Pakistan seeks inward investment to boost economic growth, particularly in the energy, agribusiness, information and communications technology, and industrial sectors. Since 1997, Pakistan has established and maintained a largely open investment regime. Pakistan introduced an Investment Policy in 2013 that further liberalized investment policies in most sectors to attract foreign investment and signed an economic co-operation agreement with China, the China-Pakistan Economic Corridor (CPEC), in April 2015. CPEC Phase I, which concluded in late 2019, focused primarily on infrastructure and energy production. CPEC Phase II, which is ongoing, is reportedly pivoting away from infrastructure development to mainly promote Pakistan’s industrial growth by establishing special economic zones throughout the country. The PRC has also pledged to provide $1 billion in socio-economic initiatives focused on agriculture, health, education, poverty alleviation, and vocational training by 2024. However, progress on Phase II is significantly delayed due to the COVID-19 pandemic, fiscal constraints, and regulatory issues. The government took almost two years to pass legislation formalizing the CPEC Authority (a centralized federal body charged with overseeing CPEC implementation across the country). Some opportunities are only open to approved Chinese companies, and CPEC has ensured those projects and their investors receive authorities’ attention.

To support its Investment Policy, Pakistan also has implemented sectoral policies designed to provide additional incentives to investors in those specific sectors. The Automotive Policy 2016, Export Enhancement Package 2019, Alternative and Renewable Energy Policy 2019, Merchant Marine Shipping Policy 2019 (with 2020 updates), the Electric Vehicle Policy 2020-2025, the Textile Policy 2021 (which took over two years for final approval), and then Prime Minister Imran Khan’s reform package for IT sector development (announced in February 2022) are a few examples of sector-specific incentive schemes. Sector-specific incentives typically include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services.

The last Strategic Trade Policy Framework (STPF) – which lays out the government’s broad trade policy outlooks and priorities – expired in 2018; the Cabinet approved an updated STPF 2020-25 in November 2021. Following the expiration, incentives introduced through STPF 2015-18 remained in place until the updated STPF came into effect. Nonetheless, foreign investors continue to advocate for Pakistan to improve legal protections for foreign investments, protect intellectual property rights, and establish clear and consistent policies for upholding contractual obligations and settlement of tax disputes.

The Foreign Private Investment Promotion and Protection Act (FPIPPA), 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection for foreign investors and investment in Pakistan. The FPIPPA stipulates that foreign investment will not be subject to higher income taxes than similar investments made by Pakistani citizens. All sectors and activities are open for foreign investment unless specifically prohibited or restricted for reasons of national security and public safety. Specified restricted industries include arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol. There are no restrictions or mechanisms that specifically exclude U.S. investors.

Pakistan’s investment promotion agency is the Board of Investment (BOI). BOI is responsible for attracting investment, facilitating local and foreign investors, implementation of projects, and enhancing Pakistan’s international competitiveness. BOI assists companies and investors who seek to invest in Pakistan and facilitates the implementation and operation of their projects. BOI is not a one-stop shop for investors, however.

Pakistan pursues investor retention through “business dialogues” such as webinars and seminars with existing and potential investors. BOI plays the leading role in initiating and managing these dialogues. However, Pakistan does not have a dedicated ombudsman’s office focused on investment retention.

Foreigners, other than Indian and Israeli citizens/entities, can establish, own, operate, and dispose of interests in most types of businesses in Pakistan, excepting those involved in arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol. There are no restrictions or mechanisms that specifically exclude U.S. investors. There are no laws or regulations authorizing domestic private entities to adopt articles of incorporation discriminating against foreign investment.

Pakistan does not place limits on foreign ownership or control. The 2013 Investment Policy eliminated minimum initial capital requirements across sectors so that there is no minimum investment requirement or upper limit on the allowed share of foreign equity, with the exception of investments in the airline, banking, agriculture, and media sectors. Waiver to these limits require approval from the cabinet and prime minister.

Foreign investors in the services sector may retain 100 percent equity, subject to obtaining permission, a “no objection certificate,” and license from the concerned agency, as well as fulfilling the requirements of the respective sectoral policy. In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agriculture sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed. Small-scale mining valued at less than PKR 300 million (roughly $1.7 million) is restricted to Pakistani investors.

Foreign banks may establish locally incorporated subsidiaries and branches, provided they have $5 billion in paid-up capital or belong to one of the regional organizations or associations to which Pakistan is a member (e.g., Economic Cooperation Organization (ECO) or the South Asian Association for Regional Cooperation (SAARC)). Absent these requirements, foreign banks are limited to a 49-percent maximum equity stake in locally incorporated subsidiaries.

There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a $100,000 limit on initial franchise investments and a cap on subsequent royalty payments of 5 percent of net sales for five years. Royalties and technical payments are subject to remittance restrictions listed in Chapter 14, Section 12 of the SBP Foreign Exchange Manual (http://www.sbp.org.pk/fe_manual/index.htm).

Pakistan maintains investment screening mechanisms for inbound foreign investment. The BOI is the lead organization for such screening. Pakistan blocks foreign investments where the screening process determines the investment could negatively affect Pakistan’s national security. Though BOI is the official lead agency for investment screening mechanism, they lack in-house capacity for running such screenings and rely heavily on intelligence agencies for the required due diligence.

Pakistan has not undergone any third-party investment policy reviews in the past three years.

Sustainable Development Policy Institute (SDPI) is the leading civil society think tank in Pakistan and in 2020 reported on “excessive regulations” as the key barrier to attracting more foreign investment. Details are at https://sdpi.org/excessive-regulations-hurdle-to-foreign-investment/news_detail. 

