Is the economy suffocating under red tape?
Pakistan ranked 136 out of 167 in the Legatum Prosperity Index 2023. In the Index, Pakistan ranked 96 in Investment Environment and 102 in Enterprise Conditions, indicating that investors face barriers to starting and scaling industries.
Legatum places Pakistan at 129 on Economic Quality, reflecting low industrial productivity and limited export diversification - evidence that our manufacturing base still depends on low-value goods. These rankings are generally consistent with other such reports, and we hope that in future editions of the Index, the government's efforts are reflected in higher ranks.
One of the key indicators of Pakistan's underperformance and low growth is low investment. Pakistan's investment-to-GDP ratio stood at 12.9% in 2024, compared to around 30% in India, Bangladesh and Vietnam. This is symptomatic of a deeper problem.
A similar gap exists in foreign direct investment (FDI). Pakistan's FDI inflows were around 0.7% of GDP, while Vietnam attracted about 4.3%, Bangladesh about 0.9% and India around 0.7%. This low level of investment, both domestic and foreign, restricts the country's ability to expand its productive capacity, modernise industries and create jobs.
The business environment remains weak, and the economy continues to move in a boom-and-bust cycle. Two structural factors stand out: a distortionary and extractive taxation system that discourages investment, and a complex regulatory landscape that increases the cost and time of doing business.
Pakistan's regulatory environment is complex and fragmented. There are more than 100 regulatory bodies at the federal level alone (PIDE Sludge Audits), and many more at the provincial level. This means investors must deal with multiple departments and overlapping requirements, often submitting the same information repeatedly.
According to the Competition Commission of Pakistan's report "Enhancing Economic Efficiency of SMEs in Pakistan", there are at least 12 different categories of general regulatory layers that are applicable to all firms doing business in Pakistan. In the manufacturing sector, a total of 50 laws and numerous secondary regulations are enforced by over 40 national and subnational agencies and departments. We hope that with the passage of the Asaan Karobar Act 2025, these problems will be solved or at least minimised.
Despite State Bank of Pakistan (SBP) assurances, firms struggle to repatriate profits and open letters of credit due to procedural restrictions and manual approval processes. International professionals and directors often face long delays in getting security clearance. These outdated and manual regulatory procedures increase costs, create uncertainty and make it difficult for businesses to operate smoothly.
The government's footprint through direct interventions amounts to more than 67% of GDP, though its nominal size is 20%. Therefore, over-regulation and government footprint are two of the major barriers to investment and innovation. Such inefficiencies translate directly into lower investment and slower firm growth.
Alongside regulatory complexity, taxation remains a major barrier to investment and growth.
Frequent changes in tax rates and structures make it difficult for investors to plan for the long term. The system is characterised by multiple rates, exemptions and cumbersome compliance procedures that increase the cost of doing business.
Pakistan's tax rates are among the highest in the region. The corporate income tax stands at 29%, and an additional super tax and other direct taxes make effective income tax rates around 50%, compared to 20-25% in most neighbouring economies.
Pakistan's tax system is not only high rate but also highly complex. A formal-sector company must file around 18 tax returns each year, covering income, withholding and sales taxes. For service firms, the burden is even heavier, operating across provinces can mean filing up to 60 or more returns annually. On average, a firm files seven income tax and 12 sales tax returns in one province, rising to 67 when active nationwide. This excessive paperwork consumes time, increases compliance costs and discourages investment.
International and local experience shows that lowering rates, simplifying structures and ensuring predictability can help expand the tax base and support economic activity. High and unpredictable taxes, on the other hand, push businesses towards informality and discourage foreign investment.
Pakistan cannot realise its true potential without addressing two critical constraints: a complex regulatory environment and a distortionary taxation system.
Taxation system issues largely remain unaddressed, and transformative reforms have not been announced. However, the government has initiated regulatory reforms through elimination and simplification of regulations to improve compliance and reduce costs. Different initiatives are currently being undertaken to overhaul the regulatory landscape and promote ease for businesses.
Reforming these two pillars can make it easier to start and operate businesses, lower the cost of compliance and increase investor confidence. Countries in the region, such as India, Bangladesh and Vietnam, have shown that targeted regulatory and tax reforms can help attract investment, boost exports and create jobs.
With these rightly calibrated reforms, Pakistan can move beyond its boom-and-bust cycles and lay the foundation for economic prosperity.
This discussion on barriers to economic growth will be echoed in the upcoming Pakistan Prosperity Forum later this week.
What should be our direction? To outline an answer, let us quote Dr Arthur Laffer, who spoke at the Pakistan Prosperity Forum in 2021: "The government needs to get out of the way, cut spending, rationalise taxes, deregulate the economy, reduce trade barriers, privatise state-owned enterprises and establish a sound money. The government should then be in the business of 'undoing things' not 'doing things'."
THE WRITERS ARE AFFILIATED WITH PRIME INSTITUTE, AN INDEPENDENT ECONOMIC POLICY THINK TANK INCLUDED IN THE GLOBAL 100 THINK TANKS TO WATCH, 2025