Why Pakistan's progress in stabilising the economy has not translated into a significant increase in investment

Pakistan has made economic progress, but this has not led to a significant rise in investment, which is crucial for long-term growth. Investors consider various factors beyond market demand, taxes, energy costs, financing and expected returns. One key factor is the cost of dealing with the state, including approval times, departmental requirements, tax consistency, decision-makers, and dispute resolution processes.

These factors affect the time, cost, and risk associated with investment. Despite macroeconomic stabilisation, Pakistan's investment-to-GDP ratio remains low at 14.38 per cent in FY26, and the country falls behind regional competitors in governance effectiveness, regulatory quality, rule of law, and political stability. This uncertainty translates into a governance cost, with potential delays, overlapping licences, uncertain tax assessments, unreliable utilities, and time spent navigating government processes.

The problem is not the lack of policies but the gap between policy announcements and their implementation. Frequent changes in taxes, tariffs, and regulations add uncertainty, making it difficult for investors to price known costs and plan for the future. Simplifying the investor's interaction with government is essential. A clearly identified lead authority, supported by a shared digital process, defined timelines, and shared responsibilities between federal, provincial, and local authorities can reduce uncertainty.

Major investment and industrial reforms should have clear institutional ownership, measurable targets, and deadlines, with regular progress reviews made public. Tax administration should broaden the formal sector base, simplify compliance, and reduce discretionary interactions. Energy sector improvements, such as addressing distribution losses, weak recoveries, theft, planning, and circular debt, can also reduce electricity costs for businesses.

A clear and predictable industrial policy framework covering tariffs, energy costs, taxation, access to finance, technology, exports, and local value addition is crucial. The focus should be on improving productivity and competitiveness over the long term rather than offering short-lived incentives. Clear accountability and better coordination between existing institutions rather than creating new ones are needed.

If Pakistan can ensure more predictable institutions, quicker decisions, and clearer responsibilities, it can reduce the governance cost faced by businesses, making the country a more attractive destination for long-term capital investment.