Pakistan Institute of Development Economics (SDPI), a public sector think tank, produced a report in 2021 on reasons Pakistan has attracted less investment than China or India. Details are at https://pide.org.pk/research/why-do-we-have-less-investment-than-china-and-india/. 

The Board of Investment’s “Doing Business Reform Strategy 2018-21” is the national roadmap for improving Pakistan’s investment climate. In last few years, the government has simplified pre-registration and registration facilities and automated land records to simplify property registration, eased requirements for obtaining construction permits and utilities, introduced online/electronic tax payments, and facilitated cross-border trade by expanding electronic submissions and processing of trade documents.

The Securities and Exchange Commission of Pakistan (SECP) manages company registration, which is available to both foreign and domestic companies. Companies first provide a company name and pay the requisite registration fee to the SECP. They then supply documentation on the proposed business, including information on corporate offices, location of company headquarters, and a copy of the company charter. Both foreign and domestic companies must apply for national tax numbers with the Federal Board of Revenue (FBR) to facilitate payment of income and sales taxes. Industrial or commercial establishments with five or more employees must register with Pakistan’s Federal Employees Old-Age Benefits Institution (EOBI) for social security purposes. Depending on the location, registration with provincial governments may also be required. The SECP website (https://www.secp.gov.pk/) offers a Virtual One Stop Shop (OSS) where companies can register with the SECP, FBR, and EOBI simultaneously. The OSS can be used by foreign investors.

Pakistan does not promote or incentivize outward investment.

While Pakistan does not explicitly restrict domestic investors from investing abroad, cumbersome and time-consuming approval processes, involving multiple entities including the SBP, SECP, and the Ministries of Finance, Economic Affairs, and Foreign Affairs, discourage outward investments. Despite those processes, larger Pakistani corporations have made investments in the United States in recent years.

Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSX) in January 2016. As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSX is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions. Per the Foreign Exchange Regulations, foreign investors can invest in shares and securities listed on the PSX and can repatriate profits, dividends, or disinvestment proceeds. The investor must open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments. In 2017, the government modified the capital gains tax and imposed a 15 percent tax on stocks held for less than 12 months, 12.5 percent on stocks held for more than 12 but less than 24 months, and 7.5 percent on stocks held for more than 24 months. The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax.

The SBP and SECP provide regulatory oversight of financial and capital markets for domestic and foreign investors. Interest rates depend on the reverse repo rate (also called the policy rate).

Pakistan has adopted and adheres to international accounting and reporting standards – including IMF Article VIII, with comprehensive disclosure requirements for companies and financial sector entities.

Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits. Banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 25 percent of a bank’s equity. Foreign-controlled (minimum 51 percent equity stake) semi-manufacturing concerns (i.e., those producing goods that require additional processing for consumer marketing) are permitted to borrow up to 75 percent of paid-up capital, including reserves. For non-manufacturing concerns, local borrowing caps are set at 50 percent of paid-up capital. While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending. Pakistan’s domestic corporate bond, commercial paper and derivative markets remain in the early stages of development.

The State Bank of Pakistan (SBP) is the central bank of Pakistan.

According to the most recent statistics published by the SBP (2021), only 23 percent of the adult population uses formal banking channels to conduct financial transactions, while 24 percent are informally served by the banking sector. The remaining 53 percent of the adult population do not utilize formal financial services. Women are more likely to be unbanked than men.

Pakistan’s financial sector has improved in recent years according to international banks and lenders. The SBP’s most recent review of the banking sector, in July 2021, noted improving asset quality, stable liquidity, robust solvency, and a slow pick-up in private sector advances. The asset base of the banking sector expanded by 12.2 percent during 2021 due to a surge in banks’ deposits and investments, which increased by 10.4 percent and 18.7 percent respectively. The five largest banks, one of which is state-owned, control 57.8 percent of all banking sector assets.

SBP conducted the 8th wave of the Systemic Risk Survey in July 2021. The survey results indicated respondents perceived key risks for the financial system to be mostly exogenous and global in nature. Importantly, the policy measures rolled out by SBP to mitigate the effects of COVID-19 have been very well received by the stakeholders.

The risk profile of the banking sector remained satisfactory, and moderation in profitability and asset quality improved as non-performing loans as a percentage of total loans (infection ratio) was at 8.9 percent at the end of FY 2021 (June 30, 2021). In FY 2021, total assets of the banking industry were estimated at $165.7 billion and net non-performing bank loans totaled approximately $5 million.

The penetration of foreign banks in Pakistan is low, making a small contribution to the local banking industry and the overall economy. According to a study conducted by the World Bank Group in 2018 (the latest data available), the share of foreign bank assets to GDP stood at 3.5 percent while private credit by deposit stood at 15.4 percent of GDP. Foreign banks operating in Pakistan include Citibank, Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the Bank of China. International banks are primarily involved in two types of international activities: cross-border flows, and foreign participation in domestic banking systems through brick-and-mortar operations. SBP requires foreign banks to hold at minimum $300 million in capital reserves at their Pakistani flagship location and maintain at least an 8 percent capital adequacy ratio. In addition, foreign banks are required to maintain the following minimum capital requirements, which vary based on the number of branches they are operating:

• 1 to 5 branches: $28 million in assigned capital;
• 6 to 50 branches: $56 million in assigned capital;
• Over 50 branches: $94 million in assigned capital.

Foreigners require proof of residency – a work visa, company sponsorship letter, and valid passport – to establish a bank account in Pakistan. There are no other restrictions to prevent foreigners from opening and maintaining a bank account.

Pakistan does not have its own sovereign wealth fund (SWF) and no specific exemptions for foreign SWFs exist in Pakistan’s tax law. Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.