Vetted version-FDI Report by Rana Sahib

Acronyms
BPM6 Balance of Payments 6th Edition (IMF)

CPEC China-Pakistan Economic Corridor
FDI Foreign Direct Investment
GDP Gross Domestic Product
IFIs International Financial Institutions
IMF International Monetary Fund
OECD Organization for Economic Co-operation and Development
UNCTAD United Nations Conference on Trade and Development
Foreign Direct Investment in Pakistan
1. Introduction
Foreign Direct Investment (FDI) is now a critical source of capital for developing
countries and a significant source of investment in the developed economies. It has grown
substantially since 1980, partly because of policy changes in developing countries to open up
their markets and increased competition amongst countries for attracting FDI.1 FDI has grown in
terms of flows and stock over the last few decades. The global flows of FDI increased from
US$290 billion (2005 constant dollar) in 1990 to US$ 2.0 trillion in 2007 before dropping to
US$1.34 trillion in 2011 and recovering in 2016 to US$1.75 trillion in 2016. 2 Development and
transition economies accounted for 37 percent and 4 percent, respectively, of global FDI in 2016
outweighing portfolio, debt, and aid flows.3
2. Global FDI stock has reached US$27 trillion at the end of 2016 from US$7 trillion in
4
2000. 63 percent of this was located in developed countries while 33 percent and 4 percent is in
developing and transition economies. Share of China alone has grown to $1.3 trillion and Hong
Kong’s to about $ 1.6 trillion. Pakistan’s share in the stock was only 0.14 percent ($ 39 billion)
as compared to 0.43 percent of Vietnam and 0.05 percent of Bangladesh by the end of 2016. FDI
inflows to Pakistan were 0.11 percent of global FDI in 2016 as compared to 0.75 percent to
Vietnam and 0.13 percent to Bangladesh.5
3. FDI is generally considered as a stimuli for accelerated development and economic

growth in developing countries. It deals with three major challenges: (a) low domestic savings
resulting in financial resource scarcity; (b) absence of modern technology and skills; and (c)
unemployment. FDI, a non-debt instrument, contributes to economic development of host
country in many ways: augmentation of domestic capital for investment, support the fragile
balance of payments, enhance efficiency through transfer of new technology, innovation,
managerial skills and marketing; and creating job opportunities.
4. Foreign Direct Investment (FDI) and international trade serve as the twin engines of
world prosperity. Econometric analysis suggests that a 10% increase in a nation’s two-way
trade relative to GDP (e.g. an increase in exports of goods and services plus imports of goods
and services from 40–44%) increases GDP by at least 1.6% through a variety of channels. It is
estimated that nominal world GDP has trebled since 1980, merchandise trade has expanded by a
1
Pandya, Sonal. 2014. “Democratization and FDI Liberalization, 1970–2000.” International Studies Quarterly.
2
UNCTAD, World Investment Reports, 1993, 2012, 2017, New York, N.Y., and Geneva, Switzerland: UN.
3
International Monetary Fund, World Economic Outlook, April 2017.
4
UNCTAD, op.cit.
5
op.cit.
factor of six and the stock of FDI has expanded by a factor of 20 (Hufbauer and Draper, 2013). 6
Global GDP was US$ 78 trillion (IMF) in 2016, global exports in goods and services were US$
23 trillion, and the global stock of FDI was US$ 27 trillion. 7 This large increase in world income
is because of huge expansion in world FDI which has transferred better technology, higher
wages and overall development and trade.
5. Pakistan also embarked upon a liberal regime in early 2000s providing multiple
incentives to attract foreign investments, including fiscal incentives, tax exemptions, credit
facilities, and repatriation of profits and dividends. Resultantly, FDI inflows rose
substantially in the last decade reaching the peak in 2007 at 3.4 percent of the GDP from a low of
0.45 percent of GDP in 2001. However, FDI experienced sharp decline dropping to below 1
percent of the GDP since then. It is mainly attributed to political turbulence, war against
terrorism and security concerns, global financial slowdown, and protracted litigation relating to
elite capturing.
6. This paper will review the literature on FDI and examine the geo-political and
economic factors that determine or drive FDI flows, overall impacts of FDI and related
policies during the past to synthesize and provide key lessons on utilizing FDI as a tool of
economic development, trends and patterns of FDI and its sectoral distribution, identify barriers
that restraint FDIs inflows including economic, institutional, financial and infrastructure, and
appraising Pakistan’s achievements vis-a-vis comparable economies with similar characteristics.
This is necessary for designing policies and strategy to boost the ability of Pakistan to attract
FDI.
2. Literature Review
7. FDI is defined as “a cross-border investment associated with a resident in one

economy having control or a significant degree of influence on the management of an
enterprise that is resident in another economy.” 8 However, the Organization for Economic
Development (OECD) adds to this definition “with the objective of establishing a lasting
interest” in an enterprise in an economy other than that of the direct investor. The ‘lasting
interest’ is the crucial component of direct investment. The “lasting interest” is evidenced when
the direct investor owns at least 10% of the voting power of the direct investment enterprise. 9
The OECD, International Monetary Fund (IMF), United Nations Conference on Trade and
Development (UNCTAD), and U.S. Department of Commerce, among others, classify a firm as
6
G.C. Hufbauer, J.J. Schott, and W.F. Wong (2010) “Figuring Out the Doha Round-Appendix A (Policy Analyses
in International Economics),” Peterson Institute for International Economics.
7
UNCTAD Trade Statistics Report 2016 and World Investment Report 2017.
8
International Monetary Fund, Balance of Payments and International Investment Manual, 6th Edition, 2009.
9
OECD Benchmark Definition of Foreign Direct Investment, Fourth Edition, 2008.
“foreign-owned” if a non-national investor (the “parent”) holds at least 10 percent of the equity
of a local firm.
8. FDI can be categorized as: (i) vertical direct investment when investors invest in
another economy with the objective of
producing components that become integral
Figure 1. FDI by Objectives part of a main product because of cost
objectives, natural resources availability or
low labour costs is termed as vertical direct
investment; (ii) horizontal direct
investment where an investor invest in a
foreign economy by duplicating his home
country manufacturing processes to supply
goods or services to a foreign market; or
may take over an existing local company or
operations known as brownfield direct
investment; (iii) the investor may enter a
foreign economy or market through
greenfield direct investment by building a new factory, distribution facility, or investment is
departmental store to establish its presence in the host country through (iv) brownfield direct
investment.
9. However, Baldwin (2013), based on the objectives of potential investors, has

categorized FDI as:10 (a) pure “market-seeking”– affiliates sell all output locally and source all
intermediates locally (northeast corner); (b) pure “efficiency-seeking”– all intermediates are
sourced locally, but some of the output is exported (eastern border); (c) “pure export-platform”
(outward processing)-all intermediates are imported and all output is exported (southwest
corner); (d) “tariff-jumping assembly” – all intermediates are imported and all output is sold
locally; and (e) pure “resource-extraction” – intermediate inputs are sourced locally and all
output is exported, e.g., cash-crop agriculture, mining and fishing, oil and gas drilling,
(southwest corner).
10
Richard Baldwin, “The New Relevance of FDI,” in Foreign Direct Investment as a Key Driver for Trade, Growth
and Prosperity: The Case for a Multilateral Agreement on Investment, World Economic Forum, 2013.
10. The UNCTAD classified determinants variables for inward FDI as under (see Box 1): 11
Cevis and Camurdan (2007) developed an empirical framework to estimate the economic
determinants of FDI inflows using six variables (GDP growth, wage, openness of economy, real
interest rate, inflation rate and domestic investment) and found that FDI is related positively with
growth rate, trade rate, and previous FDI but inversely related to inflation rate. 12 The results of
various empirical studies about the determinants of FDI are summarized in Box 2.
Box 2. The Results of the Empirical Studies about the Determinants of FDI
Empirical Studies Determinants of FDI
Moosa (2002) Market size (GDP or per capita GDP) as a market size
hypothesis, wages as a location hypothesis, trade barriers as
a other factor, growth rate as a differential rates of return,
trade deficit as a other factor, exchange rate, currency areas
hypothesis, tax as a other factor, cost of capital as a location
hypothesis etc.
UNCTAD (2002) Tax policy, trade policy, privatisation policy,

macroeconomic policy, investment incentives, market size,
market growth, market structure, raw materials, labour cost,
technology, transport and communication costs, labour
productivity.
Frenkel, Funke, and Stadtmann
(2004) The GDP growth rate and the extent of risk and that market
Bevan and Estrin (2000), size and distance, risk and economic growth.
Bevan and Estrin (2004) Unit labour costs, host and source country size, and
proximity, country risk is not a significant factor, GDP, input
costs, geographical distance and institutional and legal
factors such as trade and political
Box stability,
1. UNCTAD’scountry risk of FDI
Classification
Determinants
Nonnemberg and Mendonça (2004) Determinants Examples
Level of schooling, economy’s degree of openness, risk and
Variables
variables related to macroeconomic
Policy Variables performance
Macroeconomiclike Policy, Tax
Policy, Trade Policy,
inflation, risk, growth rate and stock market performance.
Uygur (2005) Privatization Policy,
Business Variables Investment incentives
Real interest rate of Market-Related
official treasury Market
department & growth
Size, Market
Economic potential of
of host
consolidated budget balance are main determinants FDI.market,
Determinants market structure
Mercereau (2005) Resource-Related Raw materials, labour cost,
They found out that China Economic
did not have much technology
impact on FDI
Determinants
to other countries and Efficiency-related
that some economic fundamentals
Transport and
(healthy government balances,
Economican appreciating real exchange
communication costs,
rate, low inflation, and Determinants
low interest rates labour
in theproductivity
G3) aid
explained the allocation of FDI flows among Asian
economies.
Moosa and Çardak (2006) The results reveal three robust variables: exports as a
percentage of GDP, telephone lines per 1000 of the
population and country risk in their study. They find that
11
UNCTAD (United Nations Conference on Trade and Development) (2002) World Investment Report:
Transnational Corporations and Export Competitiveness, UNCTAD. New York: United Nations.
12
Ismail Cevis and Burak Camurdan, Economic Determinants of Foreign Direct Investment in Developing Countries
and Transition Economies, Pakistan Development R eview, September 2007
developed countries with large economies, a high degree of
openness and low country risk tend to be more successful
than others in attracting FDI
11. IMF (2010), based on an analysis of 26 middle and high income economies for last 10
years data, finds that the relationship between the macroeconomic variables and FDI inflows to
primary sector are minimal, such as extraction (mining and petroleum) or agriculture has little
connection to the broader economy.13 FDI inflows to secondary sectors (manufacturing) has
more macroeconomic linkages. A depreciated real effective exchange rate is good for
manufacturing investment and countries with higher GDP growth have more manufacturing
investment. Lower wage costs are an important motivator of manufacturing FDI. However,
openness does not appear to be linked to secondary sectors FDI.
12. Nevertheless, FDI into the tertiary sectors (services industry) is found to be linked to
macroeconomic variables. While openness does not seem to be significant for primary and
secondary sectors FDI, it is very important for FDI in services since most FDI in services is
expected to be horizontal (aimed at the market in which investment is made) rather than vertical
(intended for exports). Tertiary FDI flows are also higher in more rapidly growing economies.
More flexible labor markets and deeper financial markets attract more secondary FDI, while
better infrastructure and a more independent judiciary attract more tertiary FDI.
13. To summarize, the determinants of FDI14 in most developing countries are summarized
below:
(i) Market Size: Large market size provides more opportunities for sales and also
profits to foreign firms (Wang & Swain, 1995, Moore, 1993; Schneider & Frey,
1985).
(ii) Political Stability and Growth Prospects: Countries that have high and
sustained growth rate receive has a positive influence on FDI inflows (Schneider
and Frey, 1985; Lipsey, 1999; Dasgupta and Rath, 2000; and Durham, 2002).
(iii) Labour cost and availability of skilled labor: Cheap labour is another important
determinant of FDI inflow to developing countries. A high wage-adjusted
productivity of labour attracts efficiency-seeking FDI both aiming to produce for
the host economy as well as for export from host countries (Wheeler and Mody
1992, Scneider and Frey 1985, and Loree and Guisinger 1995;).
13
James P. Walsh and Jiangyan Yu (July 2010) Determinants of Foreign Direct Investment: A Sectoral and
Institutional Approach, IMF.
14
Pravakar Sahoo (2006), Foreign Direct Investment in South Asia: Policy, Trends, Impact and Determinants, ADB
Institute Discussion Paper 56.
(iv) Infrastructure facilities:15 The availability of quality infrastructure, particularly
electricity, water, transportation and telecommunications, is an important
determinant of FDI. When developing countries compete for FDI, the country that
is best prepared to address infrastructure bottlenecks will secure a greater amount
of FDI (Wheeler & Mody 1992; Loree & Guisinger 1995; Asidu 2002).
(v) Openness and export promotion: Gains from FDI are far higher in the export
promotion (EP) regime than the import promotion regime. Import substitution
(IS) regimes encourage FDI to enter in cases where the host country does not have
advantages leading to extra profit and rent-seeking activities. However in an EP
regime, FDI uses low labor costs and available raw materials for export
promotion, leading to overall output growth. Trade openness generally positively
influences the export-oriented FDI inflow into an economy. Investors generally
want big markets and like to invest in countries which have regional trade
integration, and also in countries where there are greater investment provisions in
their trade agreements (Edwards 1990; Gastanaga et al. 1998; Housmann and
Fernandez-arias 2000; Asidu 2001).
(vi) Government finance: Government finance is an important issue that affects

