Pakistan’s current government has sought to foster inward investment since taking power in August 2018, pledging to restructure tax collection, boost trade and investment, and fight corruption. However, the government also inherited a balance of payments crisis, forcing it to prioritize measures to build reserves and shore up its current account rather than medium to long-term structural reforms. The government entered a $6 billion IMF Extended Fund Facility in July 2019, promising to carry out structural reforms that have been delayed due to the COVID crisis. In March 2021, the IMF Board authorized release of the latest tranche under the EFF program, and Pakistan successfully accessed global bond markets for the first time since 2017.
Pakistan has made significant progress since 2019 in transitioning to a market-determined exchange rate and reducing its large current account deficit, while inflation has been under 10 percent for the entire reporting period. However, progress has been slow in areas such as broadening the tax base, reforming the taxation system, and privatizing state owned enterprises. Pakistan ranked 108 out of 190 countries in the World Bank’s Doing Business 2020 rankings, a positive move upwards of 28 places from 2019. Yet, the ranking demonstrates much room for improvement remains in Pakistan’s efforts to improve its business climate. The COVID-19 pandemic negatively impacted Pakistan’s economy, particularly during the spring/summer of 2020, but Pakistan fared relatively well compared to other economies in the region. Pre-COVID, the IMF had predicted Pakistan’s GDP growth would be 2.4 percent in FY 2020. However, Pakistan’s economy contracted by 0.5 percent in FY 2020, which ended June 30, 2020.
Despite a relatively open formal regime, Pakistan remains a challenging environment for investors with foreign direct investment (FDI) declining by 29 percent in the first half of FY 2021 compared to that same time period in FY 2020. An improving but unpredictable security situation, lengthy dispute resolution processes, poor intellectual property rights (IPR) enforcement, inconsistent taxation policies, and lack of harmonization of rules across Pakistan’s provinces have contributed to lower FDI as compared to regional competitors. The government aims to grow FDI to $7.4 billion by FY2023 from $2.56 billion in FY2020.
The United States has consistently been one of the largest sources of FDI in Pakistan. In 2020, China was Pakistan’s number one source for FDI, largely due to projects under the China-Pakistan Economic Corridor (CPEC) for which only PRC-approved companies could bid. Over the last two years, U.S. companies have pledged more than $1.5 billion of investment in Pakistan. American companies have profitable operations across a range of sectors, notably fast-moving consumer goods, agribusiness, and financial services. Other sectors attracting U.S. interest include franchising, information and communications technology (ICT), thermal and renewable energy, and healthcare services. The Karachi-based American Business Council, a local affiliate of the U.S. Chamber of Commerce, has 61 U.S. member companies, most of which are Fortune 500 companies and spanning a wide range of sectors. The Lahore-based American Business Forum – which has 23 founding members and 22 associate members – also assists U.S. investors. The U.S.-Pakistan Business Council, a division of the U.S. Chamber of Commerce, supports U.S.-based companies who do business with Pakistan. In 2003, the United States and Pakistan signed a Trade and Investment Framework Agreement (TIFA) as the primary forum to address impediments to bilateral trade and investment flows and to grow commerce between the two economies.
|TI Corruption Perceptions Index||2020||124 of 180||www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2020||108 of 190||www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||107 of 131||www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2019||USD 256||apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2019||USD 1,410||data.worldbank.org/indicator/NY.GNP.PCAP.CD|