In Pakistan, past experience shows, every attempt at significant economic and governance reforms, which can inherently disrupt the status quo or challenge vested interests, must attract some kind of instinctive, ritualistic resistance from various sources: businesses, judiciary, civil and military bureaucracy, politicians, and even the public. Consequently, inertia has overtaken the moribund economy, making any tangible progress and change difficult, if not outright impossible.
There are reasons for this. Policymaking in Pakistan often swings between “panic and paralysis”. The state either makes abrupt decisions without weighing their pros and cons or delays obvious decisions until the moment is long past. Neither approach inspires confidence among the investors and the citizens. Rather, this affects economic growth and investment, turning Pakistan into a laggard across the South Asian region. The nation’s growth has tumbled to an annual average of 1.7 per cent in the last three years when the investment as a ratio of the country’s GDP at 13.8pc remains one of the lowest in the world.
There have been examples where the policymakers choose to introduce sudden, sweeping measures with little thought or preparation. And there are instances where they move so slowly that one begins to wonder whether there is any intent at all. The government’s decision in 2022 to introduce energy conservation measures, including the early closure of markets and shops, in order to narrow the twin current account and fiscal deficits due to a surging energy import bill amid shrinking fiscal space and increasing foreign exchange crunch, and the opposition it met, is one example of how difficult it has become to undertake reforms in this country.
The backlash from traders, business owners and even the general public to the decision made in haste was immediate and intense. The government’s response was to retreat and scrap the proposal as quickly as it was announced. Indeed, consultation with the market leaders might have softened the opposition, but it wasn’t merely a case of poor communication. It was emblematic of a broader, dangerous trend: in Pakistan, change is resisted not on merit but on reflex.
Pakistan’s potential for foreign investment remains lower than its competitors, largely due to its ineffective policymaking approach and lack of timely decision-making and conviction
The results can be encouraging only when a policy provides long-term consistency and clarity. The 2016 and 2021 auto policies sought to give a clear long-term future roadmap to the industry after years of dithering. The results were encouraging. It attracted many new car makers, boosted investor confidence, and gave consumers choices. The policy worked not because it was unique; it worked because it gave a clear vision of which direction the government wished to see the industry move into. The budget for the next year, however, seems to be putting breaks on the industry’s progress, though, due to sudden policy changes on importing used cars, which will impede market development for hybrids and electric cars in the country.
On most occasions, the decision-making takes so long to the consternation of local and foreign investors that many wonder if the government and its entities are even serious enough to take any crucial and tough decisions. The delays in policymaking and decisions more often make investors wind down their investment plans and, in the case of foreign firms, leave this country and take their capital to more attractive destinations.
One such instance of delayed decision-making pertains to the determination of K-Electric’s multi-year tariff (MYT) for the seven-year period of 2023-30 by the National Electric Power Regulatory Authority (Nepra). It took the regulator two years and scores of arduous public hearings before it finally announced an integrated MYT for the country’s only privatised power distribution company last month to set a stable investment roadmap for seven years. It may be recalled that the previous MYT expired in June 2023, and the utility had submitted its request for the tariff in November 2022 so that Nepra could make its decision within the stipulated six months. Due to the delay in tariff determination, the firm has not been able to publish its annual accounts for FY24. Nor is it likely to release its final financial statement for FY25 since the federal government is second-guessing the regulator’s decision and filed for its review, making foreign investors jittery.
The government has challenged the Nepra decision, allowing the firm an integrated base MYT of Rs39 per unit against Rs44 demanded by it for seven years, despite the fact that the regulator had rejected its objections on different elements of the tariff — including but not limited to loss recovery allowance to the tariff control period of seven years — during its hearings on the company’s request, which raises questions over the intentions of certain quarters within the government about the utility.
The challenge to Nepra’s determination represents a pattern of undermining institutional processes in spite of questions around the regulator’s capacity. We have seen the pharmaceutical industry shrink and foreign companies exit Pakistan over the last couple of decades due to the lack of or delayed decisions on industry issues related to the deregulation of the sector; meanwhile, better and timely policymaking has helped India become the leading pharmaceutical raw material exporter along with China; that boat seems to have already sailed for Pakistan.
In certain cases, like the ones related to the privatisation of the loss-making Pakistan Steel Mills and the contract awarded for the Reko Diq copper and gold mines, judicial activism has caused immense financial losses to the country’s exchequer and damaged Pakistan’s reputation as a secure destination for foreign investment.
The delays in policymaking and decisions more often make investors wind down their investment plans and, in the case of foreign firms, leave this country and take their capital to more attractive destinations
The latest data from the State Bank of Pakistan (SBP) shows that the net foreign investment flows declined slightly to $1.67 billion during the 11-month period ending in May of the outgoing fiscal year from $2.26bn the same period the previous year. This compares with foreign investment flows of $2.4bn during FY24, $1.61bn in FY23 and $1.55bn in FY22. As a ratio of the country’s GDP, Pakistan has been attracting foreign direct investments (FDI) equal to around 0.5pc — except in the 2000s and under the China-Pakistan Economic Corridor initiative during the 2010s — compared to the 3pc that a country of its size must receive to make progress and accumulate international reserves.
Pakistan’s potential for foreign investment remains lower than its competitors. For example, it attracted FDI equal to 0.4pc of the size of its economy in 2022 compared to India’s 1.5pc and Vietnam’s 4.4pc due to a burdensome investment climate marked by policy inconsistencies and delayed decision-making.
The significance of FDI for developing countries like ours as a catalyst for economic development and global integration through capital inflows and technology transfer cannot be overstated. Courting foreign investors is among the many challenges that the country has been trying to address as the country grapples with an economic crisis. Pakistan must break the mould and implement consistent policies if it wants to truly harness the FDI’s potential. With the country consistently ranking poorly on the World Bank’s Ease of Doing Business Index and attracting negligible investment inflow, it is more than just underperformance for a country of 240 million and a GDP just north of $400bn; it is self-inflicted harm.
Published in Dawn, The Business and Finance Weekly, June 30th, 2025