capital flows. A high fiscal deficit leads to more government liabilities and
therefore more taxes and defaults on international debt. Therefore, fiscal stability
is generally considered to be one of the indicators of macroeconomic stability.
(vii) Rate of return on investment: The profitability of investment is one of the major
determinants of investment. Thus the rate of return on investment in a host
economy influences the investment decision (Asiedu, 2002).
(viii) Human capital: The availability of a cheap workforce, particularly an educated

one, influences investment decisions and thus is one of the determinants of FDI
inflow.
(ix) Policy measures: Government policies including investment incentives on FDI

inflows into a host country impact FDI. Policies to promote FDI take a variety of
forms, but the most common are partial or complete exemptions from corporate
taxes and import duties. Standard policies to attract FDI include tax holidays,
import duty exemptions, and different kinds of direct subsidies. FDI inflows are
also affected by corporate tax rate differentiation. Subsidizing FDI helps
multinational firms reduce production costs, improves incentives to create patents,
trademarks, and enhances the relative attractiveness of locating production
facilities in the country offering incentives and raises the economic benefits of
FDI relative to exporting. (Dunning, 2002, Blomsrom and Kokko, 2002,
15
Infrastructure facilities include air freight transport per 1000 km; electricity use per capita; energy use per capita
(kg. oil equivalent per capita); port logistics; total telephone lines per 1000 population (both main lines and hand
phones); and internet.
Schneider and Frey, 1985, Grubert and Mutti, 1991, Loree and Guisuinger, 1995,
Taylor, 2000, Kumar, 2002).
14. OECD (2000) suggested that FDI affects the host economy in five different ways
depending upon host country’s policies and level of development. FDI facilitates the transfer
of technological advances and know how; it increases competition; improves human capital;
integrates the economy with the global economy; and pushes for enterprise development.
Technology transfer and diffusion takes place through interrelated channels: vertical linkages
with local purchasers and suppliers; horizontal linkages with competing or complimentary
companies; migration of skilled labour; and internationalization of research and development.
However, some factors hold back the accrual of full benefits of FDI in some developing
countries which are: level of education and health, technological level of host country,
insufficient trade openness weak competition and institutions, and inadequate regulatory
frameworks.
3. Country Context
15. A country of 207 million16 people, Pakistan is strategically located at the crossroads
of three vital regions – South Asia, Central Asia and West Asia or the Middle East to be a
regional anchor for peace, stability and progress. It can serve as the hub for multiple corridors
for cooperation in the energy, trade and transportation sectors. It provides the shortest access to
the sea for landlocked Central Asian States as well as Western China through our Karachi, Bin
Qasim and Gwadar Ports on the Gulf. Pakistan is also building a road and rail infrastructure to
link these ports to the entire region. It has also negotiated gas pipelines from Iran and
Turkmenistan17 to Pakistan as well as electricity grids from Tajikistan, Kyrgyzstan and
Kazakhstan through Afghanistan to Pakistan and beyond.18 It is confident that such multiple
linkages will create a win-win for all parties and contribute towards peace, stability and
prosperity in the region.
16. Pakistan is a member of three regional economic blocks, viz. Economic Cooperation
Organization (ECO) of Central Asian States, South Asian Association for Regional
Cooperation (SAARC) and the Shanghai Cooperation Organization . Pakistan also plays a
pre-eminent role among Muslim nations, maintaining strong links with the Arab countries in
west Asia. China Pakistan Economic Corridor (CPEC)19 is an effort to leverage this strategic
location. It is an extension of China’s proposed One Belt One Road (OBOR) initiative. The
16
Pakistan Census, 2017
17
Turkmenistan-Afghanistan-Pakistan-India (TAPI) Gas Pipeline
18
Central Asia-South Asia (CASA) electricity project
19
See discussion on CPEC later in this paper
corridor and its connectivity with Central Asia, Middle East and Africa will be a game changer
for trade, energy, telecommunication, and transportation.
3.1. Macroeconomic Situation
17. Pakistan is the world’s sixth most populous country with a per capita income of
US$1,629 in 2017 placing it in the category of lower middle income countries. The country’s
rebound from the global financial crisis has been fragile due to volatile macroeconomic, political
and security conditions, natural disasters20 as well as energy crisis. Consequently, Pakistan’s
Gross Domestic Product (GDP) growth has averaged 3 percent since 2010. However, supported
by an International Monetary Fund (IMF) and Development Policy Credits from the International
Financial Institutions (IFIs), Pakistan moved forward with macroeconomic reforms in the area of
energy, taxation, and growth starting 2013 that pushed the growth rate.
18. The country has achieved GDP growth of 5.3 percent in FY2016/17 mainly driven
by recovery in agriculture, expansion of construction, services, and large scale
manufacturing, and supported by fiscal easing, strong credit growth and improved energy
supply. Near term growth is expected to remain strong provided macroeconomic risks are
contained with real GDP growth likely to reach 5.6 percent. Growing fiscal (likely to reach over
6 percent of GDP net-of circular debt) and external (current account deficit is likely to reach to
4.8-5.0 percent of GDP in FY2017/18) imbalances are expected to erode some of these gains and
GDP growth is expected to moderate to 5 percent or less in the medium term. 21 A surge in
imports reflecting strong domestic demand (partly inventories building), implementation of
import-intensive CPEC investment projects and rising oil prices have been the main causes for
this widening current account balance. Exports have begun to rebound after three years of
persistent decline supported by recovery of cotton prices, strengthening growth in trading
partners’ countries, and gradual currency depreciation. Remittances have stabilized following
last year’s decline. FDI has risen from US$ 923 million in FY2014/15 to over US$ 2 billion in
FY2016/17.
3.2. Economic Reforms and Growth Patterns of Pakistan
20
Pakistan suffered floods in 2010 and 2011 causing a cumulative damage of US$13 billion to the economy.
21
IMF, Post-Program Monitoring Report, March 2018
20. Pakistan’s economic growth is Figure 3. Correlation of Ag. & GDP Growth Rates (%): 1961-2017
characterized by boom and busts cycles
(Figure 2). However, high growth
episodes tend to be short-lived, although 15.00
longer than low growth periods. Its growth

10.00
pattern is full of short cycles of rapid
growth followed by stagnation. These 5.00
growth acceleration tend to be correlated
with increases in investment and trade, 0.00
economic reform that remained a

-5.00
significant predictor of acceleration, high
agriculture growth and with political -10.00
Real GDP Agriculture
stability. (Figure 3).
21. Episodes of robust growth are frequent, but not sustained which is not the case in
many comparable countries in the region such as India, China, Malaysia and South Korea..
Out of 29 years of high growth since 1960s, military or quasi-military governments were in place
for 23 years while politically elected democratic governments remained for only 6 years 22 Out of
27 years of less than five percent GDP growth, Pakistan had democratic governments for 21
years while remaining 6 years23 were under the military or quasi-military government (Table 1).
Table 1. Growth Pattern (Percent)

High GDP Growth > 5% Trend of Foreign Aid Low GDP Growth < 5%
Periods Average Period Total Foreign Aid Per Capita Periods Average GDP
GDP Growth Foreign Aid as %age of Foreign Aid Growth
(US$ Mln.) GDP (US$)
FY62-FY66 7.10 1958-1969 5,715 7.0 7.6 FY67 3.70
FY68-FY70 7.40 1970-1971 1,770Figure 2.
3.9Pakistan’s Economic
6.4 FY71-FY72
Growth 1.60
Trend: 1961-2017
FY73-FY74 6.90 1972-1977 4,861 10.00 5.1 8.5 FY75-FY77 3.30
FY78-FY83 6.90 1977-1988 14,792 3.0 10.0 FY84 3;90
FY85-FY88 6.80 1988-1998 24,829 9.00 2.2 9.8 FY89-FY90 4.60
FY91-FY92 6.60 1999-2008 21,895 8.00 1.6 10.3 FY93-FY94 3.40
FY95-FY96 5.40 2009-2013 16,322 1.3 15.5 FY97-FY03 3.30
7.00
FY04-FY08 6.60 2013-2017 37,511 1.2 18.5 FY09-FY13 2.82
6.00 FY13-FY17 4.47
29 6.70 5.00 27 3.45
Source: Economic Survey of Pakistan,
4.00
various issues, World Bank Development
3.00
Data
2.00
1.00
22. It is interesting to note that
0.00
above average growth (5 percent)
6 1 6 5 69 73 7 7 81 85 8 9 93 97 0 1 0 5 09 1 3 1 7
in the 1960s, 1980s and mid-2000s, 6 0 - 6 4 - 68 - 72 - 7 6 - 80 - 84 - 8 8 - 92 - 96 - 0 0 - 0 4 - 08 - 1 2 - 1 6 -
19 19 19 19 19 19 19 19 19 19 20 20 20 20 20
occurred under military regimes.
22
FYs 1972/73, 1973/74, 1990/91, 1991/92, 1994/95 and 1995/96
23
FYs 1966/67, 1983/84, 1999/2000, 2000/01, 2001/02, and 2002/2003
By contrast, stagnation and low growth coincides with democratic period during the 1970s,
1990s and 2008/09 onwards. The economy grew by more than 7 percent annually during the
1960s, 6.1 percent per annum during the 1980s and 6.6 percent annually during 2004-2008.
1960s and 1980s performance is mainly attributable to private sector initiatives, capital inflows,
and sound economic management. The first half of 2000s benefitted from a policy of
liberalization, deregulation, and privatization and witnessed major structural reforms in all areas
of the economy including taxation, banking and financial sector, industry, agriculture moving
towards market-based environment. Other reforms included were liberalizing trade and foreign
exchange regimes, foreign direct investment policy, reducing quantitative tariffs from 125
percent in 1989/1990 to 25 percent in 2007 and non-tariff barriers and convertibility of rupee.
Monetary system reforms included abolition of credit ceilings and credit deposit ratios, and
initiation of auction of public debt and market-based interest rates. This policies reduced
distortions and increased efficiencies restoring high economic growth trajectory in Pakistan.
23. In contrast, first half of the 1970s was marked with war of secession, international
recession due to oil embargo, super floods, economic uncertainty because of nationalization
policy and high inflation. The decade of 1990s was underpinned by political instability
changing nine governments in a short span of 1989 to 1999, regional tensions, and international
sanctions following nuclear tests in May 1998 accompanied by few or half-hearted reforms. The
economy faced major challenges: stagnant tax-to-GDP ratio, double digit inflation, low levels of
investment, deteriorating infrastructure, weak social sector indicators, and poor governance
which made it difficult to sustain high growth trajectory.
3.3. Development Goals
24. The Government launched Vision 202524 in August 2014 orchestrating objectives and
development goals for Pakistan. The vision is enshrined in seven pillars: (i) Achieving Sustained,
Indigenous, and Inclusive growth; (ii) Energy, Food, and Water Security; (iii) Democratic
governance, Institutional Reform, and Modernization of the Public Sector; (iv) Developing social
and human capital and empowering women; (v) Private Sector Led Growth; (vi) Developing a
Competitive Knowledge Economy through Value Addition; and (vii) Connectivity: Modernizing
Transport, Infrastructure and Regional Connectivity. The development goals and targets are
listed under each of these pillars. While these development pillars have been crafted diligently,
the targets set forth under each development goal are highly ambitious (Appendix 2). The
success of these development goals rests on: (i) ownership of these development goals across all
sections of society; (ii) political stability; (iii) peace and security; (iv) rule of law; and (v) social
justice.
4. Foreign Direct Investment in Pakistan
4.1 FDI Policy

