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Pakistan's FDI falls to lowest since 2023 amid tax policy concerns
Pakistan’s foreign direct investment inflows have fallen to the lowest since 2023, as business leaders complain of erratic tax policies driving away business.
Data released on Friday showed a 34 per cent decline in year-on-year investment, with
just $1.64 billion net trickling into the country of 250 million people over the past 12 months.
Major multinational companies have packed up since an economic crisis in 2022, including
Procter & Gamble Co., the world’s largest consumer goods maker, which indirectly created thousands of jobs in Pakistan, and Telenor ASA, a top taxpayer which invested $2 billion over two decades, both at the end of last year.
TotalEnergies SE, Shell Plc, and Uber Technologies Inc. have also departed, while other foreign companies, including Microsoft Corp., which spent a quarter century in the capital Islamabad, have handed over to local partners or scaled back operations.
Caught between pressure from the International Monetary Fund to increase revenue and a large populace unable or unwilling to pay income taxes, Pakistani authorities have long resorted to squeezing companies. Businesses in the country currently pay up to 44 per cent tax, made up of a baseline corporate tax rate of 29 per cent and a basket of add ons that include employee protection funds and a progressive super tax.
The super tax, imposed on the highest-earning businesses, was first introduced as a one-off emergency tax but was repeatedly extended. A legal challenge against it earlier this year failed, although the government slightly reduced the rate in the latest budget.
“Pakistan is a significant outlier, and it is paying the price,” Pakistan’s Chamber of Commerce said in a statement in May. The corporate tax rate exceeds the 20 per cent rate imposed in Thailand and Vietnam.
Telenor and Shell declined to comment, while Procter & Gamble, Uber and TotalEnergies did not respond to requests. Microsoft said that they changed their operating model in Pakistan as a part of a “regular process of business evaluation and optimization”.
Khurram Schehzad, adviser to Finance Minister Muhammad Aurangzeb, said the exits are due to companies changing their global strategies. He added that there have been 79 new foreign entrants between 2023-2025, compared with 19 exits.
Still, total FDI inflows remain low, at a moment when Pakistan is enjoying one of its strongest diplomatic positions in years.
Islamabad helped to broker peace talks between the US and Iran, building on a warming relationship with US President Donald Trump. The government has seized on the chance to court investment in mining, oil and crypto. Meanwhile Pakistan’s closest allies have signaled some confidence in the market. Saudi Arabian Oil Co. has taken a stake in a local energy provider and Chinese companies meanwhile are behind the largest share of foreign investment, boosted by the arrival of electric vehicle makers including BYD Co.
Pakistan's key weakness remains its reliance on imports, particularly for energy, leaving it dangerously exposed.
A crushing economic crisis in 2022 — fueled by political chaos and compounded by a global energy price shock — brought the nation close to bankruptcy, as the currency lost almost half its value and foreign reserves plummeted to critically low levels.
Bailouts by the IMF in the following years supported by loans from friendly countries helped to stabilize the economy. Along with the financial aid came the need for economic austerity and high taxes.
The pharmaceutical sector has been particularly badly hit by a wave of exits by foreign manufacturers, according to Ayesha Tammy Haq, the executive director of Pharma Bureau, the representative body of multinational pharmaceutical companies. She said policy uncertainty created a “trust deficit” between company executives and the government, compounded by weak enforcement of intellectual property laws that allow low quality, copy-cat drugs to flourish in the market.
“
There’s a lot of people who cannot get their medicines now because they’re just not available in Pakistan,” she said in an interview. “
We have become reliant on imports.”
In the meantime, Pakistan’s external account is instead kept relatively healthy by remittances from overseas Pakistanis, which reached a record $41.6 billion in the last fiscal year which ended in June, accounting for more than 9 per cent of GDP. That cash flow has long outpaced exports which have barely moved from around $30-$32 billion and dwarfs FDI.
Critics say the cushion provided by remittances reduces the pressure on policymakers to make tough decisions for the long-term economic sustainability of the country, such as export and FDI growth.
Javed Kureishi, the CEO of Pakistan Business Council, a business policy advocacy group, said the latest FDI figures are
“extremely disappointing” and described new entrants replacing departing foreign companies as something “you can’t celebrate”.
“MNCs need stable policies,” he said. "The wrong policy is better than constantly changing policies."
https://www.business-standard.com/w...-amid-tax-policy-concerns-126072300419_1.html
