Foreign Direct Investment in Pakistan: Policy Issues and Operational Implications

Publication | July 1999

Given its fragile balance of payments position and urgent need to boost industrial production, Pakistan needs to significantly increase its mobilization of foreign resources. However, long-term official assistance will become increasingly scarce, while promoting large portfolio investments is not a proper policy option due to Pakistan's underdeveloped and narrow capital market. Significant increases in commercial borrowings are also not desirable. It is therefore crucial to accord high priority to foreign direct investment (FDI).

Previous inflows of FDI in Pakistan were meager, accounting for only 0.2% of the world total and less than one percent of the Asian subtotal each year in the 1990s. Among the major impediments are urban violence, inconsistent economic policies, and government bureaucracy. Remedial policy actions are essential. Another major problem is the concentration of FDI on the power sector, a domestic-oriented sector, which results in large foreign exchange costs and remittances. This has serious balance of payments implications.

Lessons learned from the Pakistan experience are: developing economies should attach short-term priority to attracting FDI to the foreign exchange earning sector, or, at least, both the foreign exchange earning sector and other sectors simultaneously. Multilateral development organizations, including the Asian Development Bank, should also take this into account in their private sector operations, particularly the build-own-transfer type, to develop economic infrastructures in developing economies.


  • Foreword
  • Importance of Foreign Direct Investment in Pakistan
  • Review of FDI Policy
    • Introduction
    • A Brief Review of the 1950s, 1960s and 1970s
    • The 1980s
    • The 1990s
  • Trends, Issues, Foreign Direct Investment and Economic Impact of FDI
    • Trends
    • Structural Pattern of FDI
    • Sectoral Distribution of FDI
    • Factors Influencing the Flow of FDI in Pakistan
    • Economic Effects of FDI
  • Concentrated FDI in the Power Sector and its Balance of Payments Implications
    • Introduction
    • State of the Power Sector up to the Mid-1990s
    • Demand-Supply Situation
    • Salient Features of the 1994 Power Policy
    • Balance of Payments Implications
  • Conclusions, Lessons and Policy Challenges
    • Conclusions and Lessons Learned
    • Policy Recommendations
  • Appendix
  • References

Additional Details

  • Finance sector development
  • Pakistan

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