24
Planning Commission of Pakistan
25. Till 1997, Pakistan pursued the investment policy favorable for industrial and
manufacturing sector. The first Investment Policy was framed by BOI in 1997 which opened all
economic sectors including infrastructure, social, and services for foreign investment. Keeping in
view the importance of investment for economic growth and fast economic globalization trends
around the world, Investment Policy 2013 was formulated to further improve the investment
climate in the country. Main objectives of Investment Policy 2013 are given below:
i. Reducing the cost and processes of doing business.

ii. Providing ease of doing business with creation of industrial clusters as Special Economic
Zones (SEZs).
iii. Developing partnership with Private Sector.
iv. Creating linkages of trade, industrial, fiscal and monetary policies for greater
convergence.
v. Fostering close coordination with stakeholders to implement the Policy.
Following an era of nationalization in early 1970s, Foreign Private Investment (Promotion and
Protection) Act, 1976, was enacted providing adequate legal framework for foreign investment.
Pakistan began gradual opening up the economy starting late 1980s and in early 1990s, a
package of initiatives were introduced which were further reformed in early 2000s. These
reforms were: (i) a highly liberal foreign investment policy including removal of restrictions to
entry, ownership, and repatriation, investors guarantees, property protection, credit facilities,
concessional customs duties, tax holidays, a favourable visa policy, easing foreign exchange
controls, and tariff reduction; (ii) wide-ranging structural reforms in various sectors of the
economy and pursued sound economic policies based on the principles of liberalization,
deregulation, and privatization beginning FY2001 as part of IMF-financed Poverty Reduction
Growth Facility (PRGF) and Paris Club debt restructuring deal; (iii) opening up of agriculture,
telecommunication, energy, banking, and insurance, and energy to FDI; (iv) trade openness
liberalizing import policy and reducing tariffs to 5 slabs the highest being 25 percent; (v)
protection of foreign currency accounts. Following are the main highlights of Investment
Policy, 2013
i. Equal treatment to local and foreign investors.
ii. All economic sectors open to FDI except a few specified restricted industries like arms
and ammunition, explosives, radio-active substances, security printing, currency and
mint.
iii. Foreign equity up-to 100% is allowed without any minimum requirement of investment.
However, restriction exists on foreign ownership of equity on certain sectors like airline,
banking, media, and agriculture.
iv. Remittances of royalty, technical and franchise fee, profits, dividends, and capital and
capital gains are allowed.
With these reforms, and its economic resilience to various exogenous shocks such as Afghan war
that ensued after 9/11 (2001), mobilization of Indian troops along Pakistan border following
attack on India’s Parliament (2003), Gulf war (2003),and severe earthquake (2005), Pakistan
emerged as a favourite destination for foreign investors, both direct and portfolio investment.
Thus, FDI inflows peaked during FY2007 in terms of percentage to GDP (3.37) and per capita
($32.6), and in absolute dollars in FY2008, last year of quasi-military government, to $5,410
million (3.18 percent of GDP). During the same period, foreign investors got interested in
privatization of State Owned Enterprises.
26. Pakistan’s foreign direct investment policy is based on 8 principles (Box 3). For details
see Appendix-1.
Box 3. Foreign Direct Investment Policy of Pakistan
1. Free entry of foreign investors: Arms and ammunition, High explosives, radioactive
substances, Security printing currency and mint, new units of alcohol manufacturing except
industrial alcohol are the restricted sectors. Foreign investors are allowed to hold up to 100 %
equity
2. Ease of Registration and Entry: Foreign investors are entitled to incorporate, sell shares,
transfer ownership, and de-register under Companies Act 2017 and Banking Companies
Ordinance 1962.
3. Flexibility in Financial Procedure: Promotion foreign investment in banking, insurance,

and financial sectors, conversion into local currency
4. Flexibility in Land and Real Estate Procedures: Lease of land without limit by foreign
investors
5. Agriculture Projects: Foreign investors can hold 60 percent stake in agriculture projects and
100 percent in Corporate Farming
6. Pioneer Industry: Foreign investor bringing technology not available in Pakistan avail
incentives at par with Special Economic Zones. ECC has approved in June 2018 a
proposal of Ministry of Industries and Production regarding amendments in Section 19 of
the Customs Act, 1969 along with similar amendments in Sales Tax Act, 1990 and Income
Tax Ordinance, 2001
7. Protection of Foreign Private Investment: Foreign investors in relation to the

establishment, expansion, management, operation, and protection of their investment are
protected under the Foreign Private Investment (Promotion and Protection) Act, 1976,
Protection of Economic Reforms Act of 1992, and Foreign Currency Accounts Protection
Act 2001.
27.
B o x 4
Box 4. Strengths of Pakistan for FDI
1. Locational Advantage: strategically located at the confluence of 3 vital regions of the world--South
Asia, Central Asia, and West Asia providing shortest access to energy rich Central Asia and West
China.
2. Epicenter of Economic Activities: Pakistan can be hub of economic activities providing multiple
corridors of cooperation—energy, trade, investment, transportation, and tourism.
3. Market Strengths: Pakistan, a country of 207 million people endowed with rich human and material
resources and growing middle-class with increasing demand for goods and services.
indicates the over-riding strengths of Pakistan reflecting its FDI potential.
28. Pakistan has signed Bilateral Investment Treaties (BITs) with 48 countries since 1947, of
which 01 has been terminated and14 BITs are not in force.25 Foreign investors look favourably
upon the existence of BIT between their home and host country as a signal for stronger
protection of their investments. Another 27 are under negotiations. Pakistan is making effort to
develop a standard template for BITs to remove inconsistencies and providing a level playing
field.
4.2. Trends and Patterns of FDI in Pakistan
29. The FDI inflows to Pakistan since FY1950 are around $41,747 million. These can be
broadly categorized into 4 phases as follows (Table 2):
Table 2. FDI Inflows during FY1950 to FY2017

Period Years $ Million %age of Total
FY1950 to 41 1,485 3.6
FY1990 9 4,481 10.7
FY1991 to 9 18,605 44.5
FY1999 9 17,186 41.2
FY2000 to
FY2008
FY2009 to
FY2017
68 41,757 100.0
Source: State Bank of Pakistan, Handbook of Statistics on Pakistan Economy 2015
Year-wise inflows are at Appendix 3. The FDI inflows remained flat during FY1950 to FY1986
staying below $ 100 million annually. 86 percent of the FDI inflows were received during the
last 18 years while first 50 years witnessed only 14 percent of total FDI because of restrictive
trade and investment regime. The net FDI patter over the last 68 years in shown in Figure 4.
Figure 4. Historical Trend of Net FDI Inflows: FY1950 to FY2017
25
UNCTAD, http://investmentpolicyhub.unctad.org/IIA/CountryBits/160
5800
5500
5200
4900
4600
4300
4000
3700
3400
3100
2800
2500
2200
1900
1600
1300
1000
700
400
100
-200
Source: State Bank of Pakistan, Handbook of Statistics on Pakistan
30. However, Pakistan could not sustain this high momentum starting FY2009. The FDI
inflows were constrained by a number of factors namely, global financial crisis (2008), political
instability (assassination of former Prime Minister), deteriorating security and law and order
situation because of continuous fight against terrorism and internal challenges, uncertainty and
lack of credibility due to elite capturing and its judicial scrutiny, instability in stock markets,
power and gas shortages, and weak economic policies. This ultimately led to FDI to the lowest
once again to $820 million in FY2011. It has started resurging and FDI inflows were $2,411
million (0.84 percent of GDP) in FY2017. Secondly, major chunks of FDI went to non-
manufacturing and services sector, while the export sector, particularly textile sector has been
receiving a minimum share of FDI (1.4
percent of the total in last 20 years).
Figure 5. FDI Inflows under Various Political and Military
Regimes since FY1950 31. Net FDI inflows under various
political and military regimes in the
18605 country are reflected in Figure 5.26
FY2000 to FY2008 coincided with
military and quasi-military regimes in
Pakistan followed by democratically
9783
elected political governments (FY2009-
FY2013 and FY2014-FY2017). It shows
7403
that the political stability and predictability
of policies attracted higher FDI in
18381756 Pakistan.
888
39 163 162 49 393 415 425
26
Source: State Bank of Pakistan, Handbook of Statistics on Pakistan Economy 2015
4.3. Net FDI Inflows-Region and Sector Wise
32. Nearly 49 percent of FDI during FY1990 to FY2017 came from North America (mainly
United States) and Europe (led by United Kingdom, Switzerland, and Netherland) followed by
Far East (17 percent mainly driven by China), and Middle East and Gulf countries (13 percent
driven by United Arab Emirates and Kuwait). For details, see Figure 6.
Figure 6. Sources of Net FDI Inflows during FY1997-FY2017 ($40.4 billion)
14% North America

21%
Developed Europe
13% Far East
South East Asia
3% Developing Countries
4%
28% Middle East and Gulf
17% Other
Source: State Bank of Pakistan, Handbook of Statistics on Pakistan Economy 2015 and Annual Reports
33. FDI flows restricted to few sectors: Telecom (20 percent following deregulation of state
monopoly PTCL), energy (oil and gas, petroleum, mining refining, 21 percent), banking and
finance (17 percent), power (10 percent) and food and beverages (7 percent). These four groups
accounts for over 76 percent of FDI inflows. Other areas include textiles, chemical, petro-
chemical, automobiles, construction, trade, etc. See Figure 7.
34. Categorization of FDI inflows during 1990 to 2017 into economic groups, 45 percent of
the FDI inflows were in the Service sector followed by manufacturing (33 percent), extraction
industry (19 percent and 3 percent in other sectors. See Figure 8.
Figure 7. Net FDI Sector-Wise: FY1997-FY2017

