Previous Quarterly Editions
Expropriation Risk: 58 59 60 60 ►Political Violence Risk:74 74 74 73 ►Terrorism Risk:95 95 95 97 ►Exchange Transfer and Trade Sanction Risk: 55 64 73 73 ►Sovereign Default Risk:66 74 82 82 ►
TREND ►
Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : Low MediumAll protest: Low Low
Cost-of-living protest risk in 2023*Wage protest: MediumFood/fuel policy protests: High
*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 calculations, see the introductory essay.
Pakistan has experienced astronomical levels of inflation over the last six months. Weekly inflation soared to 45% by the end of March, the highest figure since independence in 1947. The government – which took office in April 2022, after Prime Minister Imran Khan lost a no-confidence vote – became the subject of public anger after it failed to rein-in runaway inflation.
The government was slow to respond to a wider balance of payments crisis, eventually opting for talks with the IMF to seek the release of new funds associated with an existing agreement from 2019. But, despite the urgency of the situation, Islamabad did not move to rein-in the types of subsidies the IMF wanted it to remove. The government did, however, pass an austerity budget. Throughout the start of the year, the government was torn between either resorting to full-scale austerity measures or ensuring enough relief for the masses so as not to become even more unpopular.
Compounding the government’s challenge was Khan, a populist with a large, impassioned support base, becoming a major thorn in its side, mobilizing his supporters and demanding early elections.
However, in early 2023, as inflation and debt continued to soar and foreign reserves plunged to dangerously low levels, Islamabad finally committed to full-scale austerity measures, in the hope this would move it closer to an IMF deal (which remained elusive as of late March). Curiously, while Pakistan had many large and at times violent protests in early 2023, they were not triggered by inflation, but primarily by anger at the government for its crackdowns against Khan and his supporters. The protests were, therefore, more middle- and upper-class agitations than demonstrations by the destitute.
However, things could change later this year. If Pakistan defaults and experiences outright scarcities of food and fuel, this could bring people into the streets, particularly once the full effects of Islamabad’s delayed reaction austerity measures have played out.
Khan is looking to pressure the government as national elections, currently scheduled for October or November, approach. He will have a strong incentive to call for demonstrations to protest over inflation. Previous protests have resulted in violence between stone-throwing Khan backers and tear-gassing police; inflation-driven demonstrations could follow this pattern given the level of public anger towards the government.
There have been seemingly encouraging signs on greater foreign investment: the government, much more pro-West than the Khan administration, has called for better relations with the U.S. and European Union. Last October, the intergovernmental Financial Action Task Force – which aims to stamp out terrorism financing – removed Pakistan from its ‘grey list’, given Pakistan’s successful action plan. Also, Chinese financing has decreased due to the slowing pace of China-Pakistan Economic Corridor-associated development projects, thereby opening up opportunities for other foreign investors.
However, despite this, foreign investment prospects have darkened significantly in recent months. Pakistan is at risk of default, and several foreign companies have reduced operations in the country. This is in part because banks have hesitated to provide letters of credit, given plummeting foreign reserves, which has interrupted the flow of imports.
Political instability is also high after an assassination attempt against Khan last November and several anti-government protests that turned violent. Terrorism has resurged, with large increases in attacks over the last year. There is also major political uncertainty, with the government failing formally to commit to holding elections later this year; the government may use economic stress and increasing security risks as pretexts to postpone the polls.
A highly charged political environment exploded in November, when Khan was nearly assassinated. Khan publicly blamed, by name, several senior military and intelligence officials. Since then, police several times threatened to arrest Khan on corruption and anti-terrorism charges, only to be met by Khan supporters outside his home, resulting in violent exchanges with police.
Khan being arrested or disqualified from public office are regarded as red lines by Khan and his supporters. Disqualification is a very real possibility. Khan was already disqualified in October by Pakistan’s election commission, but his lawyers are challenging the move in court. The government and military may try to build a stronger case for disqualification to withstand Khan’s legal challenges.
In addition to existing corruption and terrorism allegations against Khan, the government in March 2023 accused Khan of instigating a smear campaign against the army chief and accused Khan’s party of being a group of miscreants linked to militants. These allegations could be used to buttress a case for disqualification. If the courts uphold the disqualification, his supporters will take to the streets in large numbers, with violence quite likely.
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; intensifying attacks in Pakistan in 2022, and in late 2022 vowed to expand attacks across the country, beyond the areas bordering Afghanistan. The group followed-up its threat in December 2022 and early 2023 with attacks in Islamabad and Karachi.
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. 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. Pakistan’s likely strategy will be tightening security along the border to prevent terrorists from entering from Afghanistan, but that is difficult to do, given how long and porous the border is.
One thin silver lining is the Pakistani Taliban’s latest campaign has targeted police and soldiers not civilians. However, several brutal factions do not appear to support this tactic, with the Jamaat-ul-Ahrarfaction attacking a mosque in Peshawar in January, though most of those in the mosque were police.
Pakistan experienced soaring inflation for much of 2022 and into 2023. In August, the central bank had held the rate at 15%. But in January 2023, as inflation rates continued to rise, the bank raised the rate to 17% and in March 2023, bumped the rate up to 20%, the highest rate in Asia and Pakistan’s highest rate since 1996.
This came after Pakistan’s Consumer Price Index increased by 31.5% in February, compared to the previous year. In a statement explaining its decision, the bank referred to a “deterioration in inflation outlook.” The decision was also made as part of efforts to address the IMF’s concerns.
Pakistan’s debt and liabilities have continued to mount, in fiscal year 2022 increasing by 25%. Pakistan’s total debt rose by 30% between January 2022 and 2023, and external debt increased by nearly 16%. With Islamabad having committed to full-scale austerity measures in attempts to unlock IMF funding, that may ease the debt problem, but only modestly.
Agricultural damage from floods in August 2022 has necessitated increases in food imports. Also, Pakistan’s main export of textiles saw a decline of 12.4% in January 2023, compared to January 2022. The decrease is due to Pakistan’s overall economic strain, crippling power outages that shut down some textile factories, and to agricultural damage from the floods, which lowered cotton production.
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