by 18.4% to $705.9m, while outflows grew by about 7% to $211.5m, so the improvement came mainly from new money rather than reduced withdrawals. China remained the largest investor, followed by the UAE, with Canada also a significant source in August. Net investment from Britain nearly doubled and Kuwait’s rose by 63%, but inflows from Hong Kong and Switzerland fell.
The sectoral picture is mixed. Financial services attracted the most capital, up about 30%, followed by power, which was slightly lower than a year earlier. Net investment in trading rose more than eightfold to $89.4m, and electronics received $45.7m, almost 27 times last year’s amount. But mining, communications and oil and gas exploration all recorded net outflows. Total net outflows from these sectors reached $91.3m, compared with $24m a year earlier. Foreign interest in state assets may be returning slowly, helped by the PIA sale and bids for FESCO, but analysts say it is too early to call this a broad turnaround.
Some commentators argue that the quality of investment matters as much as its volume. In the ten months to April 2026, net FDI was $1.41bn, down from $2.04bn a year earlier. Most of it went to power ($785.6m) and financial services ($658.9m), while communications recorded a net outflow of $439.6m. Investment in a new export factory and the purchase of an existing bank are both counted as FDI, but they have very different effects on the economy. Projects such as the 720MW Karot and 884MW Suki Kinari hydropower plants added much-needed capacity, but it is less clear how far they developed local suppliers or skills.
On this view, policy should go beyond attracting investment. Officials should ensure that foreign capital is used productively, linked to Pakistani suppliers, workers and universities, and used to build the capabilities of local firms. Success would be measured by supplier networks, skilled jobs, research partnerships and exports. Others favour more traditional incentives: tax holidays of five to ten years, full foreign ownership, guaranteed repatriation of profits and low duties on imported machinery. The goal would be to raise foreign direct and portfolio investment to nearly 2.5% of GDP.
Both approaches face the same underlying problem. Pakistan has restored macroeconomic stability, mainly by restricting imports, raising taxes and rebuilding reserves. Attracting investment, however, depends on firms believing that returns expected over five or ten years will not be undermined by changes in rules. Until that confidence exists, strong months like August are likely to remain occasional rather than the start of a sustained recovery.