KARACHI: Despite ranking poorly on global transparency indices, Pakistan continues to attract significant foreign direct investment (FDI), particularly in high-value sectors like energy, finance, and food services, according to a new report by the Islamabad Policy Research Institute (IPRI).

The policy brief reveals a counterintuitive trend: corruption in Pakistan, rather than deterring foreign investors, often facilitates their entry by providing informal workarounds to regulatory hurdles. With a Corruption Perceptions Index (CPI) score of just 27 out of 100, Pakistan ranks among the most corrupt countries in South Asia. Yet, the flow of foreign capital remains steady.

“Corruption doesn’t hinder investment here — it enables it,” the IPRI report states. It describes Pakistan’s regulatory environment as transactional, where progress is frequently secured not through policy reform, but through bribery and informal payments.

Using data spanning from 1995 to 2024 and employing both time-series and panel regression analysis, the study found a consistent correlation: FDI inflows rise as corruption indicators worsen. Surprisingly, this pattern holds even for countries with strong governance standards such as Japan, Germany, and Canada, suggesting that the promise of high returns often outweighs concerns about transparency and accountability.

The energy sector emerges as the most glaring example. Driven by initiatives like the China-Pakistan Economic Corridor (CPEC), billions of dollars in FDI have poured into energy projects. However, entrenched corruption has eroded their long-term impact. Pakistan’s energy infrastructure now struggles with a circular debt crisis exceeding Rs2.6 trillion, and previously celebrated initiatives — including rental power plants and independent power producers (IPPs) — have been marred by allegations of mismanagement and non-transparent dealings.

Similarly, foreign capital in the financial and food sectors has not translated into improved efficiency or self-reliance. The banking industry remains focused on lending to the government rather than the private sector, while the food sector’s dependency on imports continues to strain the country’s foreign exchange reserves.

The IPRI report positions Pakistan’s situation within a broader South Asian context. Other regional countries with similarly low CPI scores — including India (38), Bangladesh (23), and Sri Lanka (32) — also receive robust FDI flows. According to the brief, some multinational corporations may even feel more comfortable operating in environments where informal norms and practices are familiar and navigable.

To address this pattern, the report calls for a strategic overhaul of how FDI is managed and regulated in Pakistan. Recommendations include digitising all FDI-related transactions, linking investment incentives to performance benchmarks, introducing AI-driven monitoring systems to detect irregularities, and improving inter-agency coordination to streamline business operations.

“FDI should be leveraged to support long-term development goals, not sustain corrupt systems,” the report concludes. “Unless structural reforms are enacted, foreign investment will continue to perpetuate inefficiency and inequity rather than challenge them.”