Index trend
Previous quarterly editions
Expropriation Risk: 60 59 58 58 ►Political Violence Risk:74 74 74 79 ▲Terrorism Risk:98 98 98 98 ►Exchange Transfer and Trade Sanction Risk: 73 73 64 73 ▲Sovereign Default Risk:82 82 74 74 ►
Overall Risk Temperature: 81 (High 3) TREND ▲
Special topic: Relationship with the 'global rules-based order'
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
4
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
3
Pakistan is arguably both a perpetrator and victim of gray zone aggression, much of it related to cyberattacks and misinformation/disinformation campaigns, and covert sponsorship of violent non-state actors.
Pakistani hackers have targeted Indian websites, including government portals. Indian hackers have done the same to Pakistani sites and surveilled targets that include senior Pakistani officials. Each country has also exploited social media to sponsor misinformation and disinformation campaigns. This year, Pakistan has sought to curb these campaigns through tougher policing of the internet, including the installation of a new internet firewall modeled on China’s.
Pakistan also alleges that India sponsors violent non-state actors in Pakistan, from the Pakistani Taliban to Balochistan separatist groups. India alleges that Pakistan does the same with Islamist militants that stage attacks in India-administered Kashmir.
This year there have been relatively few mutual allegations of hacking and misinformation and sponsorship of violent groups compared with previous years. This is likely because Pakistan’s relations with India have been relatively stable since a border truce in 2021. However, this summer saw a fresh surge of terrorist attacks in India-administered Kashmir — and continued increases in attacks by Islamist militants and separatist rebels in Pakistan — suggesting that gray zone aggressions could once again become a tension point in bilateral relations.
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There have been seemingly encouraging signs that favor greater foreign investment. In September, following assurances of support from Pakistan’s key creditors, the International Monetary Fund (IMF) approved a new $7 billion package that includes $1 billion for immediate disbursement. This came amid indications of macroeconomic stabilization, including decreasing inflation and replenished foreign reserves. Pakistan also embarked on several key structural reforms, including steps to privatize the cash-strapped national airline.
However, the investment climate remains shaky, mainly because of the difficulty of implementing wider structural reforms needed for long-term economic stabilization. These include increasing the tax base, raising energy tariffs, diversifying exports and deepening privatization efforts — all of which could prove politically difficult, especially for a government that does not enjoy great popularity.
Additionally, the summer saw a new phase in a long-standing confrontation between the civilian and military leadership and the opposition, and this has intensified public anger toward the government. These tensions, combined with IMF-mandated austerity measures that risk increasing economic stress for the general public, along with ongoing terrorism threats, could imperil political and social stability and provoke investor anxiety.
TREND ▲
The political environment grew increasingly tense over the summer. With popular opposition leader Imran Khan in jail since August 2023, and other leaders and supporters of his Pakistan Tehreek-e-Insaf (PTI) subjected to crackdowns, the party escalated its rhetoric, threatening to free Khan by force if the authorities did not release him. The opposition was further inflamed by government plans to introduce new constitutional amendments that would give the government and the powerful military extensive influence over the judiciary.
From his jail cell, Khan called for new rounds of protests in major cities in Punjab province. Security forces cracked down hard, with dozens of arrests. Pakistani authorities also took steps to curb dissent on the internet through bans on social media platforms and the introduction of an internet firewall. The state will likely continue to clamp down over the remainder of 2024, especially with the appointment of new a spy chief, Asim Malik, who was previously a top disciplinarian in the army and is viewed as a hardliner.
Political violence risks are high in terms of likely crackdowns on the opposition but also in terms of possible unrest perpetrated by opposition supporters denied space both on and offline to channel their grievances peacefully. Violence risks will decrease if the government makes concessions to the opposition, such as withdrawing the constitutional amendments.
The terrorism risk is now higher than at any time since 2014, when Pakistani counterterrorism operations degraded a potent Pakistani Taliban threat. The same group has made a comeback, buoyed by the safe havens it has enjoyed in Afghanistan following the Taliban takeover there in 2021. Terrorist attacks have increased steadily since then. In August this year, at least 254 people were killed in terrorist attacks — the deadliest month for Pakistan in six years.
The Pakistani Taliban is the most potent terrorist threat, but Baloch separatists — mainly the Balochistan Liberation Army (BLA) — are active as well. Most attacks are perpetrated in rural areas to the west, in Balochistan and Khyber Paktunkhwa provinces near the Afghanistan border, but cities have been hit as well, including the financial capital, Karachi. In early October, the BLA targeted a convoy with Chinese investors and workers just outside the Karachi airport.
In June, Pakistan’s government announced a “reinvigorated” national counterterrorism plan, though it offered few specifics, and officials pushed back against the idea that security forces would step up kinetic activities against terrorists, whether in Pakistan or through cross-border operations in Afghanistan, where most anti-Pakistan terrorists are based. Nevertheless, the revised plan may well feature an expansion of covert activities, including intelligence-based operations in Afghanistan; this may be one reason why Malik, who previously commanded counterterrorism missions in Pakistan’s most terror-prone areas, was selected as the new intelligence director.
Decreased inflation was a bright spot for Pakistan over the first three quarters of 2024. After reaching a high of 27% in August 2023, consumer price inflation fell to 6.9% in September 2024, the lowest rate since January 2021. The lower figure can be attributed in part to increased supplies of key commodities and to falling international prices — especially wheat, flour, cooking oil, and petrol and diesel.
However, prices in many other products — including water, gas, health services, education and some food perishables — increased twofold, likely because of higher taxes mandated by IMF conditions for financing.
Pakistan’s State Bank lowered interest rates three times over the first three quarters of 2024, an indication of its confidence level that inflation is now under control (though as of September, the main interest rate still remained high, at 17.5%). It cited falling global oil prices and replenished foreign reserves as motivations for lowering rates. However, continued challenges — debt, high costs for some key foods and fuels, and still-precarious foreign reserve supplies — suggest the State Bank will be cautious about any further interest rate cuts.
Pakistan’s debt and liabilities have continued to mount: They increased 11% by the end of June 2024 compared with the fiscal year prior — to the tune of $130.5 billion, an increase of $4.4 billion from the previous year (fiscal years in Pakistan end in June). The good news is the rate of increase was significantly less than that seen during the two previous fiscal years: 29% in 2023 and 25% in 2022.
Export performance was a bright spot. Exports increased by 14% during the first two months of the current fiscal year (July and August 2024), with the trade deficit narrowing by 4.2%. Additionally, the trade deficit in August 2024 narrowed by more than 20% year-on-year compared with the same month in 2023. These figures are significant, as Pakistan experienced many consecutive months of declining exports of textiles — the country’s main global export — in 2022 and 2023 (textile and clothing exports saw slight growth, of just under 1%, between fiscal years 2023 and 2024, which ended in June 2024).
However, Pakistan’s balance of payments situation remains precarious. Imports have continued to rise, including by 5% between July and August this year. Additionally, Pakistan remains heavily dependent on expensive oil imports from the Middle East, and intensifying instability in that region could mean even higher fuel imports costs.