Food
11% 7% Manufacturing
3% 6%
Power
10%
17% Construction
5% Extraction
Communication
Financial Business
20% 21%
Trade
All Others
Figure 8. FDI Inflows Economic Group Wise
Manufacturi
ng
3% Extraction
Services
33%
Other
44%
19%
4.4. Net FDI Inflows by Skills Intensity
35. Disaggregating net FDI inflows during the last twenty years (FY1997 to 2017) on the
basis of skill intensities of workers engaged in specific industry in Pakistan, 52 percent of net
FDI inflows were received in high skills intensive industry while 31 percent in medium skills
intensive industry and 14 percent in low skills intensive industry (Figure 9). Appendix 4
provides the composition of low, medium and high skills intensive industry. A decline in net FDI
inflows to low skills industry was observed during 1999-2006 (military and quasi-military
government) as compared to democratic governments while there was a sharp surge in high skills
intensive industry during the same period. It seems that military government favours high skills
intensive industry. Inflows to medium skill intensive sectors of communication, chemicals, petro
chemicals and petroleum refining and transport experienced increasing trend amounting to 31
percent of the total during the same period. However, net FDI inflows in power and oil and gas
sectors observed an increasing trend under democratic governments.
Figure 9. Skills Intensive FDI inflows: FY1997-FY2017
3% 14% Low Skills Intensive FDI

Medium Skills Intensive FDI
High Skills Intensive FDI
All other
52% 31%
4.5 Net FDI Inflows to Greenfield Investment and Privatization
36. 84 percent of the FDI since FY1950 was received during the last 16 years. 92 percent of
that was Greenfield investment and the remaining 8 percent was invested in privatization of
Pakistan. The highlight of this was the privatization of Pakistan Telecommunication Corporation
Limited, a public sector monopoly in Pakistan, public sector banks, insurance, etc. For details,
see Table 5.
Table 3. Greenfield Investment (FDI) in Pakistan ($ million)

Year Greenfield FDI Privatization Proceeds Total FDI
FY200 357 128 485
2
FY200 622 176 798
3
FY200 750 199 949
4
FY200 1161 363 1524
5
FY200 1981 1540 3521
6
FY200 4873 267 5140
7
FY200 5277 133 5410
8
FY200 3720 0 3720
9
FY201 2151 0 2151
0
FY201 1635 0 1635
1
FY201 821 0 821
2
FY201 1457 0 1457
3
FY201 1699 0 1699
4
FY201 988 0 988
5
FY201 2281 24 2305
6
FY201 2374 37 2411
7
Total 32147 2867 35014
5. Comparison with Selected Economies of South Asia and South East Asia
37. A cross-country comparison27 of FDI performance during 1980-2016 reflects the

following trends (for details see Appendix-5):
5.1. Per Capita FDI Inflows in Pakistan peaked to US$13.9 in 2005 from US$0.8 in 1980
and declined to US$10.0 in 2016 as compared to US$14 in 2016 in Bangladesh, US$34 in India,
US$ 77 in Philippines, and US$ 133 in Vietnam. Indonesia peaked to US$65 in 2015 but there
was a sharp drop in 2016 to US$10. All these countries began from a low base in 1980. See
Figure 10.
Figure 10. Trend in FDI Inflows Per Capita ($)

Pakistan Bangladesh India Indonesia Philippines Vietnam
140
120
100
80
60
40
20
0
198 198 199 199 200 200 201 201 201
-20
-40
Source UNCTAD Database
5.2. Per Capita FDI Stock: Bangladesh at the bottom of selected economies (US$89) in
terms of per capita FDI stock followed by Pakistan (US$202), India (US$240), Philippines
(US$628), Indonesia (US$902), and Vietnam (US$1222) in 2016. See Figure 11.
27
It includes Pakistan, Bangladesh and India (South Asia) and Indonesia, Philippines and Vietnam (South East Asia).
Figure 11. Trend in FDI Stock Per Capita ($)
1400
1200
1000
800
600
400
200
0 Pakistan Bangladesh India Indonesia Philippines Vietnam

1980 1985 1990 1995 2000 2005 2010 2015 2016
5.3. FDI inflows as percentage of GDP: Pakistan dominated the inward FDI as percentage
of GDP in South Asia from 1980s to late 2000s when India overtook Pakistan. Pakistan peaked
in FY2007 (3.37 percent of GDP) but declined to the bottom of the selected economies to 0.70
percent of GDP in 2016 led by India (1.96 percent) and Bangladesh while Vietnam led the
selected economies of both South Asia and South East Asia (6.13 percent) followed by
Philippines (2.61 percent) and Indonesia (2.45 percent). See Figure 12.
Figure 12. FDI Inflows as Percent of GDP

10
0
1980 1985 1990 1995 2000 2005 2010 2015 2016
-2
-4
Source: UNCTAD Database
5.4. FDI Stock as Percentage of GDP: Notwithstanding higher FDI inflows as percentage of
GDP to India amongst South Asian economies, the gap between Pakistan (13.66 percent) and
India (14 percent) has narrowed in terms of FDI Stock as percentage of GDP accumulated during
1980-2016 while Bangladesh is at the bottom (6.67 percent) in South Asia. Selected South East
Asian economies performed far better than South Asian during the same period countries
spearheaded by Vietnam (56.16 percent) followed by Indonesia (24.9) and Philippine (21.2
percent). See Figure 13.
Figure 13. FDI Stock as Percent of GDP
60
50
40
30
20
10
0
1980 1985 1990 1995 2000 2005 2010 2015 2016

5.5. FDI Inflows as percent of Exports: The performance of selected economies in FDI
inflows as percent of exports fluctuated over 1980-2016. Pakistan reached to 11.52 percent in
FY2005 and then declined to 7.48 percent in 2016. Bangladesh achieved 8 percent of their
exports but then dropped to 5.95 percent in 2016; India remained persistent in their growth
starting from 0.70 percent of their exports in 1980 to 10.34 percent in 2016; Indonesia’s
performance fluctuated throughout the period peaking in FY2015 to 9.71 percent with a sharp
drop to 1.58 percent in FY2016; Philippines to 10.70 percent in FY2016; and Vietnam reaching
to 24.24 percent in 1995 and steadily declining to 6.67 percent in 2016. See Figure 14.
Figure 14. FDI Inflows as Percent of Exports of Goods and Services

30
25
20
15
10
0
1980 1985 1990 1995 2000 2005 2010 2015 2016
-5
-10
5.6. India leads amongst the selected economies of South and South East Asia in terms of
FDI stock as percentage of World Stock at 1.192 percent in 2016 followed by Indonesia (0.879
percent), Vietnam (0.432 percent), Philippines (0.240 percent), Pakistan (0.146 percent), and
Bangladesh (0.054 percent). See Figure 15.
Figure 15. FDI Stock as Percentage of World FDI Stock

1.4
1.2
0.8
0.6
0.4
0.2
0 Pakistan Bangladesh India Indonesia Philippines Vietnam

1980 1985 1990 1995 2000 2005 2010 2015 2016
5.7. GDP Growth and FDI Inflows as % of GDP: Figure 16 reflects that generally when
the GDP growth was 5 percent or above, it witnessed higher FDI inflows in Pakistan. Secondly,
policy of liberalization and trade openness in 2001 caused sharp growth in FDI inflows.
GDP Growth FDI Inflows as % of GDP
Figure 16.
10.00 9.47
8.71 8.96 Pakistan’s GDP
9.00
Growth and
8.00
FDI Inflows
7.00
6.00 5.54 5.28
5.00
5.00 4.51
4.13 4.06
4.00 3.25 3.37 3.17
3.00 2.58
2.00
2.00 1.38 1.21
0.73 0.88 0.84
1.00 0.61 0.46
0.21 0.08 0.31
0.00
1955 1965 1975 1985 1995 2005 2007 2008 2010 2015 2016 2017
5.8.
Inward FDI Performance Index and FDI Potential Index
38. Tables 4 and 5 present the Inward FDI Performance Index and FDI Potential Index. The
FDI performance of selected South Asian economies remained below unity. However, all these
economies have managed to increase their inward FDI performance consistently over years
except Pakistan which declined in ranking after FY2010. Likewise, Pakistan has been
performance below its potential in attracting FDI as is reflected from a mix performance in FDI
Potential Index. These rankings indicates that Pakistan and other South Asian economies has the
potential to improve their FDI performance rankings. The potential index covers much of the
benefits accruing due to the potentialities of skilled manpower, improved infrastructure facility,
and growing demand in the system. The performance index considers existing foreign resource
utilisation and efficiency while understanding the importance of scale economies. An economy
may perform in alignment with its potentials subject to its other macroeconomic fundamentals.
Table 4. FDI Performance Index28 of Selected Economies (141 Economies)
Country 1990 1995 2000 2005 2010 2015 2017
Valu Rank Valu Rank Value Rank Rank
e e
Pakistan 0.6 66 93 0.2 122 0.748 92 110
Banglades 0.0 105 117 0.1 103 0.459 109 114
h
India 0.1 96 95 0.2 115 0.451 120 97
Indonesia 0.8 56 53 -0.6 139 0.699 74 79
Philippines 1.7 44 54 0.6 71 0.646 96 116
Vietnam 1.0 17 7 2.0 53 2.056 57 22
Table 5. FDI Potential Index29 Ranking of Selected Economies

Country 1990 1995 2000 2005 2010 2015
Valu Rank Value Rank Rank Rank
e
Pakistan 0.141 91 111 0.159 131 125 121
Banglades 0.098 107 116 0.162 108 115 114
h
India 0.165 86 97 0.204 92 84 79
Indonesia 0.203 45 54 0.189 89 102 84
Philippines 0.139 85 64 0.265 68 78 82
Vietnam 0.134 76 86 0.277 75 80 73
5.9. FDI and Efficiencies in the Economy
39. The policy of liberalization, deregulation and privatization and trade openness in Pakistan
accelerated FDI inflows, productivity and efficiency gains, high economic growth, and income
and employment generation (see box 5). Kevin Stiroh (2002) has found that information and
communication technology is strongly associated with higher firm level productivity helps in
increasing the Total Factor Productivity by one-third of a percentage point per year in the
industrial economies (IMF Report on Information Technology 2005-06).
5.10. China Pakistan Economic Corridor’s Impact on FDI

28
The UNCTAD FDI inward performance index is a measure of the extent to which a host country receives inward
FDI relative to its economic size. It is calculated as the ratio of the country’s share in global FDI inflows to its share
in global GDP. A value greater than 1 indicates that the country/region receives more FDI than its relative economic
size, a value below 1 that it receives less.
29
The UNCTAD FDI Potential Index to compare the relative potentials of different countries attracting FDI inflows
is based on major economic variables: (1) market attractiveness, which explains market size (GDP purchasing power
parity), spending power (per capita GDP PPP) and growth potential of the markket (real GDP growth rate); (2)
availability of low-cost labour and skills, which includes unit of labour cost (hourly compensation and labour
productivity) and size of manufacturing workforce (existing skill base); (3) presence of natural resources—resource
exploitation (value of fuels and ores exports) and agricultural potential (availability of arable land); and (4) enabling
infrastructure, which includes all kinds transport infrastructure (road density-kilometer of road per 100 Km 2 of land
area; percentage of paved road in total; rail lines-total route km; liner shipping connectivity index); energy
infrastructure such as electricity consumption; and telecom infrastructure telephone lines/100 inhabitants-mobile
cellular subscriptions/100 inhabitants and fixed broadband internet subscriber/1,000 inhabitants) (page no 30,
UNCTAD 2012).
40. The CPEC, a subset of Belt and Road Initiative (BRI) and a nexus for the other two
subset routes called continental Eurasian “Silk Road Economic Belt” and Southeast Asian
“Maritime Silk Road,” covering China’s Xinjiang Uygur Autonomous Region and the whole of
Pakistan, is both strategic and development program intended to deliver security through
development (For details of CPEC see Appendix 6).
41. The CPEC proposes to promote connectivity across Pakistan through a network of
highways, railways, and pipelines accompanied by energy, infrastructure, agriculture
development, and industrial projects and ultimately to facilitate trade overland route that
connects Western China with Gwadar Port as well as boosting Pakistan’s economic growth. The
lion’s share of China’s investment is expected to go to energy projects, including coal, solar,
hydroelectric, liquefied natural gas, and power transmission, expected to generate nearly 17,000
megawatts of energy and nearly double Pakistan’s installed capacity. Of those twenty-one
projects, Pakistan expects fourteen “early harvest” projects to add 10,400 megawatts to the
national grid by 2018. To take advantage of new infrastructure and power capacity, the
government has identified more than forty sites for new and upgraded industrial parks and
special economic zones, designed to encourage investment and boost local employment. For
details of financing, see Appendix 7.
Box 5. FDI Success Stories in Pakistan

