Previous Quarterly Editions
Expropriation Risk: 60 60 60 60 ►Political Violence Risk:74 73 74 74 ►Terrorism Risk:95 97 97 98 ►Exchange Transfer and Trade Sanction Risk: 73 73 73 73 ►Sovereign Default Risk:82 82 82 82 ►
TREND ►
Protest intensity to date* 2022 2023 Medium MediumUnrest risk in 2024**Cost of living: Very HighAnti-austerity: Medium
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
In Pakistan, the global debt crisis played out loudly over the past few months, in great part because of a combination of poor export performance and large amounts of expensive fuel imports that sent the country’s debt soaring. Strong public perceptions this past summer that the government did not adequately address debt issues and resolve related economic problems (especially inflation) was a major contributor to the government’s unpopularity during its last few months in office.
The government’s inability to fix or even ease the debt crisis was a major reason why Pakistan’s army, always a powerful political player, deepened its influence over economic policy once an interim government — meant to prepare the grounds for elections early next year — took control in August 2023. Pakistan’s army now plays an instrumental role in a new special investment facilitation unit, which was formed in June 2023 and is meant to secure immediate financing from key allies in the Gulf.
The military hopes to use the term of the interim government to ease the debt crisis and Pakistan’s broader economic malaise, mainly through implementing an International Monetary Fund (IMF) package ratified in June and securing additional external financing.
If the caretaker administration struggles to stabilize the economy, it will feel more public pressure from a public already concerned that elections will not happen on time. But the military may calculate that, in the interest of longer-term public order and internal stability, it is better to delay elections further in order to have more time to right the economic ship — a move that could spark protests and political instability.
There have been seemingly encouraging signs that favor greater foreign investment. In July 202 3, the IMF approved a new financing package that kept Pakistan from defaulting. Additionally, after a volatile spring and summer that included a temporary arrest of opposition leader Imran Khan (former prime minister), brief violent protests and harsh crackdowns, and then another arrest and the jailing of Khan, political protests abated, and the streets were largely quiet into the early part of autumn.
However, despite this, foreign investment prospects remain shaky. The economy is very strained, with high levels of inflation. High food and commodity costs are likely through the end of 2023, as an immediate term consequence of the austerity measures imposed as required by the IMF plan. Prolonged periods of high costs, coming on top of several years of deep economic stress, could trigger street protests in urban areas, with the risk of violence.
Additionally, there is serious political uncertainty. The government ended its term in August 2023, giving way to the caretaker administration as constitutionally required to prepare the country for elections, which were scheduled for October or November. But new census figures were announced by the outgoing government in early August, which per the constitution means polls are delayed until January 2024. However, the interim setup has not formally committed to elections in January, or at all. This means Pakistan is now being led by a caretaker, unelected government that could remain in power for an indefinite period.
In this context, expropriation risks cannot be totally discounted, and as seen above, the Pakistan military has felt free to increase its economic influence in the face of the political power instability.
The political environment has been deceptively calm since August 2023, after Khan was imprisoned and disqualified from public office, with the streets empty of protestors. This is not because political stability has returned but because the state has cracked down so hard on the opposition — with arrests and imprisonments of top opposition leaders and thousands of supporters — that there is little capacity to mobilize. Khan’s large support base quietly continues to seethe at the state’s crackdown.
However, there are several potential triggers for violence. If the interim government — which is heavily influenced if not led by the military — declines to hold elections in January, opposition supporters may try to mount a comeback and return to the streets. If so, this would likely be met with violent crackdowns. Additionally, if Khan were to die in prison — his lawyers say his health has been deteriorating — Pakistan could see angry supporters taking to the streets. The military, fearing this very outcome, is likely to try to ensure his health does not get dangerously poor.
So long as Khan remains in prison, there is a chance that his anxious supporters could risk further crackdowns. With Khan facing dozens of charges, he is unlikely to be freed before the end of the year. Still, despite real political violence risks, it is even more likely that Pakistan will see violent protests triggered by high food prices, which will probably remain a reality for the rest of 2023 at least.
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, and has intensified attacks in Pakistan in 2023, just as it did in 2022.
An alarming new trend emerged in September 2023. Since 2021, the Pakistani Taliban had largely been targeting police and soldiers while avoiding civilians. But the number of civilian casualties in September was double that of August, in part because of rises in attacks by other groups, including Islamic State-Khorasan, which regularly target civilians.
Over the summer, most attacks continued to occur in remote areas along the border with Afghanistan in the Balochistan and Khyber Pakhtunkwa provinces. But attacks in cities cannot be ruled out, especially those closer to the Afghanistan border such as Quetta and Peshawar, which have already been hit in recent months.
Pakistan lacks a strategy to combat the Pakistani Taliban. There is not enough of a political consensus to support a new counterterrorism offensive, and severe economic stress complicates the state’s capacity to muster the financial resources for an offensive. Pakistan may quietly stage limited cross-border activities to target militant bases in Afghanistan, but that risks tensions and even conflict with the Taliban in that country.
Talks between Pakistan and the Pakistani Taliban are dead in the water, though talks have never stopped the group in the past. Moreover, the Taliban in Afghanistan have been unwilling to curb or expel the presence of the Pakistani Taliban. Reports emerged in July that the Taliban would relocate several thousand militants away from the border, where they would pose less of a threat to Pakistan. But this does not mean they cannot eventually return to the border areas.
Pakistan experienced soaring inflation in 2023. In August, inflation was at around 27%, and consumer rates in September were 31% higher than the year before. Not surprisingly, Pakistan’s rupee has performed poorly, with the currency falling to all-time lows in 2023, including a 6.2% drop between mid-August and September.
In January 2023, as inflation rates continued to rise, the central bank raised the interest rate to 17% and in March 2023 bumped the rate up to 20%, Pakistan’s highest rate since 1996. The rate was moved up further to 22% this summer, before the bank decided in September to hold steady, citing the expectation of falling inflation rates later in 2023.
However, IMF-mandated austerity measures and likely rising global oil prices — due to the war in Ukraine, possibly the new war in Gaza and if OPEC again restricts supply — make many in Pakistan think the central bank’s views on inflation are unrealistically sanguine.
Pakistan’s debt and liabilities have continued to mount: In fiscal year 2023, they increased by 29%, after an increase of 25% in fiscal year 2022. Total debt increased by around 16 trillion rupees (US$57 billion) between fiscal years 2022 and 2023. Debt servicing increased by 76% between the two years.
The silver lining is that agricultural losses were much less serious this past summer than in 2022, when floods caused major damage to harvests in Pakistan, prompting increases in food imports that then exacerbated debt levels.
However, one consistent problem from 2022 — falling textile exports — has remained in place through the summer of 2023. July 2023 marked the 10th month in a row of declining textile exports. Falling exports, combined with high global oil prices that translate to expensive oil imports (and Pakistan is heavily dependent on hydrocarbon imports from the Middle East), mean that Pakistan will continue to struggle with a serious balance-of-payments crisis.
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