Pakistan’s investment crisis

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Pakistan is grappling with a significant savings and investment challenge, worsened by persistent fiscal deficits that have squeezed the private sector and hindered productivity growth. The country’s recurring economic crises can largely be attributed to the government’s failure to broaden the tax base.

Consequently, investment in the formal economy, as a percentage of GDP, is approaching historic lows. To overcome the current crisis, Pakistan’s policymakers must encourage the flow of private capital into key sectors like infrastructure. Persisting with incentives for informal investments in areas like real estate has been disastrous. Pakistan must now foster an environment that encourages citizens to invest in the country’s long-term development, rather than in unproductive, speculative assets.

This shift would not only help formalise the economy but also attract the long-term investments necessary for sustainable economic growth and improved productivity. According to Economic Survey of Pakistan, investment as a percentage of GDP in FY24 stands at only 13.1%, the lowest in 64 years. The highest was recorded in FY65 at 24.6%.

Pakistan’s economy has always been driven by consumption. The contribution of consumption to GDP has remained around 89% in every period, whereas the contribution of investment to GDP has been recorded at 15-19%. The 1960s recorded the highest average investment-to-GDP ratio, followed by the 1980s and 1990s, with averages of 18.7% and 18.5%, respectively.

However, since 2011, the investment-to-GDP ratio has seen a significant decline, averaging just 15.2%. According to the World Bank, in 2023, Pakistan recorded the lowest investment-to-GDP ratio in the region. The South Asian average stood at 31.8%, with India, Bangladesh and Vietnam reporting significantly higher ratios of 33.74%, 30.95% and 32.75%, respectively. This raises concerns about Pakistan’s economic competitiveness in the region.

A large portion of investment in Pakistan is driven by public sector spending. However, recurring economic crises have diminished the government’s capacity to fund this investment, with over 60% of federal fiscal resources now dedicated to debt servicing, and most of the rest going toward covering current expenditures.

Consequently, Pakistan’s ability to pursue large-scale infrastructure projects without external borrowing is severely limited. This challenge is further worsened by the lack of incentives for formal economic activity, which reduces the capital available within the formal economy, particularly for infrastructure development.

Pakistan has experienced significant de-industrialisation over the past several decades. According to Pakistan Bureau of Statistics, in last 40 years, the industry’s share of GDP has declined annually by an average of 0.6%, dropping from 22.3% in 1980 to 20.8% in 2023. Pakistan’s ranking on the Competitive Industrial Performance Index (CIP) has also worsened, falling from 78th in 1990 to 80th in 2022 out of 153 countries. In a regional context, Pakistan’s CIP ranking is the lowest, with India and Bangladesh ranking 40th and 65th, respectively.

A prudent, targeted policy is required to overcome de-industrialisation and achieve competitiveness. Government should: raise the investment-to-GDP ratio to 20% by prioritising sectors like petrochemicals, engineering, minerals, chemicals, leather, food processing and IT services; lower borrowing costs for manufacturing firms to reduce financial burdens; gradually reduce the Corporate Income Tax (CIT) to 25% for the manufacturing sector; revive the Export Finance Scheme and reduce taxes on SMEs and Associations of Persons; reduce input costs over the next decade and enhance export competitiveness by liberalising tariffs on raw materials and intermediate goods; lower the average tariff from 9.03% to 5% and facilitate duty-free access for industries; shift capital from real estate to manufacturing by raising taxes on the real estate sector and promoting Public-Private Partnerships to develop critical infrastructure such as railways, roads, highways, warehouses and ports.

These reforms would help alleviate Pakistan’s investment crisis by stimulating domestic investments and boosting industrial production, thereby increasing exports.

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