Index trend
Previous Quarterly Editions
Expropriation Risk: 60 60 60 59 ►Political Violence Risk:74 74 74 74 ►Terrorism Risk:97 98 98 98 ►Exchange Transfer and Trade Sanction Risk: 73 73 73 73 ►Sovereign Default Risk:82 82 82 82 ►
Overall Risk Temperature: 82 (High) TREND ►
Special topic: Relationship with the 'global rules-based order'
Pakistan’s political leaders have a complex relationship with the rules-based order. On the one hand, they strongly embrace institutions associated with it, especially the United Nations (U.N.) and International Monetary Fund (IMF), and seek close relations with Western powers. On the other, they court nations such as China and Russia that have tried to establish alternatives to the rules-based order. Also, Pakistan, with its heavy military influence over politics and high levels of intolerance and discrimination against religious minorities and other vulnerable communities, does not embody the human rights ideals of the global rules-based order.
Pakistan has benefited from this order. International institutions help serve its interests. For example, the IMF is a key source of financing, and the U.N. is a rare international forum that Pakistan can use to advance key priorities such as Kashmir. For these reasons, Pakistan does not try to actively undermine it or even call for revisions to the rules-based order (U.N. Security Council reform could arguably work against Pakistan’s interests because it may weaken Chinese power). Because of close ties to China, however, Islamabad also does not openly and publicly advocate for the global rules-based order. Pakistan embraces alternatives to the rules-based order, including multilateral institutions led by Russia and China, such as the Shanghai Cooperation Organization, of which Pakistan is one of the newer members. Islamabad would also welcome membership in BRICS (an intergovernmental organization comprising Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates), but it lacks the global economic strength to be a candidate.
Pakistan’s overall trajectory would not be radically affected if the rules-based order were to become weak or collapse; its deep ties to China and the Arab Gulf states would help provide insulation against such a shock. Major challenges with democracy and rights have persisted throughout the period of the rules-based order, driven by internal factors. Such challenges would remain unaffected. Still, there could be significant impacts on economic interests. Pakistan depends heavily on the World Bank and IMF for financial support, and the West — especially the U.S., European Union and U.K. —are top export destinations. If these institutions or countries are weakened by a significant reshaping of the rules-based order, Pakistan’s access to capital and other assistance could be hampered. Islamabad could face compounded economic problems.
TREND ►
Prospects for foreign direct investment are brightening. Political uncertainty decreased after election dates were announced in late 2023 and polls took place in February 2024. A new government took office in March. The IMF responded favorably to economic steps taken by the caretaker government in power from August 2023 to March 2024, including those taken toward privatizing state companies. The IMF reached a staff-level agreement with Islamabad in March 2024 to release US$1.1 billion to Pakistan.
However, there is still reason for concern. Political instability remains. The elections were deeply controversial, with strong allegations of rigging and other irregularities. The opposition rejected the polls and the new governing coalition, led by the same parties that headed the previous government.
The military has deepened its role in the economy. The army chief is influential in the Special Investment Facilitation Council (SIFC), launched in 2023. The caretaker and new governments have pushed the SIFC as a core vehicle to attract global investment; however, the SIFC has struggled to bring in new funds. This may be due to the military’s deep influence over SIFC and the broader economy and concerns that Islamabad’s strong emphasis on this new entity will take policy attention away from pursuing much-needed economic reforms. A weak governing coalition that lacks strong public support may hesitate to implement fully politically risky IMF liberalization reforms and austerity measures. This could all dampen investment prospects.
The political environment has remained deceptively calm since August 2023, when popular opposition leader Imran Khan was arrested and imprisoned. Although the election modestly eased political volatility by removing uncertainty, the situation remains tense. Khan’s large support base rejected the election result. Independents backed by Khan’s Pakistan Tehreek-e-Insaf (PTI) won the most seats of any party, but PTI supporters believe that rigging prevented the party from winning an outright majority. Instead, the parties that gained the second and third highest seats formed an alliance and cobbled together a coalition. Many Pakistanis reject the new government.
