Previous Quarterly Editions
Expropriation Risk: 55 57 57 55 Political Violence Risk: 62 65 66 63 Terrorism Risk: 88 88 88 88 Exchange Transfer and Trade Sanction Risk: 66 67 66 70 Sovereign Default Risk: 65 65 66 69
TREND ▲ OUTLOOK ▲
Prime Minister Imran Khan was already grappling with serious economic challenges before the arrival of the COVID-19 crisis, and this may have contributed to his relatively delayed response. As the virus gathered global momentum, he urged people to respond by self-quarantining, arguing that the coronavirus situation in Pakistan did not merit a lockdown because such a measure would cause "chaos" in a country with so many poor people. However, on March 22 (2020), the chief minister of Sindh, a province whose local government is controlled by Khan’s political opponents, imposed a two-week, province-wide ban on unnecessary movements and gatherings, pointedly describing the move as a lockdown. The following day, the chief minister of Punjab, which is controlled by Khan’s own party, announced a similar two-week, province-wide closure of non-essential shops and services, although he was careful not to call this a lockdown. The result was that Khan appeared outmanoeuvred by political allies and opponents alike. He had earlier missed a teleconference on the virus crisis that was attended by all the other heads of government of the South Asian Association for Regional Cooperation (SAARC), presumably because it had been called by India. Khan’s response to the criticism was that he simply could not afford to declare a COVID-19 lockdown in Pakistan because of the damage it would do to the economy, and the inability of the government to support daily-wage earners if they were prevented from making a living. His position was clearly tied to the country’s relations with the IMF, as Islamabad has approached the Fund for a 1.4-billion USD loan to help deal with the economic impact of the pandemic. This is on top of the bailout worth 6 billion USD that it secured from the Fund last year. Khan realises that, as exports decline with the global slowdown and oil prices begin to recover, foreign exchange reserves will fall and increase his dependence on continued IMF support. The Fund is currently considering release of 450 million USD as the next tranche of the loan agreed last year but has acknowledged that spending related to the COVID-19 crisis will not count against this year’s budget. That allowed the cabinet to approve a stimulus package worth 7.2 billion USD at the end of March 2020. Khan knows that a central problem for the country’s economy has been the decades-long failure of politicians from all parties to increase revenue collection. Pakistan's tax-to-GDP ratio remains far below IMF-mandated targets. Rather than face the unpopularity of asking more people to contribute, governments have long tried to boost revenue by hiking taxes rather than expanding the tax base. The result is that only around two million out of a population of more than 200 million file income tax returns and the Federal Board of Revenue, which is in charge of collections, consistently misses its targets. Against this background, continued access to international sources of funding and investment are crucial, but another of Imran Khan’s challenges is to prevent the country falling into further trouble with the intergovernmental Financial Action Task Force (FATF). This has put Pakistan on its 'grey list' of jurisdictions with weak measures against terrorist financing. Being on the FATF’s grey list makes access to international funding more difficult and costly, but the restrictions resulting from being on its blacklist would be catastrophic for Islamabad by effectively ending its relationship with the IMF. The prime minister tried but failed to have Pakistan removed from the grey list last October (2019) and again in February 2020. He is now hoping for success at the next FATF meeting, which was originally scheduled for June 2020. However, at the start of April 2020 the Sindh High Court overturned the conviction by an anti-terrorism court of a man convicted in the 2002 kidnap and murder of the US journalist Daniel Pearl. The FATF may have been inclined to ease pressure on Pakistan in light of the pressures it faces from COVID-19, but the overruling of the anti-terrorism court in such a high-profile case makes that much more difficult.
TREND ▼ OUTLOOK ►
Before COVID-19 struck, the government was already moving to implement some of the conditions attached to last year’s IMF loan. In particular, it raised gas prices and endured the subsequent political protests and was at least beginning to improve tax collection. These achievements have been set back by the virus. Moreover, the concern in Islamabad late last year that Beijing is slowing its investment because it sees Pakistan as already stretched to capacity in its ability to absorb more new infrastructure projects has been overtaken by the impact of the virus in both countries. Chinese investment is now likely to be cut, slowing the pace of infrastructure development.
TREND ▼ OUTLOOK ▲
With the military’s help, Imran Khan continues to pressure the media to reduce coverage of his critics. However, to the extent that the COVID-19 crisis postpones the need to proceed with IMF-required austerity measures, the pressure from political opponents will be less about his failure to stand up to the Fund and more about the state of the healthcare sector, for which all political parties are culpable. The virus-related restrictions on movement and gatherings reduce the prospects of protests for the time being.
TREND ► OUTLOOK ►
In April 2020, small arms fire across the line of control separating the parts of Kashmir administered by India and Pakistan escalated into artillery exchanges. Neither government wants open conflict at a time when both are dealing with the impact of COVID-19, but tensions over Kashmir have been high in recent months and will worsen quickly if each side believes the other is targeting civilian populations. There is also a higher risk of an unintended incident quickly escalating beyond control if government attention is elsewhere.
The central bank was already expecting lower growth of around 3% this year even before the COVID-19 crisis due to poor agricultural output and a contraction in large-scale manufacturing. But as the extent of the crisis grew, it slashed its benchmark interest rate by 4.25% in three cuts between late March 2020 and mid-April 2020 as it forecast a contraction of 1.5% this year. However, this still leaves the rate higher than in most other countries that are trying to respond to the economic crisis through monetary easing. Exporters are unhappy with the high cost of borrowing but the high interest rates had been helping to encourage capital inflows, mainly towards short-term treasury bills.
A long-delayed overhaul of the country’s tax system is more important than ever, and while the government’s revenue projections for 2020 were never realistic, it was making a start before the virus hit. The fact that the public debt-to-GDP ratio reached 88% during 2019 underlines the importance of change given the current situation.
Return to contents Next Chapter