Pakistan's investment-to-GDP ratio has been enervating. At a meager 13.1% in Fiscal Year 2024 — the lowest in the past 64 years — the country continues to grapple with economic incoherence. This underscores that, despite the much-celebrated “stabilisation” following the IMF’s programme, the current recovery is neither sustainable nor sufficient. Economic vulnerabilities remain high unless there is a comprehensive overhaul of the government’s mechanics at both the strategic (policy) and operational levels.
Historically, Pakistan’s investment-to-GDP ratio has seen a troubling decline. The 1960s recorded the highest average at 18.7%, followed by the 1980s and 1990s at 18.5%. However, since 2011, the ratio has averaged just 15.2%, reflecting a concerning trend for economic durability as our GDP panorama has remained primarily consumption-driven. Additionally, a regional comparison reveals an even grimmer scenario. While South Asia averages 31.8%, countries like India, Bangladesh, and Vietnam report significantly higher ratios of 33.74%, 30.95%, and 32.75%, respectively. This disparity embodies the shortsightedness of Pakistan’s policy-makers in fostering global competitiveness vis-à-vis our neighbours.
Investment is a bedrock for economic growth, fomenting the creation of capital assets like infrastructure, factories, and technology. A low investment ratio signals insufficient capital formation, which hinders long-term productivity and concurrent growth. Low investment also limits modernisation in industries and the adoption of advanced technologies, increasing dependence on imports and exposing the economy to global economic shocks, perennial current account deficits, and volatile exchange rates.
Lack of fiscal discipline is another visceral problem in the economic milieu, causing trouble and leading to an informal economy, which in turn deteriorates investment in the economy
It also reflects limited private sector participation, driven by an unfavourable business environment, regulatory barriers, high borrowing costs, and weak investor confidence. This is evident from banks' preference to invest in government securities rather than lending to consumers. As highlighted by PwC’s 2024 Banking Publication, credit to the private sector as a percentage of GDP is a mere 12% in Pakistan, compared to 50% in India, 38% in Bangladesh, and 47% in Sri Lanka. These figures, coupled with declining business confidence and a deteriorating ease of doing business, paint a dire picture for private sector investment.
Lack of fiscal discipline is another visceral problem in the economic milieu, causing trouble and leading to an informal economy, which in turn deteriorates investment in the economy. The government is guilty of incessant current expenditure (an increase of around 30% YoY in Budget-25, with around 56% of the budget allocated to interest payments), sapping the revenue pool and forcing the FBR to heavily tax. Like other governmental machinery, the FBR also has a penchant for taking the easy way out is taxing the taxed, owing this myopia first to the lethargic post-colonial administration and second to the deepening of elitist pockets.
There is hostility and a lack of trust between the State and its citizens, causing trouble both for the government in running its affairs and for individuals in thriving like those in business-friendly economies
The lack of governance and fruitful policies in revenue mobilisation is obvious from the following instances: Per FBR’s report on 2023-24 performance, an analysis of the income tax collection indicates that withholding tax accounts for 29% of the FBR’s total collection and represents 60% of the income tax collected. Further, B-25 has set an exorbitant target of Rs12.9 trillion in tax revenue (couched within an enormous withholding-station), representing a 40.2% growth from the previous period. Salaried individuals as well as non-salaried individuals/AOPs are to be taxed heavily under a kaleidoscopic mosaic of the normal tax regime, surcharge, and super tax—one of the most vibrant taxation tapestries worldwide. In other words, a person may end up working for six to seven months just to pay taxes. And not to mention, the exorbitant corporate tax rate of 29% (compared to the worldwide average of 23%), plus additional super tax and tax on dividend distribution.
With a myopic taxation landscape and a lack of conducive business clime (obvious from WB’s Ease of Doing Business rankings and Business Ready Report), the government is warding off corporatisation and dissuading urban high-income and upper-middle-income segments from remaining within the documented economy. Consequently, the informal economy is where savings thrive, as evident from high cash circulation; people prefer keeping savings in gold, real estate, or cash rather than channeling them into the formal economy. There is hostility and a lack of trust between the State and its citizens, causing trouble both for the government in running its affairs and for individuals in thriving like those in business-friendly economies.
To provide economic opportunities to more than 2.5 million young people entering the labor market annually, there is a need to double investment levels.
Another impasse hampering investment is the plummeting development budget: a decrease of around 156% since FY16. Pakistan could not even spend 50% of the meagre Rs950 billion it allocated for the PSDP in FY 2023-24, as per the last quarterly report (2024) of the Ministry of Planning and Development. The state of planning is so dire that to complete the overall backlog of development projects, the country would need Rs10.7 trillion (more than 14 times the budget allocation of Rs727 billion in 2022-23).
There is no silver bullet for Pakistan's current disposition. The only way to address Pakistan’s investment challenges is through a comprehensive reform agenda. The government must prioritise fiscal discipline by cutting current expenditures (this includes sequestration of SOEs bleeding resources, eliminating unfunded pensions, and curbing elitist rent-seeking) and implementing robust debt management strategies to create fiscal space for public sector development programmes (PSDP), which can have a multiplier effect on economic growth. These projects should be free from political maneuvering, be ‘development-based’ rather than purely ‘infrastructural,’ and contribute to the welfare, economic growth, or development of the people.
China-Pakistan Economic Corridor (CPEC) could also play a significant role by attracting private investment and fostering joint ventures between local and Chinese investors, particularly in export-oriented industries
Tax reforms are critical—rather than overburdening the already taxed sectors, efforts should focus on bringing the undocumented economy into the tax net. Pakistan needs a fairer, more transparent, and simpler tax system that encourages compliance, fosters sustainable economic growth, and achieves fiscal sovereignty. Additionally, a national programme to support Small and Medium Enterprises (SMEs) should be launched to encourage entrepreneurship and safeguard social development indicators.
Political consensus is equally vital; political parties must recognise the gravity of the economic situation and make swift, informed decisions to enable meaningful reforms. Governance improvements are essential at both political and bureaucratic levels to ensure efficient decision-making and effective resource allocation. Pakistan must prioritise empowering the private sector to engage with interested investors in China, Saudi Arabia, UAE, and Qatar. Government-to-government transactions face complexities stemming from challenges such as limited capacity within ministries, weak audit practices, and legal complications. The government needs to offer a package of financial and regulatory incentives free from rent-seeking and ill-governance.
Leveraging the China-Pakistan Economic Corridor (CPEC) could also play a significant role by attracting private investment and fostering joint ventures between local and Chinese investors, particularly in export-oriented industries. Industry-centric strategies must be adopted to enhance value addition, improve production efficiency, promote technology adoption, and address specific investment needs.
To sustain long-term growth, the government should prioritise the development of human capital through investments in education and vocational training, particularly in technology and high-growth sectors. Partnerships with international institutions to enhance skill-building programmes can bridge the gap between workforce capabilities and industry requirements. Lastly, creating a robust framework for public-private partnerships (PPPs) could accelerate infrastructure development and provide shared accountability, ensuring efficient use of resources.
These measures, collectively, can pave the way for sustainable and inclusive economic growth in Pakistan. Without immediate and synchronised efforts from all stakeholders, Pakistan risks falling further behind in global competitiveness, with dire consequences for future generations.