Previous Quarterly Editions
Expropriation Risk: 53 55 55 57 Political Violence Risk: 62 64 62 65 Terrorism Risk: 90 90 88 88 Exchange Transfer and Trade Sanction Risk: 63 64 66 67 Sovereign Default Risk: 66 64 65 65
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The IMF gave final approval in July to a three-year, 6-billion-dollar loan deal agreed in May that is meant to help Islamabad cope with its macroeconomic crisis. A first tranche of one billion dollars was released immediately, with the remainder of the loan to be dispensed at intervals so long as the government of Prime Minister Imran Khan meets the austerity conditions attached to it. The budget for the fiscal year ending June 2020 already includes measures to increase tax revenue by 25% over last year, and in July the authorities raised natural gas prices by some 200%. Going to the IMF has exposed Khan to widespread political criticism, as he knew it would, with his opponents telling their supporters that the IMF conditions will raise the cost of living. With growth expected to be only 2.4% in the fiscal year just started, down from 5.8% last year, popular frustration with economic conditions is growing. However, he is relying on the military-security establishment, which supports his bailout diplomacy, to curb any protests that become serious. Khan still needs to persuade the international Financial Action Task Force (FATF) to remove Pakistan from its ‘grey list’ of countries that have weak measures to prevent terrorist financing. Islamabad has missed targets from FATF in January and May, and in August a regional body associated with FATF moved the country to its blacklist. This makes it more likely that the full FATF will do the same in October, threatening Pakistan’s financial ties with other countries and scaring off investors. In July, Prime Minister Khan travelled to Washington, where President Trump told him that he expects Pakistan’s help in extricating the US from Afghanistan by using its influence with the Taliban. The US has already helped Pakistan by not objecting to the financial assistance it has received from the Gulf states and the IMF, by assisting Islamabad in tackling the separatist Balochistan Liberation Army, which has been targeting Chinese investments in the region, and by not criticising Khan’s recent crackdown on his domestic opponents. Khan, in turn, is hoping to use this new warmth from Washington to limit US support for Delhi in the dangerous stand-off that has followed India’s move in August to end the special autonomy enjoyed by the state of Jammu and Kashmir in the Muslim-majority Kashmir Valley. Given what Islamabad sees as a significant provocation, Khan may find it hard to prevent Pakistan’s military from backing more raids by insurgent groups across the border into the region, raising the risk of a serious military confrontation with Delhi. However, he will try and restrain the situation at least until the FAFT makes its decision in October.
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In July, a World Bank arbitration tribunal ordered the government to pay nearly six billion dollars in damages to a joint venture between Canada's Barrick Gold and Chile's Antofagasta, in a case from 2011. This puts the Khan administration in an awkward position as the amount it now owes is roughly the same as the latest IMF loan, allowing its opponents to say that the Washington-based financial institutions have a punitive approach to Pakistan. At the same time, Islamabad will want to reassure prospective investors that their rights will be safeguarded as privatisation efforts continue. However, at present, the country’s status with the FATF is a greater cause for concern than expropriation, followed by its close embrace of Chinese investment under the Belt and Road Initiative.
The National Accountability Bureau (NAB), an anti-corruption body, arrested a number of leading government opponents in June and July, with the sweep culminating in the detention of former Prime Minister Shahid Khaqan Abbasi in relation to the awarding of LNG contracts. All deny the charges against them. Khan’s government rejects the claim that it is trying to stifle critics, but the crackdown coincides with government pressure on media outlets to reduce coverage of its opponents, and few of its own supporters are in trouble. The result will be more unity among opposition parties as they seek to put significant pressure on Khan. This will increasingly be in the form of mass protests against the conditions of the IMF deal, rather than parliamentary opposition, which raises the risk that Khan’s military backers will encourage a heavy-handed response by the security services.
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Although the army continues to downplay the presence of Islamic State in the country, it looks likely to become a growing threat in the medium term. In May, IS declared that it had a 'province' in Pakistan after taking responsibility for an April attack in Quetta, capital of Balochistan province, that targeted the (Shia) Hazara community, killing more than 20 people. Balochistan, highly prone to violence perpetrated by ethnic Baloch separatists as well as Islamist militant groups, will likely be a key battleground for IS. The group already has links with the Sunni supremacist Lashkar-e-Jhangvi and factions of the Pakistani Taliban, which are active in the province.
The central bank governor has denied that the country will transition to a completely market-based exchange rate in line with IMF prescriptions, instead retaining a managed float regime. But even intervention to prevent rupee volatility is unlikely to curb rising inflation. This reached a six-year high of 10.3% in July, having been just 5.8% a year earlier. Rising energy prices and the falling rupee are the main reasons behind the increase. In May, the central bank raised its key rate from 10.75% to 12.25% as the rupee hit a record low of 150 to the dollar.
The budget deficit widened to 8.9% of GDP in the fiscal year that ended in June, up from 6.6% a year earlier. Although governing spending was largely unchanged, revenue fell to just 12.7% of GDP, down from 15.2%. A long-delayed overhaul of the country’s tax system, which has one of the narrowest bases in the world, is part of the latest IMF requirements. Although it is not clear that the Khan administration can be any more effective in this area than its predecessors, the fact that the public debt to GDP ratio had reached 88% of GDP by mid-2019 underlines the importance of change.
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