Air pollution costs 6.5% of GDP

248,000 premature deaths a year, FDI down 34% to $1.64b as investors weigh air quality

KARACHI:

Air pollution is emerging as a major threat to Pakistan's economic competitiveness and investment attractiveness, with deteriorating air quality contributing to premature deaths, declining workforce productivity, business disruptions and rising healthcare costs, according to business and environmental experts.

The Overseas Investors Chamber of Commerce and Industry (OICCI) stated that air pollution represented one of the country's most severe public health and economic challenges, accounting for more than 248,000 premature deaths annually, according to the State of Global Air.

The environmental crisis has intensified over the past decade, with national average concentrations of fine particulate matter (PM2.5) increasing by 7% between 2013 and 2023, while ground-level ozone rose by 16% between 2010 and 2020.

Currently, 92% of the population lives in areas where PM2.5 concentrations exceed the World Health Organisation's interim target of 35 micrograms per cubic metre, while the entire population resides in areas breaching national air quality standards.

Children and other vulnerable groups bear a disproportionate share of the health burden, with children under five accounting for 18% of air pollution-related deaths.

The OICCI stressed that addressing the crisis required stricter enforcement of industrial emissions standards, faster adoption of cleaner transport and greater support for the private sector to transition towards sustainable production practices.

Karachi Urban Lab acting Director Muhammad Toheed said clean air was not merely an environmental demand but an economic necessity.

Experts argue that stricter emissions standards, cleaner fuels and reliable public transport should be treated as economic investments rather than additional costs, as preventing pollution is considerably cheaper than managing its long-term consequences.

"Pakistan's struggle to attract foreign investment had several underlying causes, with air pollution adding another layer of concern for international investors," highlighted Sajjeed Aslam, Partner at Sustainability LLC, USA.

Net foreign direct investment declined 34% to $1.64 billion in FY26, while total foreign investment, including portfolio flows, plunged 74% to just $451 million. The State Bank of Pakistan has primarily linked the weakness in investment inflows to governance concerns and policy uncertainty.

However, Aslam said environmental conditions also influenced investment decisions, particularly as international businesses increasingly considered climate risks and environmental sustainability when assessing potential destinations. Toheed cautioned against attributing the entire pollution crisis to vehicles, arguing that fossil fuels were significant contributors through transport, power generation and industrial activities, but household fuels, crop-residue burning, waste burning and industrial emissions also played a substantial role.

The country bears an enormous financial burden through premature deaths, healthcare expenditure and lost productivity, with the estimated cost reaching around 6.5% of GDP, including the impact of lead exposure. The actual burden could be higher because many pollution-related health cases remain unreported.

Aslam said high pollution levels make it increasingly difficult for companies to persuade foreign employees to relocate to major urban centres such as Lahore, while recurring winter smog and associated closures disrupt business operations and economic activity.

"International investment funds with environmental and climate-related mandates also scrutinise air quality and sustainability indicators when allocating capital," he said. The World Bank estimates that environmental degradation, with air pollution representing its largest component, costs the country nearly 6% of GDP annually. Meanwhile, the University of Chicago's Air Quality Life Index estimates that air pollution reduces average life expectancy by 3.8 years, with losses reaching as much as seven years in the most polluted areas, he added.

The crisis, however, is not beyond control. Much of the country's air pollution originates from domestic sources, making targeted policy interventions potentially effective.

In Lahore, vehicles account for 35% of fine-particle pollution, followed by heavy industry at 28% and brick kilns at 17%, while crop-residue burning adds to pollution levels during the winter months.

International experience also demonstrates that sustained policy action can deliver measurable improvements. Beijing reduced its annual average PM2.5 concentration from 89.5 to 58 micrograms per cubic metre between 2013 and 2017. Studies attributed approximately 80% of the improvement to emissions reductions rather than favourable weather conditions.

The country has also initiated measures to tackle the problem. The World Bank-backed $300 million Punjab Clean Air Programme aims to reduce PM2.5 concentrations by 35% over a decade through interventions including the introduction of 600 electric buses and 5,000 super seeders to discourage crop-residue burning.

Experts say the country needs to accelerate the transition towards cleaner fuels, with Euro-5 fuel available at all petrol pumps by 2027 and Euro-6 by 2030, alongside mandatory continuous emissions monitoring for major industrial units and public disclosure of pollution data.