42.
T impacth of thee FDI in Pakistan’s
The p twor major orecipients
p in theo servicess sector,e i.e. d i
Telecommunication and Banking sectors is reflected here.
Telecom sector after deregulation in 2004 has attracted FDI of US$7382 million by the end of
FY2017. FDI has not only provided much needed impetus to the sector, but it has had multifaceted
impacts on the economy. The teledensity of the country has grown from 2.8 percent in FY2001 to
73.7 percent, cellular subscribers has increased from 2.4 million in FY2003 to 149 million,
penetration has reached to 27.45 percent with 56 million broadband subscribers and 53 million
3G/4G subscribers, revenues has increased from PKR 19.8 billion in FY2003 to PKR 468 billion in
FY2017, and contribution to national exchequer was PKR 161 billion in FY2017 Intense
competition among cellular companies has resulted in a steep fall in tariffs. Consumers have
benefited through reduction in prices for both fixed. Other impacts include supply chains of vendors
for providing sets/connection services, income generation, employment creation, and cheap
connectivity to the bottom of the pyramid in the society.
Similarly, the privatization of nationalized banks and opening up the banking sector led to the
impressive performance of the banking sector made this sector very attractive for the foreign
investors. As a result, the sector attracted approximately US$6354 million investment during
FY1990 to FY2017. The gain in technical efficiency in terms of proliferation of electronic
transactions which has pushed up on the operating performance of the banking sector. The efficiency
gain in operation led to higher growth in profitability and banks’ assets.
implemented as planned, the CPEC could provide significant boost to Pakistan’s economy, vital
for political stability. Given the current incremental capital output ratio (ICOR) of 3.0 in
Pakistan, the proposed investment is expected to contribute between 1.5-2.0 percent annual GDP
growth.
5.10.1. Impact of CPEC on Trade
43. The demand for imports surged to US$48.6 billion in FY2017, growth of 17.8 over the
last year, on the back of CPEC-projects related imports. Cumulatively, imports of power
generation machinery and assorted equipment, heavy commercial vehicles (transporting raw
materials from ports of entry to project sites); and fuel (mainly HSD) grew by 22 percent YoY to
US$21.1 billion in FY2017, accounting for 43.5 percent of total imports. With exports and
remittance tapering off, the current account gap rose to over US$ 12 billion or 4 percent of the
GDP. The trend continued to persist during the first half of FY2018 as imports grew further by
20 percent over the same period of FY2017. Pakistan’s imports from China have witnessed 82
percent increase in a span of 7 years (FY2011-2017) or by 50 percent in three years (FY2015-
2017), in-line with CPEC activities. China has the highest share in Pakistan’s imports, at 22
percent in FY17 which has been rising consistently since FY09, when it was just 9 percent. In
the wake of Pakistan’s declining exports to the country, the trade balance has tilted in favour of
China. For details see Table 6.
5.10.2. Impact of CPEC on FDI
44. The FDI from China has also risen from US$47 million in FY2011 to 1,186 million in
FY2016, an increase of 2423 percent or 272 percent increase in a span of three years (FY2015-
2017). A part of the CPEC-related imports is being financed by financial inflows from China.
Private firms operating in the power and construction sectors, have seen sizable levels of
financing from their Chinese sponsors and commercial banks either in the form of equity
injections (FDI), or commercial loans from Chinese banks.
Table 6. Pakistan’s Trade and Financial Transactions with China

(US$ Million)
FY FY FY FY FY FY FY
2011 2012 2013 2014 2015 2016 2017
Exports to China 1,634 2,184 2,609 2,417 2,321 1,905 1,622
Imports from China 5,790 6,717 6,642 7,725 7,025 8,824 10,531
Trade Balance -4,056 - - -5,308 - - -8,909
FDI (net) 47 4,533 4,033 696 4,704 6,919 1,186
Portfolio investment - 126 91 - 319 1,064
Official bilateral loan - - 11
Disbursement 1,594
Official Commercial 1,161 1,042
Loans by Chinese Banks 2,300
Source: State Bank of

Pakistan
45. The downside of this investment initiatives will create long-term balance of payments
outflows in the form of loan repayments, debt servicing, profit repatriation, and imports of input
fuel starting FY2018. These outflows are expected to rise in the next several years (FY2035),
peaking at about $3.5-$4.5 billion by FY2024 (1.2-1.6 percent of FY2016 GDP) and gradually
declining in the long run.30 Realizing the transformational potential of this investment while
maintaining external stability will require policy actions: (i) concerted efforts to raise exports on
sustained basis by diversifying product mix, penetrating new markets, revising free trade
agreements, reducing transaction costs, and improving competitiveness; (ii) attracting foreign
investment in manufacturing and export sectors and set up joint ventures in the industrial zones
by maintaining a supportive investment climate; (iii) channel workers’ remittances though the
banking system by reducing the differential between the open and inter-bank market rates; (iv)
building up foreign exchange reserves to create buffers for BoP outflows period; (v) reform the
power sector by bringing DISCOs to full cost recovery and privatizing them, mandating Nepra to
develop competitive power markets and power exchanges by providing open access to producers
for transmission and distribution, setting tariffs through open and transparent bidding, and
introducing smart technologies; (vi) containing fiscal costs by limiting tax exemptions and (vii)
strengthening growth sustainability.
6. Impediments in Attracting FDI
46. Pakistan has been pursuing a policy of liberalization, deregulation, and global integration
since late 1990s including opening up of capital account, yet the stock of foreign direct
investment as percentage of GDP has remained low as compared with some of the emerging
economies such as Malaysia, Vietnam, Indonesia, and Philippines. Even, India is now overtaking
Pakistan.
47. Despite a very liberal foreign investment policy (Box 3) and strengths of Pakistan (Box 4)
indicating high potential for FDI, the FDI flows have been generally less than the potential (Table 2,
Figure 4). 49 percent of FDI during 1990-2017 originated from North America and Europe (Figure 6),
mainly to Services Sector (45 percent), manufacturing (33 percent) and extraction industry (Figure 8) in
telecom, extraction industry, and financial sectors (Figure 7), 52 percent of which was high skills
intensive FDI (Figure 9). 92 percent of FDI inflows during last 16 years was greenfield investment
(Table 3). Amongst the selected economies of South and Southeast Asia, Pakistan is at the bottom in per
capita FDI inflows (Figure 10) but slightly better in FDI stock as percent of GDP (Figure 12). Pakistan
also performed better than Bangladesh in FDI as percentage of export of goods and services amongst
selected economies (Figure 13) and has acquired only 0.146 percent of World FDI Stock (Figure 14).
Pakistan is just above Bangladesh in FDI Performance Index (Table 5) and at the bottom in FDI Potential
Index (Table 6).
48. Pakistan’s performance has been either slow or inconsistent in accomplishing the
fundamental requirements despite its very strategic location. Comparative analysis reveal that
Pakistan’s ranking in all the major factors important for attracting FDI is low compared with
30
IMF, Article IV 2017.
some of the regional countries in South and Southeast Asia which has kept the FDI inflows
below its potential (Table 7).
Table 7. Countries Comparison of Global Competitive Indicators (2017)
Country Institution Macroeconomic Infra- Health & Goods Labour Financial Technological Market Business Innovation
s Stability structure Education Market Market Market Readiness Size Sophistication
Efficienc Efficiency Developmen
y t
Pakistan 111 116 116 128 117 129 107 119 29 95 75
Bangladesh 125 65 114 105 96 120 99 122 38 107 121
India 42 75 68 85 60 84 38 110 3 35 29
Indonesia 56 30 60 100 58 108 42 91 10 39 31
Malaysia 26 35 24 44 12 24 13 43 24 20 22
Philippines 91 20 95 81 99 86 48 83 31 52 62
Vietnam 82 77 79 65 81 63 78 92 32 96 73
Source: Global Competitiveness Report 2016-17
49. Historical trend and empirical analysis of FDI flows reveal that real GDP growth, trade
ratio, infrastructure, and human capital have positive and significant impact on FDI flows.
However, real exchange rate volatility, wage rate, and current account deficit have negative
impact on FDI inflows. The factors responsible for impeding the flow of FDI in Pakistan are the
following:
(i) Political Stability and Security are critically important for the confidence of
foreign investors as it ensures consistency and continuity in the economic
policies. Incidentally, politically instability during 1988-199931 and 2008-2016
accompanied by abrupt changes in policies and programs were not congenial for
foreign investors. Fragile security situation, due to blow back effect of war on
terrorism during 2007-2015, in major growth poles of the country (Port city of
Karachi, the largest industrial and commercial centre, Punjab) and northern
Pakistan deterred the flow of FDI in Pakistan. Notwithstanding, the security
situation has substantially been improved since early 2016 as demonstrated by
resurge in the FDI inflows.
(ii) Economic Strength and favourable exchange rate are the basic prerequisite as
macroeconomic stability reflects how strong an economy is and how it can adjust
to external or internal economic shocks. Pakistan’s economic growth is
characterized by boom and bust cycles (Figure 2) and short-lived episodes of
high growth (Table 1) rather than sustained high growth, high current account
and fiscal deficit, exchange rate volatility and falling industrial production due to
energy shortages. Post-IMF program (2016), Pakistan’s fiscal deficit is rising
again and its current account is also under pressure. However, the investors are
confident with Pakistan’s potential to grow higher and opportunities available in
this market size.
(iii) Predictable and Consistent Economic Policies provide certainty and comfort to
the foreign investors. While the government attempts to deliver on these elements,
31
Four elected governments were dismissed during this period on charges of corruption and misgovernance
abrupt changes in policies, ineffective implementation of policies, weak
regulation, complex procedures and lack of resolution of issues are quite
common. Pressure to raise revenues, changing incentive system, and other
conflicting objectives have generally led to inconsistencies in investment and
industrialization policies. Uncertainty is exacerbated by issuance of Special
Regulatory Orders (SROs) which can amend a particular law at any time. Though
this authority to the extent of Federal Board of Revenue has been restricted, the
Economic Committee of the Cabinet can still issue it.
(iv) Business Environment has not been made comfortable for foreign investors.
Lack of professionalism is the major hurdle in creating a friendly business
environment. Pakistan ranks 147 in the World Bank Doing Business ranking,32
second from the bottom amongst comparable selected economies. Pakistan’s
weak business climate continues to constrain private investment and economic
growth. The business environment in Pakistan has improved but the major risks
identified by foreign investors33 are taxation, inconsistent and ineffective
government policies, exchange rate fluctuations, macroeconomic stability, legal
and regulatory issues and unsavory practices, lengthy procedures and high cost for
opening a new business, limited access to credit notably for small and medium
enterprises (SMEs), complex border trading requirements, and weak contract
enforcement weigh on the country’s business climate. Slow implementation of
approved policies and weak check and balance system are yet another set of
problems reflects the poor management at the top.
(v) Legal and regulatory environment is important for building the confidence of
foreign investor as complex legal formalities and amendments or altering rules
and regulations always creates an environment of uncertainty. Pakistan ranks 156
in enforcement of contracts and 82 in resolving insolvency. Complex legal
system, protracted litigation in enforcement of contracts and cumbersome
procedures are also responsible in deterring FDI.
(vi) Infrastructure facilities (electricity, gas, logistics, and transport and

