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Pakistan’s economic situation is teetering on the brink as the country is facing a perilous financial crisis, scrambling to secure external financing to meet growing obligations. The country has received only temporary relief from a US$7 billion staff-level agreement with the International Monetary Fund.

Pakistan’s financing need for the 2023–2024 fiscal year is estimated at US$25 billion. To bridge this gap, Pakistan has turned to its traditional allies — Saudi Arabia, the United Arab Emirates (UAE) and China — to seek additional financial support, debt restructuring and foreign direct investment (FDI). Pakistan aims to re-profile US$12 billion in bilateral debt, with US$3 billion owed to the UAE, US$4 billion to China and US$5 billion to Saudi Arabia. The goal is to extend the repayment of these loans over the next three to five years, providing Pakistan with a more stable financial foundation.

Pakistan has opened the door to Gulf countries, especially Saudi Arabia and the UAE, through the Special Investment Facilitation Council — a platform to attract FDI in key sectors such as agriculture, mining, energy and infrastructure. FDI increased to US$1.9 billion in 2023–2024 fiscal year compared to US$1.6 billion in 2022–23 fiscal year, a 17 per cent increase. Although China remains the largest contributor, there has been an increase in FDI from Saudi Arabia and UAE, rising from US$1 million to US$10 million over the 2022–2023 fiscal year.

Saudi Arabia and the UAE have shown interest in agriculture and mining, sectors where significant investment opportunities exist. These investments align with their broader strategies — Saudi Arabia’s Vision 2030 and the UAE’s post-oil economy strategy — to diversify their economy away from oil dependency and expand their global influence. By investing in Pakistan, both nations seek to strengthen their diplomatic ties and economic presence in South Asia, tap into new markets and expand their geopolitical reach.

Pakistan has actively invited Saudi Arabia and the UAE to invest in specific projects identified through the Pakistan Sovereign Wealth Fund, which includes state-owned enterprises. Pakistan hopes these countries will make significant investments as it urgently needs foreign exchange and economic stimulus. The strong historical ties, people-to-people connections and growing alignment of business interests between Pakistan and these Gulf nations provide an additional layer of optimism.

The government believes that attracting investments from Saudi Arabia and the UAE would significantly boost Pakistan’s economic activity and provide much needed support during these difficult times. But Pakistan has yet to make significant improvement in its investment environment.

In May 2024, a Saudi delegation visited Pakistan to evaluate the proposed investments but chose not to proceed, citing that the projects did not meet their investment criteria. Both Saudi Arabia and the UAE are looking for well-structured and high-yield investments, not ventures driven solely by historical ties. Saudi Arabia made it clear that ‘We are taxing our people, we are expecting also others to do the same, to do their efforts. We want to help but we want you also to do your part’.

This response underscores the structural issue and distrust within Saudi financial circles towards Pakistan’s fiscal management. Pakistan must improve its presentation of investment opportunities to meet international standards and attract investors seeking robust returns, independent of geo-political and historical pressures.

Several systemic problems in Pakistan need to be addressed to attract and retain significant investments. Regulatory inefficiencies and a burdensome taxation system are major barriers. Investors often only realise these challenges after committing, finding themselves entangled in a complex web of predatory tax regimes, rent-seeking practices, elite captures, capital and financial market issues, and unpredictable exchange rate policies. These issues force companies to spend considerable time and resources seeking exemptions or other forms of relief, a process that is inefficient and unattractive at the international level.

Investors seek policy certainty, long-term stability and a conducive political environment. The economic cost of political instability is around 3 per cent of GDP. To attract investments from Saudi Arabia, the UAE and other potential investors, Pakistan must create a more stable, transparent and investor-friendly environment. Its regulatory framework, particularly regarding foreign investment and funds repatriation, may not be sufficiently conducive to attract Gulf capital. High debt levels and concerns about financial management could further deter Gulf investors.

The potential for attracting investment from countries like Saudi Arabia and the UAE is promising, especially as these nations actively expand their global economic footprint. If Pakistan can present attractive and well-structured projects, it could encourage these countries to increase their investment levels. But the focus must be on greenfield investments — those that create new infrastructure and opportunities in sectors with minimal domestic competition. Brownfield investments through partnerships with local businesses also have potential, as local businesses can provide the trust required within the system.

When foreign investments are heavily incentivised by the government, it is more difficult for local businesses to remain competitive. Foreign investors may be drawn more by the incentive than the business opportunity, leading to market imbalance where foreign entities dominate at the expense of local industries. A cautionary example is the Karachi Electric Supply Company, where ongoing subsidies to private investors have become a financial burden rather than an asset. Such investments create liabilities without offering long-term economic benefits.

Pakistan must carefully evaluate the nature of the investments it seeks. The government should prioritise projects that contribute positively to the economy, avoid creating perpetual financial liabilities and ensure that any sale or lease of national assets does not prioritise short-term gains over long-term economic growth. FDI can only come as complementary to domestic investment efforts. Thoughtful planning and strategic alignment with domestic market dynamics will be essential to ensuring that investments benefit the country’s future.