Corruption
KARACHI: Foreign direct investment (FDI) continues to flow into Pakistan despite widespread systemic corruption, a new study reveals, exposing the deep structural issues that channel capital into vulnerable sectors rather than fostering sustainable growth. The Islamabad Policy Research Institute (IPRI) published a policy brief highlighting how corruption, far from deterring investment, actually facilitates foreign capital inflows into the country.
Pakistan ranks poorly on global transparency indices, with a Corruption Perceptions Index (CPI) score of just 27 out of 100, positioning it as one of the most corrupt investment environments in South Asia. Despite this, FDI remains concentrated in critical sectors such as energy, food, and financial services—areas notorious for rent-seeking behaviors and informal payments.
The report emphasizes that corruption in Pakistan is not merely a background issue but an active enabler of foreign investment. Instead of reforms addressing regulatory hurdles, investors often resort to bribery and “speed money” to fast-track projects. This transactional environment, where navigating bureaucracy involves paying off officials, appears to attract foreign capital, especially when high returns are promised.
Analyzing data from 1995 to 2024 through time-series and panel regression models, the study finds a surprising positive correlation between rising corruption and increased FDI. This trend holds true even for investments coming from countries with lower corruption levels, including Germany, Japan, and Canada. These investors seem willing to tolerate governance risks to capitalize on opportunities, particularly in Pakistan’s energy sector.
The energy sector serves as a prominent example. Billions of dollars have been invested under initiatives like the China-Pakistan Economic Corridor (CPEC) to enhance energy capacity. However, systemic corruption has undermined these gains, contributing to a staggering circular debt of over Rs2.6 trillion.
Projects such as rental power plants and independent power producers, once hailed as solutions, have instead become cautionary tales due to mismanagement and a lack of transparency.
Foreign investment in the financial and food sectors has similarly failed to spur productivity. The financial sector is skewed heavily towards government lending, while the food industry remains reliant on imports, adding to Pakistan’s external economic pressures.
This pattern is not unique to Pakistan. Other South Asian countries with low CPI scores—like India (38), Bangladesh (23), and Sri Lanka (32)—also receive substantial FDI despite governance challenges. Investors sometimes prefer these markets due to familiarity with operating in such environments.
The report urges Pakistan to move beyond superficial anti-corruption measures. It recommends digitizing FDI transactions to increase transparency, enforcing performance-linked contracts, and using artificial intelligence tools to detect irregularities. Improved inter-agency coordination and streamlined licensing processes are also essential.
In conclusion, the study warns that without deep structural reforms, foreign investment will continue to prop up dysfunctional systems rather than drive genuine development. “FDI should be a tool for development, not a subsidy for dysfunction,” it states, highlighting the urgent need for reform to ensure that foreign capital benefits Pakistan’s broader economy rather than entrenching existing problems.
