Previous Quarterly Editions
Expropriation Risk: 56 56 56 58 ▲ Political Violence Risk: 67 67 68 74 ▲ Terrorism Risk: 90 90 90 95 ► Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 66 66 66 66 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Pakistan’s government has expressed a strong commitment to reduce emissions, an issue that has long been a priority for Prime Minister Imran Khan. Before office, he helped develop and implement a tree-planting campaign in Khyber-Pakhtunkhwa ,a province that has seen heavy rates of deforestation over the last decade. In office, he announced a similar nationwide campaign. In 2021, Khan announced a moratorium on coal production in Pakistan.
In another indication of the government’s commitment to curbing emissions, the prime minister’s special advisor on climate change, Malik Amin Aslam, is a seasoned, highly knowledgeable and respected leader on climate change, who has led Pakistan’s delegation in international climate change negotiations and developed Pakistan’s climate policies.
Such commitment is important: Pakistan is susceptible to many manifestations of a warming planet, including glacial melt, drought, rising temperatures, flooding, and cyclones. This vulnerability is exacerbated by the densely populated coastal regions, with the megacity Karachi lying on the Arabian Sea, and the centrality of agriculture in its economy, both as a source of gross domestic product and employment.
However, there are limits to this commitment. The Khan government has done little to address Pakistan’s heavy reliance on fossil fuels, both in terms of domestic production and global imports. While it has pledged to reduce emissions by 50% by 2030, this promise was made as part of efforts associated with international climate negotiations, and not as part of a national policy at home. Khan did announce a national climate change policy in 2021, but it lacks detail.
Some of Pakistan’s ‘big-ticket’ climate initiatives appear more focused on global image-shaping than on longer-term considerations about mitigation and adaptation. Critics note, for example, that the moratorium on coal production entails plans to convert coal to gas, but such conversions require extensive water and energy. Additionally, while the government has emphasised its intention to ramp up renewables, with Pakistan’s weather conditions are especially conducive for wind and solar power, it has failed to take important steps such as developing stronger battery capacity to store solar power.
Pakistan public companies continue to struggle financially, with one of them, the national airline, experiencing a nearly 50% increase in losses in 2020-21. These companies remain a major source of Pakistan’s public debt, and the International Monetary Fund (IMF) continues to pressure Pakistan to privatise them, but there are no indications of this happening soon. Prospects for foreign investment remain clouded by Pakistan’s continued presence on the ‘grey list’ kept by the intergovernmental Financial Action Task Force (FATF), which aims to stamp out the financing of terrorism.
Being grey listed has some reputational costs, but it does not deter foreign banks and investors as much as does the more serious FATF ‘black list’. Pakistan, however, is unlikely to be blacklisted. The FATF has said that Islamabad has made progress with its ‘Action Plan’ that must be completed to leave the grey list, but the group decided not to remove Pakistan from the list during its most recent plenary, in March 2022. Pakistan’s next chance to exit the list is in June 2022.
Meanwhile, regulatory challenges remain considerable. Decentralisation reforms in recent years have led to the creation of parallel regulatory regimes on federal and provincial government levels, with more than 60 regulatory agencies, and poor coordination among these. Pakistani research studies find such regulatory conditions have deleteriously affected foreign direct investment inflows in recent years. These challenges will persist in the coming months.
Chinese financing, long dominant in Pakistan, has decreased due to a slowing in the pace of development projects associated with the China-Pakistan Economic Corridor. This may provide opportunities for other foreign investors. However, Pakistan’s investment environment remains patchy, with tax regimes and heavy bureaucracy, along with a lack of enabling legislation, which are not favourable to potential foreign financiers.
Finally, Pakistan is suffering from the rise in inflation internationally, due to COVID-19’s effects including supply chain distortions, and now The Russia/Ukraine crisis, which has contributed to raising fuel costs even further. This will worsen Pakistan’s debt situation and the government may feel compelled to announce new subsidies and other sops for an aggrieved public, which could further drive inflation and debt.