There were few street protests post-election, however. A crackdown on PTI has hurt its ability to mobilize. There is also a fear factor. Khan supporters are aware that the state has detained and imprisoned hundreds (the party says thousands) of party members and supporters. Khan remains in prison on multiple serious charges, including corruption and terrorism. The courts suspended several convictions in early 2024, but he faces so many charges that he’s unlikely to leave prison in the coming months. Unless there is a major trigger — such as Khan dying in prison — the streets are likely to remain quiet, though Khan’s supporters will continue to seethe. Public anger does increase the chances of street protests against economic stress, especially if austerity policies are stepped up to satisfy conditions for IMF financing.
Pakistan is facing its greatest terrorism challenge since 2014 when counterterrorism operations degraded a potent Pakistani Taliban threat. The group has resurged and ramped up attacks on Pakistani targets from its base in Afghanistan. Islamabad has failed to combat the threat, mainly because the Afghan Taliban is closely allied with the Pakistani Taliban, and Kabul has not cracked down on the group. Islamabad has taken several drastic steps. In November, it announced it was expelling hundreds of thousands of Afghan refugees, likely to pressure the Taliban to clamp down on the Pakistani Taliban. In March 2024, Pakistani military forces staged cross-border operations against militant targets in Afghanistan; however, attacks in Pakistan have continued, mostly against police and soldiers. The Pakistani Taliban says it no longer targets civilians.
Still, threats to civilians remain high. Pakistan faces a three-pronged terrorism threat: from the Pakistani Taliban, Islamic State-Khorasan (IS-K) and ethnic separatists. Since September 2023, IS-K has been linked to increasing numbers of attacks outside Afghanistan (its main base), including in Iran in January and Russia in March. IS-K’s growing external threat could galvanize the group to carry out more attacks in Pakistan, a periodic target.
Ethnic separatists from Balochistan also continue to target Pakistan. Western interests are not targeted as much as previously, though China is increasingly in the crosshairs. A deadly attack in March killed Chinese engineers in northwestern Pakistan, just days after foiled plots on the port in Gwadar and the Turbat naval base — both in Balochistan and strategically important for Beijing’s Belt and Road Initiative.
At the end of March, Pakistan’s inflation rate was 20.7% — the lowest rate in two years. Inflation had reached a peak of 27% in August 2023. Slowly declining inflation is likely tied to a 22% interest rate set by the State Bank (central bank) last summer, a rate the bank has refused to lower since then. There was some momentary good news with the currency rate, with the rupee gaining 8% between September and October 2023, a surge attributable to the government’s response to illicit dollar transactions; however, an ongoing dollar crunch prompted the currency to plummet again, ending 2023 as one of the worst performing in Asia and poised for more struggles in 2024.
This year could produce additional monetary challenges. Economists predict the central bank will reduce the interest rate during the second quarter of 2024; the finance minister has suggested a cut could come; however, other factors — including more inflows of IMF funds and a new sales tax on petroleum products — could cause inflation spikes, suggesting the interest rate may be brought up again later in 2024.
The default risk has declined significantly since 2022 and 2023. Islamabad secured new financing from the IMF in 2023; additional funds will likely be released in 2024. Debt, however, remains high. As of late March 2024, Pakistan’s debt-to-GDP ratio was above 70%. Interest payments on Pakistan’s debt comprised about 50% of government revenues — the highest figure of any comparably sized economy.
Meanwhile, a large negative trade balance remained high, due mainly to poorly performing exports and a heavy reliance on expensive fuel imports. To avoid a longer-term risk of default, Pakistan would need to strengthen its exports and reduce its reliance on costly fuel imports, which could become even more expensive given rising instability in the Middle East, the region from which most Pakistani hydrocarbon imports are sourced.
