The FDI angle:

• Pakistan faces political upheaval and interlinking economic and security issues.
• Foreign direct investment (FDI) is critical for the country to attract foreign currencies, technology and boost its exports.
• Why does this matter? Countries like China and Saudi Arabia have become critical sources of investment for the country.

In December 2023, Saudi Aramco made its first entry into Pakistan’s fuel retail market by buying a 40% stake in Gas & Oil Pakistan. For the beleaguered country, which goes to the polls on February 8 in a fraught general election, this signifies a shift in its FDI strategy at a time of political upheaval and economic crisis.

Western multinationals such as pharmaceutical firms Eli Lilly and Bayer and energy giant Shell have all decided to exit Pakistan in recent years. Their place is being filled by investors from developing economies, as shown by Saudi fuel retailer Wafi Energy acquiring 77% of Shell’s local operations in the country. 

There is a “transition of ownership of assets happening from traditional post-colonial Western outfits to new powers emerging in Asia,” says Haroon Sharif, an economist who served as Pakistan’s investment minister under former prime minister Imran Khan from September 2018 to June 2019. “It is a new model and new people.” 

The 10 developing countries that are expected to make up the Brics+ bloc have become a key source of investment for Pakistan as investor confidence wanes in the country. They feature the original members of Brazil, Russia, India, China, South Africa (Brics) as well as the UAE, Iran, Egypt, Ethiopia and Saudi Arabia, which is yet to make a final decision on the invitation. 

Gross fixed-capital formation, a measure of total investment, was only 13.3% of Pakistan’s gross domestic product in 2023, according to the IMF. The south Asian country lags regional peers like India and Bangladesh, and ranks 121st out of 129 developing countries with available data.

The growing prominence of Brics investors in Pakistan reflects a push by China to build out infrastructure in the developing world and oil-rich Gulf countries to diversify their international investment portfolios. “[Brics countries’] national champions are going into regional markets,” says Fawaz Valiaani, CEO of Elixir Securities, a Pakistan-focused investment advisory.

China has committed billions of dollars to build energy and transport infrastructure in the country under the China-Pakistan Economic Corridor (CPEC). The infrastructure built under CPEC “hasn't created jobs [or] increased Pakistan's exports”, says Mr Sharif, who stresses the need for export-oriented investment to help bring in technology and foreign exchange reserves to Pakistan.

Pakistan is at a critical juncture. The country of 250 million people faces an economic crisis, security issues and political turmoil. Imran Khan, the former prime minister who has been in jail since last August, was sentenced to 10 years in prison in January 2024 for leaking the contents of a diplomatic cable. 

Mr Khan, who is leader of the Pakistan Tehreek-e-Insaf (PTI) party, vehemently denies the allegations. The PTI claims the conviction aims to prevent the former cricket star from contesting in the general election on February 8. An interim government has been in place since August 2023.

More data trends to understand the new age of globalisation:

• Brics expansion dilutes G7 investment influence
• Sovereign investors splurge on emerging markets
• Chinese outbound FDI boom signals 'new phase'

Sources tell fDi that investor confidence in Pakistan has been hampered by policy uncertainty, exchange rate instability and high inflation and interest rates. Consumer prices rose at an annualised rate of 28.3% in January 2024, and Pakistan’s benchmark interest rate currently sits at 22%.

“I am a perpetual optimist on Pakistan, but the way the things are being handled by our establishment is really shattering the confidence of the entire business community,” says Sohail Tabba, a director at YB Holding, a family-owned conglomerate with interests in cement, textiles, energy and real estate. 

In May 2023, YB’s Lucky Cement said it would expand its manufacturing capacity in Iraq, in what Mr Tabba describes as “insurance” against the challenging environment in Pakistan. 

Another critical challenge is the country’s high levels of public debt. At the end of September 2023, Pakistan had a total external debt stock of $101.3bn, of which $34bn was from non-Paris Club countries like China and Saudi Arabia, according to the IMF. 

“The key to boost foreign investor confidence is a long term agreement with the IMF,” says Adeel Shahid, Karachi-based chief financial officer of Arzan Capital, a Kuwaiti investment group.

Amid these fundamental economic challenges, greenfield FDI announced in Pakistan is increasingly coming from the 10 Brics+ countries, as Western countries’ FDI falls to record lows, according to fDi Markets. A memorandum of understanding signed between Pakistan’s government and Saudi Aramco to set up a refinery in the port of Gwadar made up almost all planned greenfield FDI in 2023. 

Pakistan’s interim government said in November that it is consulting with Aramco on the scope of the project. Saudi Aramco declined to comment on the MoU. In light of a shift in Pakistan’s FDI strategy, local business leaders hope the country can regain favour with other partners too. 

“We are in need of energy, investment and building infrastructure. We should not only focus on Brics and leave others,” says Mr Tabba, who hopes for Pakistan to develop ties with Europe, US, Japan, the Brics and wherever there is “mutual benefit”.

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This article has been amended to reflect that Saudi Arabia was invited to join the Brics+ bloc, but is yet to make a final decision on this invitation.