akistan recently hosted the Shanghai Cooperation Organisation summit to enhance trade and strengthen ties with neighbouring countries. While such diplomatic engagements are important, they may not be sufficient to attract institutional and individual investors.

Investors need more than symbolic meetings; they look for a stable, business-friendly environment supported by clear policies, political stability and structural reforms. Such an environment allows investors to make large investments confidently.

Let’s take a look at the key factors that drive investment decisions and economic growth.

Diplomatic summits can serve as a platform for building relationships and announcing initiatives, but the real driver of foreign investment is a conducive economic environment. Investors seek macroeconomic stability, transparency, simple regulatory frameworks, well developed infrastructure and the rule of law.

Factors like ease of doing business, predictable tax regimes and reliable dispute resolution mechanisms are critical in shaping investor confidence. Pakistan currently faces several economic challenges despite securing a $7 billion loan from the International Monetary Fund.

The situation is dire. The inflation has been very high for quite some time; unemployment is endemic; the public debt is staggering. The World Economic Outlook report for 2024 paints a bleak picture, projecting high inflation. It also says the prices of essential goods, including food and fuel, will remain volatile.

Although inflation may decline eventually, the short-term outlook remains grim. Global uncertainties, such as the war in Ukraine, the conflict in the Middle East and tensions between Iran and the West are reshaping global priorities. These factors could further weaken business activity and erode household purchasing power in Pakistan.

The external sector of the economy remains fragile. Although the current account deficit is expected to decrease to 0.18 percent of GDP this year, the improvement is primarily due to reduced imports rather than a significant increase in exports. As of September 2024, the trade deficit stood at $1.8 billion.

The IMF has cautioned Pakistan to address its fiscal discipline issues. A failure to do so could lead to more debt and threaten future growth prospects. Major challenges for the economy include low productivity, weak governance, a low tax revenue-to-GDP ratio and inadequate investment in essential infrastructure. All these factors deter foreign investors. Addressing these issues is crucial for unlocking the country’s potential for sustained growth.

To transition from an aid-dependent economy to one that can attract long-term, sustainable private investment, the government must implement comprehensive economic reforms.

The country’s long-term prosperity depends on implementing structural reforms, stabilising the political environment and addressing fiscal imbalances and governance deficiencies. These measures are crucial to moving beyond the superficial diplomatic gains. 

Competitive tax incentives, simpler tax structures and reduction in bureaucratic red tape are crucial to making Pakistan more attractive to foreign investors. Consistent and predictable policies can bolster investor confidence. Transparency in government dealings and a reduction in corruption are essential.

Building trust with domestic and international investors requires strengthening the rule of law, ensuring judicial independence and establishing transparent legal frameworks for business dispute resolution. Governance reforms are not just necessary for attracting investment but are also fundamental to economic stability.

Clear, consistent policies and functioning logistics systems - from reliable transportation networks to dependable energy supplies and high-speed internet – are vital to reducing operational costs and improving Pakistan’s competitiveness as an investment destination.

Investment in both physical and digital infrastructure is essential to unlocking growth.

Additionally, the government should establish mechanisms to track the progress of investment agreements from forums like the SCO, ensuring that commitments are fulfilled and prioritising projects that offer long-term economic impact.

To reduce import dependency and stabilise the current account, Pakistan must prioritise sectors that can drive export growth, such as agriculture, manufacturing and information technology. Modernising these sectors through innovation and increasing value-added exports will improve the trade balance and boost foreign exchange reserves.

The government should shift its focus from diplomatic victories to economic fundamentals. Hosting forums like the SCO and participating in international summits is valuable for building diplomatic goodwill. However, Pakistan must now prioritise reforms for lasting economic success.

The country’s long-term prosperity depends on implementing structural reforms, stabilising its political environment and addressing fiscal imbalances and governance deficiencies. These measures are crucial to move beyond superficial diplomatic gains and creating an environment where sustainable investments can flourish.

By prioritising these reforms, Pakistan can create a predictable, investor-friendly climate that will enable it to move from reliance on external financial support to becoming a self-sustaining economy capable of attracting global investment and driving long-term export-led growth. These reforms have the potential to substantially enhance Pakistan’s economic prospects and foster a more stable and prosperous future.

The writer is a senior lecturer in finance and heads the international and trans-national education within the College of Accountancy, Finance and Economics at Birmingham City University.