Pakistan's investment-to-GDP ratio has hit a record low, standing at just 13.1% in Fiscal Year 2024—its lowest in 64 years. This alarming statistic underscores the country's struggle with economic incoherence despite the much-publicized "stabilization" efforts following the IMF program. The recovery, while important, remains neither sufficient nor sustainable. The nation faces severe economic vulnerabilities unless there is a comprehensive overhaul of the government’s policies and operations.
A Declining Investment Trend
Pakistan's investment-to-GDP ratio has seen a gradual decline over the decades. In the 1960s, the average was 18.7%, and the 1980s and 1990s both recorded averages of 18.5%. However, since 2011, this ratio has averaged just 15.2%. The trend is even more troubling in a regional context: while South Asia’s average is 31.8%, countries like India, Bangladesh, and Vietnam boast ratios of 33.7%, 31%, and 32.8%, respectively. This stark contrast highlights Pakistan's failure to foster global competitiveness in comparison to its neighbors.
The Importance of Investment
Investment is essential for economic growth, as it generates capital assets like infrastructure, factories, and technological advancements. A low investment-to-GDP ratio signals insufficient capital formation, which hampers long-term productivity. It also stifles industrial modernization, technological adoption, and leads to a greater reliance on imports. This leaves the economy vulnerable to global economic shocks, exacerbates current account deficits, and creates volatility in exchange rates.
Additionally, low investment reflects limited private sector involvement, which is largely driven by an unfriendly business environment. Regulatory barriers, high borrowing costs, and a lack of investor confidence deter private investments. According to PwC’s 2024 Banking Publication, credit to Pakistan’s private sector as a percentage of GDP is only 12%, compared to 50% in India, 38% in Bangladesh, and 47% in Sri Lanka. This disparity, along with declining business confidence, highlights the challenges faced by the private sector in Pakistan.
The Fiscal Deficit and Governance Challenges
A major impediment to investment is Pakistan’s ongoing fiscal mismanagement, particularly the growing informal economy. The government’s unchecked current expenditures, such as the 30% year-on-year increase in Budget-25 and the 56% of the budget allocated to interest payments, deplete the revenue pool. This leaves the Federal Board of Revenue (FBR) no choice but to tax already-burdened sectors. According to FBR’s 2023-24 performance report, withholding taxes account for a disproportionate share of income tax revenue, forcing salaried and non-salaried individuals to bear the brunt of the tax burden. The exorbitant corporate tax rate of 29%, well above the global average of 23%, adds further pressure on businesses.
With the taxation landscape in disarray and a lack of support for businesses, there is little incentive for high-income individuals and corporations to stay within the formal economy. This has led to an increase in cash circulation, with many preferring to invest in gold, real estate, or simply hold onto cash. The trust deficit between the state and its citizens continues to grow, creating barriers to economic participation and further stifling growth.
The Plummeting Development Budget
Another significant barrier to investment is the shrinking development budget. Since FY16, the budget has decreased by approximately 156%. In FY 2023-24, Pakistan was unable to utilize even half of the Rs950 billion allocated for the Public Sector Development Programme (PSDP). The backlog of unfinished projects requires an estimated Rs10.7 trillion—over 14 times the current allocation. This underinvestment in development projects is one of the key reasons why the economy is struggling to generate sustainable growth.
The Path Forward: A Comprehensive Reform Agenda
There is no quick fix for Pakistan’s economic stagnation, but a multifaceted reform agenda can help address the country’s investment challenges. First and foremost, Pakistan must adopt fiscal discipline. The government must cut down on current expenditures, focusing on reducing the financial burden of State-Owned Enterprises (SOEs), eliminating unfunded pensions, and curbing elitist rent-seeking. This will help create fiscal space for development programs that can stimulate economic growth.
Tax reforms are also essential. Instead of burdening the already-taxed sectors, the government should focus on bringing the informal economy into the tax net. A simpler, fairer, and more transparent tax system would encourage compliance, boost investor confidence, and promote sustainable economic growth. Additionally, the government must launch a national program to support Small and Medium Enterprises (SMEs) and foster entrepreneurship to drive social and economic development.
Political Consensus and Governance Reforms
Political consensus is crucial for effective reforms. All political parties must recognize the severity of the economic crisis and work together to implement necessary policy changes. Improvements in governance at both political and bureaucratic levels are essential to ensure effective decision-making, efficient resource allocation, and successful implementation of policies. The private sector must also be empowered, and the government should engage more actively with potential investors from key countries like China, Saudi Arabia, UAE, and Qatar to facilitate business partnerships.
Leveraging CPEC and Human Capital Development
The China-Pakistan Economic Corridor (CPEC) has the potential to be a game-changer for investment in Pakistan. By fostering joint ventures with Chinese investors, particularly in export-oriented industries, CPEC can enhance technological adoption, improve production efficiency, and create new jobs. At the same time, Pakistan must prioritize human capital development through investments in education and vocational training, particularly in technology-driven sectors, to align the workforce’s skills with the demands of the modern economy.
Finally, public-private partnerships (PPPs) can play a pivotal role in accelerating infrastructure development, ensuring that resources are used efficiently while maintaining shared accountability.
For Pakistan to achieve sustainable, inclusive economic growth, immediate and coordinated action is needed. By embracing comprehensive reforms—focused on fiscal discipline, tax reforms, governance improvements, and investment in human capital—the country can overcome its current economic challenges and foster long-term growth. If left unchecked, Pakistan risks falling further behind its regional counterparts, with lasting consequences for future generations.
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