One possible silver lining is remittances. Though remittances fell from USD2.5 million in December 2021 to USD2.1 million in January 2022, higher oil prices could strengthen economies in the Gulf region, home to several million Pakistani workers, and increase remittances this year.
Pakistan’s political environment will be volatile in 2022. Amid high inflation, an opposition alliance plans a campaign of protests against the government’s economic policies. The chance of a change in government will be higher in 2022 than at any other time since the Khan administration began in 2018. Even if Khan survives immediate challenges, including a no-confidence vote before the end of March, he will continue to face pressure, including in civil-military relations, which have cooled in recent months over the election of a new spy chief for Pakistan. The next elections are scheduled for May 2023 but could come sooner.
This political volatility, however, is unlikely to result in violence. Any change in power would take place peacefully. A military coup is unlikely. However, there could be some short-term political unrest, including violent protests by Khan’s supporters and opponents, if Khan loses the no confidence vote and there is uncertainty over the succession process. Separately, continued high inflation could spark violent protests in urban areas. Violent riots are less likely if the government announces subsidies or energy price cuts.
Another potential source of violence is the hard-line Islamist political party Tehreek-e-Labbaik Pakistan (TLP), a group that has staged violent protests in the past over its chief cause, aggressive enforcement of Pakistan’s blasphemy laws. In 2021, Islamabad reached a deal with TLP that entailed the group ending a long sit-in protest in return for being allowed to join the political mainstream and contest elections. The group’s track record, however, suggests it may not be prepared to abjure violence.
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The terrorism risk will be high this year. Pakistan faces three potent threats. One is the Pakistani Taliban, which has resurged since 2020. The group was further emboldened after its Taliban ally in Afghanistan seized power last year, resulting in increased attacks in Pakistan (the Pakistani Taliban is based in Afghanistan but carries out attacks across the border in Pakistan). Islamic State-Khorasan, also based in Afghanistan, has grown stronger too. With NATO forces out of Afghanistan and the Afghan military having collapsed, it is no longer getting hit by air strikes. Additionally, Taliban prison breaks in Afghanistan last year freed large numbers of Islamic State fighters. Finally, Baloch separatist groups have picked up their attacks, including beyond Balochistan, the traditional base focus.
Pakistan will struggle to ease terrorist threats in 2022. The Taliban in Afghanistan has facilitated talks between Islamabad and the Pakistani Taliban, but so far these have resulted only in a month-long truce last November. In order to agree to lay down arms, the Pakistani Taliban will continue to insist on major concessions, such as the release of large numbers of prisoners and the imposition of a new Sharia-based government in Pakistan’s tribal areas, that Pakistan’s government will not accept.
The threat of Pakistani Taliban attacks in major Pakistani cities should not be overstated, as the group lacks the strength and numbers it had pre-2014, despite its resurgence. But it has gained momentum, and it along with Islamic State-Khorasan did target urban areas in early 2022.
After raising the interest rate in September 2021, since January 2022, Pakistan’s central bank has pledged to keep the rate unchanged at 9.75%, until its next expected monetary policy committee meeting in late April. However, after the Russia/Ukraine crisis began, citing the level of uncertainty, the central bank said it would reserve the right to meet sooner if needed to make any necessary changes “to safeguard external and price stability”.
Pakistan’s debt and liabilities combined by end-2021 had increased by 15% from the previous year. The same obstacles that have dogged Pakistan for decades, such as high debt ratios, a small tax base, and poorly performing state corporations the government has been unable to privatise, remain. This year, an IMF package is intended to spur more austerity measures to reduce Pakistan’s debt, but the future of the spending plan, and the release of new tranches of funds associated with the current package, is now uncertain amid IMF concerns about Pakistan’s decision in early 2022 to bring out a relief package that cut energy prices.
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