Pakistan’s foreign direct investment (FDI) saw a 41% year-on-year increase in the first eight months of FY25, reaching $1.618 billion. While this appears positive, experts warn that base effects and sporadic capital inflows, rather than genuine investor confidence, are driving the trend.

In February 2025, net FDI stood at $94.7 million, marking a 45% decline from February 2024. The majority of inflows continue to concentrate in the financial sector ($52.55M), the power sector ($26.99M), and the oil & gas exploration ($9.59M). Despite the need for economic diversification, sectors like IT, manufacturing, and clean energy remain underrepresented, especially compared to regional competitors.

Foreign Investment Concentrated and Cautious

China continues to dominate Pakistan’s FDI landscape, contributing over 40% of total inflows. Western investment, while present, remains significantly below what regional peers attract. The UK, a key source of FDI in South Asia, shows sporadic participation, reflecting Pakistan’s policy and economic volatility.

While the modest improvement in FDI is encouraging, it is not yet a sign of sustained growth. Experts highlight political instability, regulatory inconsistencies, legal uncertainties, and exchange rate volatility as key barriers preventing long-term capital commitments. Investors remain hesitant due to frequent governance changes and macroeconomic uncertainties.

Profit Repatriation: A Double-Edged Sword

A significant increase in profit repatriation by foreign investors presents both opportunities and challenges.

• In FY24, foreign businesses repatriated $2.21 billion, the highest in six years.
• In 8MFY25, repatriations surged to $1.486 billion, up 455% from just $267.5 million in 8MFY23.
• The UK led outflows with $489M, followed by the US ($160M), the Netherlands ($133M), and the UAE ($131M).

On the positive side, this signals renewed investor confidence and the removal of FX restrictions, allowing businesses to repatriate earnings more freely.

However, the scale of repatriation compared to FDI inflows is concerning. In some cases, repatriated profits exceed 50-100% of new FDI, meaning Pakistan is losing reinvestment opportunities. Key sectors such as food ($247M), finance, and power are leading the outflows.

Key Concerns and Policy Considerations

1. Balance-of-Payments Pressure – High repatriation outflows strain Pakistan’s foreign exchange reserves.
2. Limited Local Reinvestment – Multinational companies send profits back home rather than reinvesting in Pakistan.
3. Lack of Incentives – No strong policies exist to encourage foreign firms to reinvest earnings for long-term economic growth.

For FDI growth to be sustainable, Pakistan must:

• Ensure macroeconomic stability and regulatory consistency.
• Diversify FDI beyond financial services and energy.
• Implement policies that incentivize reinvestment.

While easing FX restrictions is a positive step, policymakers must focus on retaining foreign investment to fuel long-term economic development.