communication infrastructure) play a key role in attracting FDI. Pakistan has
made substantial headway in communication infrastructure (teledensity and
penetration) and broadband internet and to overcome power and gas shortages
during the last four years. While the road system has improved substantially,
Pakistan’s extensive but poorly managed railway system impede the availability
of cheaper freight system. Port services not only lack quality (score 4 out of 7) but
32
Bangladesh (177), India (100), Indonesia (72), Malaysia (24), Philippines (113), Vietnam (68) out of 190
economies
33
Overseas Investors Chamber of Commerce and Industries (OICCI) Perception Survey 2017
also expensive (burden of custom procedures (3.7 out of 7) as compared to
neighbouring countries. Pakistan ranks 68 in Logistics Performance Index (LPI)34
as compared to UAE (13) Oman (31), India (35), and Malaysia (32).
(vii) Trade Facilitation. Pakistan ranks 171, just above Bangladesh, in trading across
borders as compared to Malaysia (61), UAE (91), Vietnam (94), and India (146).
See Table 8. Documentary compliance and cost for imports and exports is way
too high as compared to its competitors and so is the dwell time at the ports.
Likewise, Pakistan ranks 122 in Enabling Trade Index as compared to Bangladesh
(123), India (102), Indonesia (70), Malaysia (37), Philippines (82), and Vietnam
(73).35
Table 8. Trading Across Borders36

Country Tradin Tradin Time to Cost to Time to Cost to Time to Cost to Time to Cost to
g g Export: Export: Export: Export: Import: Import: Import: Import:
Across Across Border Border Documentar Documentar Border Border Documentar Documentar
Border Border Complianc y
s DTF s Rank
Complianc e (USD)
y y Complianc Complianc y Compliance
e (Hours) Compliance Compliance e Hours e (USD) Compliance (USD)
Hours (USD) (Hours)
Pakistan 41.9 171 75 406 55 257 129.3 936.6 143 735
Banglades 34.8 173 99.7 408.2 147 225 183 1294 144 370
h 58.6 146 106 382.4 38.4 91.9 264.5 543.2 61.3 134.8
India 66.6 112 53.3 253.7 61.3 138.8 99.4 382.6 119.2 164.4
Indonesia 82.7 61 45 321 10 45 69 321 10 60
Malaysia 69.4 99 42 456 72 53 72 580 96 50
Philippines 71.5 91 27 462 6 178 54 678 12 283
UAE 70.8 94 55 290 50 139 56 373 76 183
Vietnam
DTF: Distance to Frontier
(viii) Taxes: Governments in both developing and developed countries provide tax and
other incentives and to match or even surpass offers by competing countries to
reduce the relative cost or risks to foreign investment so as to attract FDI. Low tax
rates or tax holidays is an important factor in attracting investment. Pakistan ranks
172 in paying taxes with 47 taxes contributing 33.8 percent of profit. However,
the foreign investors are guaranteed 17 percent return on investment. An
overwhelming majority of the current international investors view high tax rates,
complex withholding tax regime, imposition of Super Tax, cumbersome
procedures and lengthy timeline for tax filing and tax refunds, and lack of
34
World Bank, Logistics Performance Index Report 2016 based on customs, infrastructure, international shipments,
trucking and tracing and timeliness
35
World Economic Forum, Global Enabling Trade Report, 2016
36
Doing Business measures the time and cost (excluding tariffs) associated with logistical process of exporting and
importing goods in three sets of procedures—documentary compliance, border compliance and domestic transport—
within the overall process of exporting or importing a shipment of goods. The most recent round of data collection
for the project was completed in June 2017. http://www.doingbusiness.org/data/exploretopics/trading-across-borders
coordination between federal and provincial tax authorities as serious issues. The
additional bottleneck have been caused after the enactment and establishment of
Provincial Revenue Authorities, collecting GST on Services. The telecom sector
has also identified exorbitant taxes as well as complex and frequently changing
taxation structure, and cumbersome procedures as major issues.
(ix) Labour force. An educated, technically skilled, and disciplined labor force along
with country’s labor laws are critical factors in attracting foreign investors.
However, here majority of the labour force is unskilled and labour markets are
rigid. Pakistan’s labor force with advanced education is 39 percent (90 percent
female) as compared to 53 percent in Bangladesh, 30 percent in India, 79 percent
in Indonesia (91 percent female), 66 percent in Malaysia, 57 percent in
Philippines, and 87 percent in Vietnam.37 Additionally, Pakistan’s labor laws are
complicated and overprotective.
(x) Protection of civil and property rights must be ensured to guarantee social and
moral security to foreign investors. Pakistan ranks 170 in registering property as it
takes over 150 days in registering property. Secondly, the land administration is a
provincial subject and price of land in main cities is exorbitantly high which at
times takes 30-40 percent of expected capital investment.
(xi) Judicial System must be strong enough to enforce laws in letter and spirit. Strong
judicial system is also imperative to curb corruption. Pakistan has established
Centre for Dispute Resolution to settle business dispute and Alternate Dispute
Resolution mechanism is frequently employed, the judicial system is generally
slow in disposing disputes.
(xii) Financial market development is also a key factor in attracting investment.

Pakistan has undergone major reforms in financial and capital markets since 2000
encouraging FDI inflows in banking sector as well as in the Stock Exchange.
However, weak enforcement of Anti-Money Laundering regime and other
unsavoury practices are considered major risks. However, Pakistan is making
efforts to comply with the observations of FATF to get itself delisted from the
Watch list.
(xiii) Availability of financing in the domestic market, business sophistication and

innovation are important factors in attracting FDI. Pakistan has made progress in
all of these indicators since 2000. However, lack of consistency and reversion of
policies have placed Pakistan second from the bottom amongst selected
economies (see Table 8).
37
World Bank Database
(xiv) Post-18th Constitutional amendment in 2010, lack of Federal-Provincial and
inter-provincial coordination, weak governance and lack of initiative to improve
in this area are emerging as main concerns. Each province has come up with its
own investment policy and tax regime, at times, competing with the Federal
Government.
7. Recommendations
50. As mentioned above, Pakistan has the potential to be Asia’s premier trade, energy, and
transport corridor. Its geographical location suits transit trade given its proximity to West Asia,
Central Asia, China, and South Asia and with its Gwadar Port provides the shortest route to
Western China. 75 percent of the foreign investors already operating in Pakistan are interested in
new investment given Pakistan’s considerable market potential.38 The Federal and Provincial
Governments are now need to make concerted efforts to address some of the key concerns of the
foreign investors and implement the policies diligently and swiftly. It is accordingly
recommended that Pakistan may:
(i) Macroeconomic Stability: Political and economic stability are the most important
determinants of FDI. Secondly, FDI decision involves two-stage process: (i) prospective
foreign investors’ shortlist the potential host countries on the basis of economic and
political fundamentals; and (ii) FDI investment incentives once the shortlisting is done.
Policy liberalization and financial incentives provided to attract foreign investment do not
compensate for the unpredictable effects of political uncertainty and macroeconomic
instability. Investors are generally risk-averse and thus, will be unwilling to invest in a
country with high economic and political risk. To encourage foreign investment, policies
and measures must aim at reducing the perceived risk associated with investment and
overall investor costs. It is important that all key players must build consensus on the
economic policies to be pursued on sustained basis.
(ii) Economic Policies: There is a robust relationship in economic freedom and levels of
economic growth. Economic freedom also leads to innovation and social transformation.
Pakistan ranked 131 in Economic Freedom Index 39 as compared to Bangladesh (128),
India (130), Indonesia (69), Malaysia (22), Philippines (61), and Vietnam (141) reflecting
that Pakistan, Bangladesh, India and Vietnam fall in the category of “most unfree” while
Indonesia, Malaysia, and Philippines are categorized as “Mostly Free.” Pakistan ranked
105 in economic quality as compared to India (56), Indonesia (47), Malaysia (24),
Philippine (75), and Vietnam (37).40 Pakistan needs to take measures to ensure
consistence of economic policies to signal predictability on long-term basis. Secondly,
38
OICCI, Op.cit
39
The Heritage Foundation, The Index of Economic Freedom, 2018
40
Legatum Institute, Prosperity Index 2017
authority of issuing SRO must move from the executive to legislature to bring changes in
economic policies on predictable basis rather than on ad hoc basis to attract FDI.
(iii) FDI in Manufacturing: To enable foreign investment to better serve Pakistan’s

economic development in the future, the strategic direction of foreign capital may be
directed from simply encouraging investment in services industry to investment in both
manufacturing and services industries; from greenfield investment to Mergers and
Acquisition; and encouraging foreign investment to set up R&D, design, management
and marketing agencies in Pakistan to extend industrial chain for producing engineering
goods and improve products’ value addition and technology content.
(iv) Improving Business Environment: Pakistan slipped to 147th position in improving

quality of the business environment in the host country seems to be the most effective
way to increase FDI inflows. In order to bring more focus on improvement of
Pakistan’s position in the Doing Business and Global Competitiveness Indices, the
Prime Minister constituted a committee, headed by Chairman, BOI to chalk out,
supervise and coordinate a sell structured plan in April, 2016. In January 2018, PM
constituted a steering committee chaired by himself to improve the doing
business ranking. Since the formation of Steering Committee, an ambitious plan
called a 100 day sprint was undertaken by the Board of Investment and all
implementing agencies. The summary of key reforms implemented since June 2017
and in the 100 day sprint for each business area are annexed.
(v) Attracting FDI into Manufacturing through Trade Facilitation: Trade facilitation
and can contribute to attracting FDI into high value-added manufacturing and
participation in regional and global value chains. A recent report finds that improving
trade facilitation by 1 percent corresponds with a 3.2 percent increase into
manufacturing.41 Similarly, Duval and Utoktham (2014) find that 1 percent reduction in
non-tariff trade costs and shipping connectivity is associated with an increase of FDI of
0.8 and 0.6 percent respectively, while moving 1 percent closer to the overall business
climate frontier is linked with a 4.3 percent increase in FDI.42 Therefore, the government
needs to take measures that improve Enabling Trade Index in Pakistan comprising 7
pillars and 43 indicators. Current ranking and score in each of the 7 pillars and 43
indicators is at Appendix-8. The impact of trade facilitation is shown in Figure 17.
Improving the transparency and efficiency of cross border trade can also strengthen
government revenue collection.
41
Global Alliance For Trade Facilitation, Can Trade Facilitation Drive Manufacturing FDI?”, April 2017.
42
Duval Yann, and Chorthip Utoktham, op.cit.
Figure 17. Impact of Trade Facilitation
Increased
Exports
FDI Integration
Integration
into GVCs
into GVCs
Trade
Facilitation
Improved
Improved Economic
Economic
Employment
Employment Growth
Growth
Opportunities
Opportunities
Increased
Increased
Governemnt
Governemnt
Revenue
Revenue
(vi) Improving Logistics Environment: Improving logistics environment can play a key role
in greater integration in international production networks and attracting FDI. Lower
transportation costs, better and cheaper access to communication technologies, and even
the reduction of tariffs have allowed firms to relocate their supply chains and production
processes across multiple countries. Saslavsky and Shepherd find that machinery parts
and components are 50% more sensitive to logistics performance. 43 They also found
correlation between the share of intermediate imports (used as inputs for exports) and the
reliability of logistics performance. It is important that the federal and provincial
governments take necessary measure to improve logistics performance indicators as
measured by the World Bank, i.e. efficiency of the clearance process, quality of
infrastructure, ease of arranging competitively priced shipments, competence and quality
of logistics services, ability to track and trace consignments, and timeliness of shipments.
(vii) Market Openness: While the FDI policy is considered quite liberal, Pakistan needs to
focus on trade openness, tariff rationalization (eliminating SROs), improving non-tariff
barriers, and equal treatment for all. Tariffs directly increase the prices that consumers
pay for foreign imports and also distort production incentives encouraging producers to
produce goods in which they lack a comparative advantage or provide protection to
political influencers. This impede overall economic efficiency and competitiveness.
Regulatory duties for wheat (60 percent) and sugar are cases in point.
(viii) Financial Development: An accessible and efficiently functioning formal financial

