Pakistan’s paradox: Stability without investment

At the start of 2026, Pakistan’s economy is finding a firmer footing. Interest rates are low, the currency is stabilized, and equity market is buoyant. IT exports have hit record highs. Reforms backed by the International Monetary Fund (IMF) appear more credible than at any point in the past decade. 

Yet beneath these reassuring signals lies a striking contradiction. Foreign direct investment (FDI) into Pakistan remains negligible. Between July and December 2025, foreign direct investment (FDI) fell by 43 percent compared with the same period last year. For a country that relies heavily on borrowing to stabilize, foreign investor behavior is becoming impossible to ignore.

This is the Pakistan paradox: domestic stabilization in the absence of meaningful international investor participation, with some foreign firms quietly exiting.

This is the Pakistan paradox: domestic stabilization in the absence of meaningful international investor participation, with some foreign firms quietly exiting.

- Vaqar Ahmed

Official messaging around this contradiction fails to convey what is different. Established businesses point to familiar constraints: security concerns, long term political uncertainty, regional volatility, high taxes, ambiguous energy policies and high overall costs of doing business. Yet this misses the deeper reality. Pakistan is not simply experiencing cyclical investor caution; it is confronting a persistent geopolitical risk premium that now outweighs domestic reforms, IMF backing, and bilateral diplomacy.

This risk premium is shaped less in Islamabad than in Washington, Tehran, Tel Aviv, Kabul, and New Delhi.

The Trump administration’s pressure on Iran has revived a level of regional uncertainty that investors had largely discounted over the past decade. The prospect of sanctions and tariffs on select countries has heightened the scrutiny of supply chains. For Pakistan, both geographically and commercially exposed, these spillover risks are no longer theoretical. Yet, there has been little official messaging on Islamabad’s risk-mitigation options.

The brief but intense flare up with India last year, ongoing low-level skirmishes with Afghanistan, the unresolved Iran–Israel confrontation and the risk of escalation involving US forces, have all reinforced Pakistan’s classification as a high-volatility country in global risk models. This helps explain why positive domestic signals have yet to translate into renewed FDI. 

The paradox therefore is not that reforms are insufficient. It is that they are no longer decisive.

Pakistan has been here before, but the context has changed. In earlier cycles, IMF-led macroeconomic stabilization was enough to trigger at least a modest return of foreign capital. Today, stabilization is a necessary condition, not a sufficient one. Investors are asking a different question: not whether Pakistan’s economic fundamentals are improving, but whether its geography has become too risky to price.

This distinction matters because it alters the policy response. If the problem were purely economic, the answer would lie in faster reforms, deeper liberalization, and stronger signaling. But when capital withdrawal reflects geopolitical risk rather than domestic mismanagement, traditional reforms lose traction.

The challenge, then, is not to deny geography, but to design around it.

Resolving the Pakistan paradox requires a deliberate shift toward what might be called protected investment corridors: investment structures that are insulated, as far as possible, from geopolitical volatility. Pakistan needs to prioritize capital that is structurally and politically patient.

The Special Investment Facilitation Council (SIFC) offers a vehicle for targeted de-risking. By channeling government-to-government capital from the Gulf and China into ring-fenced sectors: infrastructure, mining, energy transition and logistics, Islamabad can attract investors less prone to sudden exits triggered by regional headlines. Sovereign capital does not ignore risk, but it prices it differently. 

This strategy is not without trade-offs. Government-to-government investment is slower, more negotiated and often comes with strategic conditions. But with private institutional investors remaining on the sidelines, it may be the only viable way to attract FDI.

In parallel, Islamabad may lean more decisively into sectors that are inherently insulated from physical insecurity. IT and digital services, alongside select defense and security-related products, are the most obvious candidates. Unlike manufacturing or extractives, their exposure to border disruptions and regional conflict is limited. The continued growth of Pakistan’s IT exports through repeated crises reflects this geographic decoupling.

The priority must be long term credibility over incentives: stable and low taxation, predictable regulation and recognition of IT as a strategic export sector. Extracting quick revenue from a globally integrated, mobile industry risks undermining one of the few sectors where Pakistan combines growth with resilience. Even freelancers and diaspora capital remain hesitant to return without lower, transparent taxes.

None of this implies that domestic reforms are irrelevant. On the contrary, Pakistan’s weak productivity in commodity producing sectors continue to undermine its long-term investment case. The Pakistan paradox is a warning but also an opportunity. Only those economies that adapt their investment strategies to geopolitical reality will attract capital. 

- Dr. Vaqar Ahmed is an economist and former senior civil servant, and President-elect of Rotary Club Pakistan Corporate (RCPC). He specializes in macroeconomic strategy, investment policy, and public finance.