Investment stuck at 13.8% of GDP

Govt borrowing, regulatory hurdles, trade gaps block growth despite stabilisation

KARACHI:

Bangladesh had a turbulent 2025, yet its investment-to-GDP ratio stood at 22.4% — still far above Pakistan's 13.8%, which has failed to regain even its FY2022 peak of 15.6%. Regional peers such as India and Vietnam continue to sustain investment levels above 30%, underscoring Pakistan's persistent position as the lowest-investing major economy in Asia.

Although the current hybrid and multiparty setup has achieved macroeconomic stability, it has clearly failed to improve investor sentiment and investment outcomes.

Industry leaders say structural barriers remain largely unaddressed despite the creation of a high-level investment facilitation council intended to streamline approvals. Although improving, executives report that establishing an industrial project still requires roughly 25 regulatory permissions across federal and provincial agencies, prolonging timelines and raising uncertainty.

Senior corporate executives privately acknowledge frustration with the performance of the investment facilitation council, which was designed as a single-window platform to cut red tape. While its leadership is widely viewed as disciplined and execution-oriented, business representatives argue that the same rigidity has constrained innovation in investment strategy.

"Discipline has delivered many achievements in human progress, but it can also discourage new thinking," said a business association official familiar with investor outreach.

Pakistan has largely continued offering conventional, legacy project ideas to global investors, securing memoranda of understanding rather than binding investment agreements. Analysts say proposals have often centred on traditional sectors such as conventional oil refining, even as major energy producers — such as KSA and the UAE — are themselves shifting toward diversified and renewable-linked industries, limiting Pakistan's competitiveness in attracting modern industrial capital.

"Pakistan's investment ratio is structurally disconnected from the region," said Maryam Ayub, Research Economist at the Policy Research Institute of Market Economy (PRIME). "Even economies facing shocks maintain much higher investment than Pakistan, which indicates deep domestic constraints rather than temporary weakness."

Pakistan's investment-to-GDP ratio declined from 15.6% in FY2022 to 13.1% in FY2024 before only marginally recovering to 13.8% in FY2025. India sustained investment around 32-35% of GDP during the same period, while Vietnam remained near 30-33% and Bangladesh historically near 30% despite its 2025 dip.

Economists say the sub-15% level effectively caps Pakistan's growth potential far below regional peers. Asian economies that achieved sustained industrialisation typically maintained investment above 25-30% of GDP, enabling productivity gains and export expansion.

"If stabilisation were restoring investor confidence, investment would be rising decisively. Instead, it remains stuck near historic lows," said the PRIME economist.

Credit allocation patterns help explain the stagnation. Banking data for 2025 shows government borrowing dominating credit flows throughout the year, ranging between roughly Rs30 trillion and Rs36 trillion per month, compared with only Rs9.5-10.9 trillion for the private sector.

At several points, sovereign borrowing exceeded private credit by more than three times, a scale economists say reflects entrenched fiscal dominance rather than cyclical crowding-out.

"Banks prefer lending to the government because it is risk-free and profitable," Ayub said. "That keeps banks healthy but leaves industry underfinanced."

Rising domestic debt has reinforced the pattern, as the state absorbs banking liquidity to finance deficits instead of enabling productive investment.

Forward-looking indicators show firms remain cautious despite stabilisation claims. The Overall Business Confidence Index fell from 57.7 in August to 53.0 in November before edging slightly up to 53.4 in December, signalling declining optimism and delayed investment plans.

"Businesses do not yet see predictable, competitive conditions for long-term investment," said a manufacturing sector official on condition of anonymity. "Stability without credibility does not trigger capital spending."

External sector data reinforces the same concern. Exports fell from $2.85 billion in October to $2.32 billion in December before rebounding to $3.06 billion in January 2026, while imports remained structurally high around $5-6 billion, sustaining large trade deficits.

Ayub said the imbalance shows Pakistan has not built export-oriented investment despite stabilisation. "Restricting imports is not a growth strategy. Pakistan has not expanded export capacity comparable to regional peers," she said.

Another official added that limited foreign direct investment (FDI) has largely flowed into domestic or consumption-oriented sectors rather than export-bound industry, which will become a burden in the long term.

FDI stood at $2.49 billion in FY2025, showing gradual recovery, in comparison to $1.9 billion in FY2022, but largely offset by a surge in profit repatriation to $1.79 billion in FY25, which limited net capital retention. At just about 0.6-0.7% of GDP, FDI remains negligible, implying domestic public and private investment still accounts for roughly 85-95% of Pakistan's total capital formation.

Industrial energy tariffs in Pakistan remain significantly higher than in competing manufacturing hubs such as Bangladesh, undermining cost competitiveness. Businesses also face a layered tax regime that includes corporate tax, advance tax and multiple withholding levies, raising compliance costs and unpredictability.

"Pakistan remains one of the most complex jurisdictions in the region for industrial investment," Ayub said. "These structural costs directly suppress capital formation."

Taken together, low investment ratios, government-dominated credit allocation, declining business confidence, persistent trade deficits and unresolved regulatory barriers point to a broader risk: stabilisation without growth transmission. Economists warn Pakistan may be entering a low-growth stabilisation trap, where macro indicators improve but productive capacity fails to expand.

"If investment remains below 15% of GDP, Pakistan's sustainable growth rate will stay near 3-4%," she said. "That is stagnation relative to regional peers."