system ensures the availability of diversified savings, credit, and investment services to
businesses. The system largely depends on transparency in the market and the integrity of
the information being made available. Pakistan now needs to take second generation
reforms to deepen the capital markets, improve their efficiency and integrity. The
43
Daniel Saslavsky and Ben Shepherd (October 2012), Facilitating International Production Networks: The Role of
Trade Logistics, The World Bank, Policy Research Working Paper 6224.
Regulatory role of the State Bank of Pakistan (SBP) as well as the Securities Exchange
Commission of Pakistan (regulating capital markets) needs to be strengthened to make
our banking and financial markets system FATF 40 Plus 8 compliant and make it more
efficient and transparent.
(ix) Tax Burden: Individual and corporate income tax rate as well as indirect taxes (Custom
Duties, Excise Duties, General Sales Tax or Value Added Taxes) and Provincial
Taxes/Duties are critical in attracting FDI. Higher tax rates or tax burden reduce the
ability of foreign investors to pursue their goals in the market place. The overall tax
burden in Pakistan equals 13.2 percent of GDP. The top personal income tax rate of 35
percent plus a fixed rate is proposed to be reduced to 15 percent effective from FY2019
while the top corporate tax rate is proposed to be reduced from 34 percent to 26 percent
by FY2023 and budget deficit averaged 5.5 percent. Pakistan needs to devise long term
and consistent policies regarding taxes and fiscal measures, such as, (i) benchmark tax
rates against regional and other competitors; (ii) make procedures for tax concessions on
investment simpler; (iii) reduce the number of taxes and consolidate provincial taxes; (iv)
limit the tax appeals disposal period to a maximum of 6 months; (v) rationalize the
procedures for refunds and make it more transparent and consistent; and (vi) establish a
mechanism for federal and provincial tax authorities for effective coordination and online
adjustments. For the long term, the Government must move towards consolidating
General Sales Tax on goods and services and may consider introducing single stage
Value Added Tax to simplify the taxation system.
(x) Special Economic Zones: Special Economic Zones (SEZs) and Export Processing Zones
(EPZs) are important channels of attracting FDI into a country. Successful SEZs offer
immediate access to high-quality infrastructure, uninterruptible power supply, clearly
titled land, public facilities, and support services. There are over 4000 SEZs in the world.
Emulating the experience of China and other emerging economies, Pakistan is also
moving in that direction. It enacted SEZ Act in 2012 with the objective of making SEZ
an engine of growth by providing quality infrastructure with minimum regulation. The
fiscal benefits under the SEZ law include a one-time exemption from custom duties and
taxes for all capital goods imported into Pakistan for the development, operations and
maintenance of a SEZ (both for the developer as well as for the zone enterprise) and
exemption from all taxes on income for a period of five years to developers and ten years
to enterprises starting production on or before June 30 th 2020 and five years thereafter.
The provincial SEZ authorities, set up under the law, are required to move the
applications received from developers to the Federal Board of Investment which is to act
as the secretariat to the Board of Approvals and the Approval committee. However, to
attract FDI, Pakistan in coordination with the provinces need to create a conducive policy
environment, provide complete infrastructure, cheap labor and flexible labor laws and
low cost of capital which made Chinese SEZs a viable proposition for foreign investors.
CPEC is a good opportunity for Pakistan to establish these SEZs for attracting FDI.
(xi) Invest in Skills and Innovation: MNCs are attracted to invest where human capital is
larger given the higher productivity per labour cost unit. Moreover, technology intensive
investment might require more advanced knowledge and thus the need for skilled labour.
The federal and provincial government must formulate a comprehensive strategy to
invest in education, training and innovation to ensure the supply of skilled labor meeting
the demand of foreign investors. A higher ratio of skilled to unskilled labor with
advanced education will improve productivity, a critical factor for competitiveness.
(xii) Invest in Technology Parks: FDI coming to Pakistan brings in technology and
management skills but does not generate strong spill-over effects. Thus, R&D and
technology capacity is not upgraded automatically because of FDI inflows. It is essential
to invest in creating centres for R&D and to invest more in upgrading technology
capacity. The development of technology parks, technology zones and research
application areas are useful investment for which the federal and provincial governments
may need to pursue an integrated strategy rather than overlapping efforts and duplication
of resources.
(xiii) Regulatory Efficiency: An individual’s ability to establish and run an enterprise without
undue interference from the state is one of the most fundamental indicators of economic
freedom. Additionally, the ability of businesses to contract freely for labor and remove
redundant workers when they are no longer needed is essential to enhance productivity
and sustaining overall economic growth. Arduous labor laws penalize businesses and
workers equally. Rigid labor regulations prevent employers and employees from freely
negotiating changes in terms and conditions of work, and the consequently, there is often
a mismatch between labor supply and demand. Pakistan secured 55.3 score in business
freedom as against world average of 64.9 and regional 44 average of 66.5 while 40.6 in
labor freedom compared to world average of 58.9 and regional average of 64.1. 45
Pakistan still needs to cover quite a distance to reach to regional and world averages in
regulatory efficiency. All regulatory policies including that of Engineering Development
Board need to be revisited and simplified. Make one window solutions for all regulatory
enforcements related to taxes, environment, quality standards, etc.
(xiv) Rule of Law: Pakistan ranked 103 in governance as compared to India (41), Indonesia
(44), Malaysia (45), Philippine (50), and Vietnam (97).46 Rule of law includes property
rights, judicial effectiveness, and government integrity in a country. The recognition of
private property and an effective rule of law to protect it are important features of a fully
44
Asia-Pacific Region
45
The Heritage Foundation, op.cit.
46
Legatum Institute, Op.cit., The Governance pillar measures a country’s performance in three areas: effective
governance, democracy and political participation and rule of law.
functioning market economy as it gives confidence to investors to undertake
entrepreneurial activity. A key aspect of this protection of property rights is the contract
enforcement which needs an efficient and fair judicial system to ensure that laws are fully
respected. An institutional commitment to the preservation and advancement of judicial
effectiveness is critical for attracting FDI. The systemic corruption in government
institutions for gaining special interests is always a major concern for the foreign
investors as it is against the principle of fair and equal treatment. Pakistan secured 36
points in property rights as compared to regional average of 52.8 and world average of
52.2. Likewise, it secured 34 points in judicial effectiveness as against regional average
of 45.9 and world average of 47.7 and 27.3 in government integrity as compared to
regional average of 43.0 and 42.6 world average.47 This gap clearly reflects that Pakistan
needs to take urgent measures in accomplishing effective rule of law and governance that
could increase the confidence of foreign investors and attract them to Pakistan. The
strength of the legal system over protection of new ideas (Intellectual Property Rights) is
of high important and of major concern to any foreign investor. Weakness in this system
have a negative impact on FDI.
(xv) Capacity Building: The federal and provincial governments must devise a
comprehensive plan to build capacity of bureaucratic leadership in government
departments/Ministries and ensure that this leadership implement approved policies in a
transparent manner swiftly.
(xvi) Improve Infrastructure: Pakistan requires to improve infrastructure in respect of

transportation, utilities, telecommunication (internet), and access to information and
enforce stringent action against the channels of counterfeit and smuggled goods.
(xvii) Integrating with Global Value Chains: South Asian countries are linking up with
regional and global value chains and production networks. Taking advantage of China,
Pakistan must move up the value chain in highly competitive manufacturing industries
such as petroleum, chemical, electronics, information technology, automotive and aircraft
(Pakistan is already engaged in off-set program with Boeing) by establishing its own
brands, building up its innovative capacities and expanding its distribution networks.
(xviii) New Incentives: The Government may consider providing new incentives to attract FDI,
such as, supporting pioneering industry, introducing Innovation or golden Visa to attract
innovative foreign entrepreneurs, reducing corporate tax on profit on major investment
projects for 5 to 10 years, support package for research and development and innovation
related activities e.g. doubling or tripling tax credit for businesses engaged in R&D,
simplifying procedures for investors to purchase and sale land in SEZs for industrial or
commercial activities, making Public-Private Partnership framework more attractive to
incentivize FDI and private investment in public infrastructure and housing and
47
The Heritage Foundation, op.cit.
innovative technologies, provide legal certainty and protection as well as repatriation of
investors’ investment, establishing specialized Courts for commercial and investment
disputes aiming to ensure that disputes are resolved swiftly and fairly and make decisions
of Alternate Dispute Resolution Centre binding.
51. Notwithstanding above, economic growth and security is the overarching concern that
provide comfort and confidence to foreign investors to invest in host country. Therefore, it is
critical that all efforts are made to sustain economic growth and improving security situation in
all parts of the country to encourage foreign investors to invest in Pakistan. Equally important is
to focus on improving Pakistan’s image abroad.
Summary of key reforms implemented since June 2017
1. Starting a Business
• Promulgated Companies Act, 2017: The law became effective on May 30, 2017. This will enable
greater autonomy for SECP as a regulator creating a more robust accountability framework for
greater ease in new company incorporation. Single member companies now face fewer
regulations. Allows SECP to automate systems and incorporate technology to facilitate end
user/consumer/ new and old companies. This reform applies to both Karachi and Lahore.
• Enabled online registration through e-services/VOSS has now been operationalized. SECP has
developed data linkages with FBR and EOBI at the back end. Corporate data of companies
registered by SECP is pushed to these entities in real time.
• Reduced cost for new company incorporation. Made available certified true copies of company
formation documents for free and reduced documentation as now only one form called
annexure IV is required instead of four separate documents which had their separate costs
• Merged Procedure No. 12 (notify appointment of CEO) and Procedure No. 4 (Company
Incorporation).Merged Procedure No.1 (Name Reservation) with Procedure No. 4(Company
Incorporation)
• Developed a business registration portal at Lahore. Integrated business registration portal with
National Database and Registration Authority (NADRA) and Securities and Exchange Commission
Pakistan (SECP) e-services portal. Established helpline for business registration portal.
• Integration of Labour Department and PESSI on the business registration portal resulting in
reduced time to register a business from 10 to two days.
• Sindh Business Registration Portal operationalized.(combined registration with Labour

