FDI shrinks 69 percent as power sector pulls back

By Staff Reporter

KARACHI: Pakistan’s appeal to foreign capital deteriorated sharply in the fiscal year through May, with total foreign investment plunging 69% to $478 million from $1.56 billion a year earlier, as a retreat from the country’s dominant power sector and turbulence in global equity markets eroded inflows that Islamabad has long counted on to shore up its balance of payments.

Foreign direct investment alone dropped 28.4% to $1.623 billion in the eleven months through May of fiscal year 2026, down from $2.267 billion in the same period a year earlier, according to data released Wednesday by the State Bank of Pakistan. The decline strips out roughly $644 million in capital that had flowed into the country in the prior year — a shortfall that lands at a particularly delicate moment, as Pakistan navigates a fragile economic recovery underpinned by an International Monetary Fund bailout program.

The power sector, historically the engine of Pakistan’s FDI story and a magnet for Chinese capital under the China-Pakistan Economic Corridor, bore the brunt of the retreat. Power-sector inflows fell to $871.4 million from $1.091 billion in the year-earlier period, a decline of roughly 20% that reflects both project-cycle maturity and a broader pullback by independent power producers that have spent years locked in payment disputes with Pakistani state utilities. Those disputes, which threatened to unravel billions of dollars in energy agreements and forced successive rounds of government-brokered renegotiations, appear to have cooled appetite for new commitments.

The oil and gas exploration sector swung from an inflow of $121.8 million to a net outflow of $5 million over the same eleven-month stretch — a sign that extraction investment, which had offered some diversification away from power, is also losing momentum.

Financial services provided the one clear bright spot. Inflows into banks and financial institutions climbed to $718.5 million from $646.4 million a year earlier, buoyed in part by capital injections into foreign-owned lenders capitalizing on Pakistan’s elevated interest rate environment and recovering banking margins.

On a monthly basis, FDI came in at $214.3 million in May — down 8% from $232 million in May 2025, though sharply higher than the $54.6 million recorded in April, when deal flow had effectively stalled. The April-to-May rebound suggests some recovery in transaction activity toward the end of the fiscal year, though analysts caution that monthly figures are volatile and often reflect the timing of single large commitments rather than underlying trend shifts.

Portfolio investment told an even grimmer story. Foreign holdings in Pakistani equities and debt instruments fell by $566 million during the eleven-month period, as the U.S.-Iran conflict injected fresh risk aversion into frontier and emerging markets and prompted fund managers to reduce exposure to economies perceived as vulnerable to regional spillovers. Pakistan’s equity market, which had staged a dramatic rally in the prior fiscal year on the back of IMF deal optimism and falling inflation, gave back a portion of those gains as geopolitical uncertainty mounted.

The cumulative effect pushed total foreign investment — combining FDI, portfolio flows and foreign public investment — to just $478 million, a figure that underscores how dependent Pakistan’s external financing has become on official creditors rather than market-driven capital.

Pakistan’s government acknowledged the deterioration in its annual economic survey for fiscal 2026, while striking a cautiously optimistic note. The survey cited ongoing structural reforms, investment facilitation efforts under the Special Investment Facilitation Council — a civil-military body established to fast-track foreign deals in agriculture, mining, technology and energy — and improving macroeconomic stability as factors expected to rebuild investor confidence and lift FDI over the medium term.

The SIFC has become the centerpiece of Pakistan’s pitch to Gulf sovereign wealth funds and strategic investors, with Islamabad pointing to pledged commitments from Saudi Arabia and the UAE across real estate, agriculture and minerals. Whether those pledges translate into disbursed capital has been a persistent question, and the fiscal 2026 data suggest the conversion rate remains slow.

Pakistan’s macroeconomic backdrop has improved measurably over the past eighteen months. Inflation has fallen from peaks above 38% to single digits, foreign exchange reserves have stabilized, and the rupee has held relatively steady after a period of severe depreciation. The IMF in March completed a review of its $7 billion extended fund facility, releasing a fresh tranche and providing something of a credibility endorsement.

Yet the FDI data illustrate the gap between macroeconomic stabilization and the restoration of investor confidence. Structural impediments — including a circular debt crisis in the energy sector exceeding $15 billion, an unpredictable regulatory environment, and longstanding concerns about contract enforceability — continue to weigh on the risk calculus of multinational companies considering long-term commitments.

The full-year FDI figure for fiscal 2026 will be released after June data are compiled, but the eleven-month trajectory points to the weakest annual result in several years, reinforcing pressure on the government to accelerate reforms and deliver on deals that have so far remained on paper.