Department and SESSI)
2. Dealing with Construction Permits
Karachi
• SBCA reduced time to obtain building permit from 60 to 30 days. Reduced time for issuance of
completion certificate from 45 to 30 days.
• Reduced time taken for water connection at Karachi Water and Sewerage Board (KWSB) to 21
days.
• Reduced time taken i.e. 30 days have been reduced to zero) by eliminating requirement for
environmental approval by Sindh Environment Protection Agency (SEPA).
• Reduced time taken by 31 days reduced to zero as requirement at KWSB for tax certificate and
property tax valuation from Excise & Taxation Department waived (Procedure 10 & 11)
Lahore
• Creation of an Integrated One Window System including counters of Traffic Engineering and
Planning Agency (TEPA), Water and Sanitation Agency (WASA) at Lahore Development Authority
(LDA) office
• Eliminated the requirement to request assessment copy of property unit, in turn eliminating the
need for inspection from the Excise & Taxation Department.
• Implemented and disseminated Environment Protection Agency (EPA) de-notification of the

requirement for obtaining NOC (105 days) to construct non-hazardous and non-toxic DB case
study type warehouses (EPA, LDA and Metropolitan Corporation Limited [MCL]).
• Made available Construction Permits (CP) information on LDA website for increased
transparency
• Published online permit issuance statistics. Published CP procedures, fees and binding timelines
on LG&CD/MCL website. Developed and uploaded CP requirement checklists and required forms
for all major types of project
• Completion certificate issued in 22 days
• Time and cost of requesting water connection from WASA has been reduced significantly
• Standardization of by-laws between Metropolitan Corporation Lahore and Lahore Development

Authority
• Final inspections legally mandated through by-laws – Metropolitan Corporation Lahore and
Lahore Development Authority
3. Enforcing Contracts
• Alternate Dispute Resolution Centre (ADR) Bill 2017 approved by the Senate
• Automated Case Flow Management System launched at Lahore High Court
• Operationalization of a court annexed Alternative Dispute Resolution (ADR) Centre

• Pre-trial conference system launched (senior civil judge scrutinizes cases before being presented
to the court formally)
• Mediation centres established in Lahore
• District and Sessions Court has developed a website through which cases can be tracked, this
includes the category of cases and its status. https://www.dsjlahore.com.pk/
• The cause list and short summary of cases can also be accessed at
https://www.dsjlahore.com.pk/
• Division of courts established to process commercial cases e.g. negotiable instruments, rent,
intellectual property and consumer courts.
4. Getting Credit
• Enacted Secured Transactions Act 2016 and strengthened legal rights through a Secured
Transactions Collateral Registry (STCR) rules and regulations. Pakistan will have a stronger legal
framework for enabling easier access to finance.
• Part VI "REGISTRATION OF MORTGAES CHARGES, ETC" of Companies Act 2017 allows creation of
charge on immovable property, floating charge and other categories.
5. Getting Electricity
• Improved power infrastructure has resulted in exemption of load-shed to over 61% of Karachi
• Introduced simple to understand New Connection request forms, available on KE website
• Enabled single undertaking for new connection requests.
6. Protecting Minority Investors
• The law, Companies Act 2017 became effective on May 30, 2017 and is highly relevant for the
Protecting Minority Investors indicator as it directly addresses the liability of interested
directors. Specifically, under Article 286 of the Companies Act 2017, shareholders representing
ten percent or more of the issued share capital of a company may make an application to the
court by petition and sue an interested director for losses arising from a related-party
transaction
• Additional requirements have been prescribed through 3rd, 4th and 5th schedules to the
Companies Act, 2017. This will create a stronger legal environment for minority investors in
Pakistan, creating more favorable financial partnerships, consequently improving access to
finance.
• Listed Companies (Code of Corporate Governance) Regulations, 2017 available. These will clarify
guidelines for businesses to conduct their management affairs.
• The commission has prescribed detailed disclosures required to be made to the shareholders by
the companies
• Enactment of Corporate Rehabilitation Bill for a stronger legislative framework for minority
shareholders as well as making it easier for businesses to liquidate
• Facilitation of members through postal ballot (e-voting and voting through post) in case of
demand of polls by members benefitting minority shareholders catering to the drawback of
location/spread of shareholders across Pakistan.
7. Paying Taxes
• Introduced and activated STRIVE system for reduction in time for filing taxes by 50%.
• Major Banks have now been integrated into IRIS to allow for online payment of corporate
income tax and GST.
• Reduced a total number of payments from 12 to 1 by implementing e-services for GST payment.
8. Resolving Insolvency
• Enabled a framework for establishing and licensing for companies to take over non-performing
assets of distressed entities through Corporate Rehabilitation Act.
• Enabled the establishment, licensing and regulation of corporate restructuring companies and
the manner in which they can operate businesses under Corporate Restructuring Companies
Act, 2017 and subsequently it's rules.
9. Registering Property
Karachi
• Digital scanning for all registered documents available as well as digitized maps for Sindh online;
NOCs verified online; title search available online. Overall time reduced from 208 days to 25
days. The entire procedure of property registration (excluding Mutation) takes 17 days only.
• Reduced time taken to six days for Procedure 7 (execution and registration of the deed before
the registration authority) by five months and 21 days. The primary reason this initiative took so
long is the use of microfilming technology. The unavailability of microfilms led to extraordinary
delays. Since microfilms have been replaced by Digital Scanning Units the time taken for this
procedure has been reduced significantly.
• Standardized sale-purchase agreements template available online saves up cost of hiring deed
lawyer. One of the main reasons to hire a deed writer in Karachi was calculation of applicable
taxes. BOR has introduced Online Property Tax Calculator which provides accurate and classified
details of all applicable federal and provincial taxes on registering property in Karachi.
• Made available progress reports and performance statistics. Improved online availability of
information about Procedure 2 - advertisement in newspaper not required
Lahore
• Launch of E-stamp papers. Procedure 4 and 5- All the stamp papers have been converted into
the e-stamp papers and only issued from the Bank of Punjab. Now, there is no need to visit the
National Bank or Treasury for the issuance of stamp papers and for the verification of receipt of
payment & its submission to Sub-Registrar office as the online verification of e-stamp papers has
been launched.
• Computerization of Sub-Registrar offices and Linkages between LRMIS and SRO.
Now, deed is presented at the computer section where all the data entry of the deeds is being
done. Digital capturing of thumb impressions, digital pictures and digital capturing of text of
registry is being done at the computer section. On the same day it is sent into the hard and soft
form to the Sub-Registrar. The Sub- Registrar passes the registry on software application as well
as on the hard copies. Then registries are being scanned at the computer section and
electronically sent to the LRMIS center for mutation. The mutation process is being completed
automatically and there is no need to visit the LRMIS Center for the execution of the mutation.
Both the processes have been automated and linked. Overall duration has been reduce to 15
days instead of 38 days and also cost of registration is fixed PKR 500/- Only.
• Computerization of land Records: Procedure 1 has been simplified as land records data has been
computerized. Now, Fard can be obtained in just 30 Minutes. Procedure 2- There is no need to
publish an advertisement in newspaper for a transaction as all the computerized land records
has been published at website and now parties can examine the exact status of land. Moreover,
online Fard verification system has also been put in place at the Sub-Registrar offices in order to
verify / cross check the particulars of the Fard.
• Improvement in transparency of information available-Land information is available online for

free of cost for anyone. Similarly a detail regarding registered deeds is also available online.
• Reliability of Infrastructure Index - All the registered deeds and mutations are fully digital. Can
be extracted through any field from the system as well as all the registered deeds are being
scanned.
10. Trading Across Borders
• The I-form and E-form have been integrated into Web Based One Customs (WeBOC) along with
certificate of origin. This enables importer and exporter to access it online, pre-fill and complete
the required documentation for customs clearance without having to visit several regulatory
contact points.
• Integrated WeBOC with three departments involved in clearances - Plant Protection, Seed
Certification and Animal Quarantine. This means clearance information from these departments
can be accessed online and creates ease for the traders in knowing the status of their
containers/shipment much faster.
• FBR Customs wing, department responsible for creating easier cross-border trade has
introduced e-payment system for online payment of duty, taxes and all other charges. This will
allow faster payment of Custom-related duties, taxes and levies. It includes enabling payment
through ATMs which is easier for users, as compared to online payment mechanisms.

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Acronyms

BPM6 Balance of Payments 6th Edition (IMF)

3. FDI is generally considered as a stimuli for accelerated development and economic

7. FDI is defined as “a cross-border investment associated with a resident in one

9. However, Baldwin (2013), based on the objectives of potential investors, has

UNCTAD (2002) Tax policy, trade policy, privatisation policy,

(vi) Government finance: Government finance is an important issue that affects

(viii) Human capital: The availability of a cheap workforce, particularly an educated

(ix) Policy measures: Government policies including investment incentives on FDI

3.1. Macroeconomic Situation

3.2. Economic Reforms and Growth Patterns of Pakistan

longer than low growth periods. Its growth

economic reform that remained a

Table 1. Growth Pattern (Percent)

3.3. Development Goals

4. Foreign Direct Investment in Pakistan

4.1 FDI Policy

i. Reducing the cost and processes of doing business.

3. Flexibility in Financial Procedure: Promotion foreign investment in banking, insurance,

7. Protection of Foreign Private Investment: Foreign investors in relation to the

4.2. Trends and Patterns of FDI in Pakistan

Table 2. FDI Inflows during FY1950 to FY2017

Figure 4. Historical Trend of Net FDI Inflows: FY1950 to FY2017

Source: State Bank of Pakistan, Handbook of Statistics on Pakistan

Figure 6. Sources of Net FDI Inflows during FY1997-FY2017 ($40.4 billion)

14% North America

Figure 7. Net FDI Sector-Wise: FY1997-FY2017

Figure 8. FDI Inflows Economic Group Wise

4.4. Net FDI Inflows by Skills Intensity

Figure 9. Skills Intensive FDI inflows: FY1997-FY2017

3% 14% Low Skills Intensive FDI

4.5 Net FDI Inflows to Greenfield Investment and Privatization

Table 3. Greenfield Investment (FDI) in Pakistan ($ million)

37. A cross-country comparison27 of FDI performance during 1980-2016 reflects the

Figure 10. Trend in FDI Inflows Per Capita ($)

0 Pakistan Bangladesh India Indonesia Philippines Vietnam

Figure 12. FDI Inflows as Percent of GDP

Pakistan Bangladesh India Indonesia Philippines Vietnam

Figure 14. FDI Inflows as Percent of Exports of Goods and Services

Pakistan Bangladesh India Indonesia Philippines Vietnam

Source: UNCTAD Database

Figure 15. FDI Stock as Percentage of World FDI Stock

0 Pakistan Bangladesh India Indonesia Philippines Vietnam

Table 5. FDI Potential Index29 Ranking of Selected Economies

5.9. FDI and Efficiencies in the Economy

5.10. China Pakistan Economic Corridor’s Impact on FDI

Box 5. FDI Success Stories in Pakistan

5.10.1. Impact of CPEC on Trade

5.10.2. Impact of CPEC on FDI

Table 6. Pakistan’s Trade and Financial Transactions with China

Source: State Bank of

6. Impediments in Attracting FDI

(vi) Infrastructure facilities (electricity, gas, logistics, and transport and

Table 8. Trading Across Borders36

(xii) Financial market development is also a key factor in attracting investment.

(xiii) Availability of financing in the domestic market, business sophistication and

(iii) FDI in Manufacturing: To enable foreign investment to better serve Pakistan’s

(iv) Improving Business Environment: Pakistan slipped to 147th position in improving

(viii) Financial Development: An accessible and efficiently functioning formal financial

(xvi) Improve Infrastructure: Pakistan requires to improve infrastructure in respect of

Summary of key reforms implemented since June 2017

• Sindh Business Registration Portal operationalized.(combined registration with Labour

2. Dealing with Construction Permits