Previous Quarterly Editions
Expropriation Risk: 57 57 55 54 Political Violence Risk: 65 66 63 62 Terrorism Risk: 88 88 88 90 Exchange Transfer and Trade Sanction Risk: 67 66 70 69 Sovereign Default Risk: 65 66 69 67
TREND ▼ OUTLOOK ▲
The fallout from the COVID-19 crisis is taking a heavy toll on an already troubled economy. Although the number of cases has continued to rise since mid-March 2020, Prime Minister Imran Khan has consistently maintained that a nationwide COVID-19 lockdown is unsuitable for Pakistan because of the hardship it would inflict on the informal sector in general and on low-income (daily wage earners in particular). Provincial governments, even those controlled by Khan’s own party, responded to this lack of action by imposing restrictions on movements and business operations but the federal government stepped in to lift many of these measures from mid-May 2020. Khan introduced a stimulus package at the end of March 2020 that provided cash transfers to more than six million daily wage earners and 12 million low income families, as well as offering help to small businesses and the agricultural sector through deferring power bills, providing tax incentives, and encouraging greater bank lending. Just ahead of the start of the new fiscal year in July 2020, parliament passed a budget of 42.4 billion USD for 2020-21. The budget reflects both the need for stimulus as the COVID-19 crisis continues and the need to rein in spending as Khan relies on support from the IMF and other international creditors to shore up the economy. Just over 40% of expenditure is allocated to debt servicing, with the second largest item being defence spending at 18%. This has increased by 12% over the last year following a notable rise in military appointees to prominent government roles in recent months, but there is little in the way of stimulus money. In April 2020, Pakistan secured approval from the IMF for a loan of 1.4 billion USD under the Fund's Rapid Financing Instrument specifically to help with spending in response to the COVID-19 pandemic. That was on top of the six-billion-dollar (USD) loan programme under the Fund's Extended Fund Facility that began in July 2019. That loan is meant to ease long-standing macroeconomic woes, with one billion US dollars dispensed immediately to reduce pressure on foreign exchange reserves. This renewed dependence on IMF assistance has limited Khan’s ability to stimulate the economy during the second half of 2020 even though another contraction looks likely in 2020-21, after a contraction of 2.5% in the year just ended. There is good news for the current account deficit as imports fall and oil is cheaper, but remittances- which play a vital role in much household spending- are expected to fall by more than 20% this year. The main hope for recovery lies in agriculture, where recent growth has approached 3%, but in another example of the combination of challenges facing the country, Pakistan is suffering a major locust infestation that is threatening to create serious food shortages. Authorities are exploring various possible solutions to the problem, including schemes to turn dead locusts into organic fertilisers or chicken feed. Although the government believes the deficit will narrow to 7% of GDP in 2020-21, this assumption largely rests on an unrealistic target for tax revenue. Although the budget has introduced no new taxes, the government is counting on an increase of nearly 25% in collected tax revenue and may be forced to announce new taxes in a supplementary ‘mini-budget’ later this year.
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As Pakistan relies increasingly on non-tax revenue streams, it is looking again at privatisation as the cabinet approves the sell-off of loss-making Pakistan Steel Mills in June 2020. However, the timing for a renewed push is far from ideal. PIA, the national airline which remains state-owned despite prolonged efforts to sell it, became even less attractive in mid-year 2020 when the EU prevented it flying into Europe for six months after Islamabad grounded 140 of its pilots on suspicion that they may have falsified their qualifications. Prospects for foreign investment also remain clouded by the country’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. A reconsideration of Pakistan’s status was due in June 2020 but has been postponed because of the COVID-19 pandemic. One country that is less concerned about the FATF is China, but Chinese investment in the country’s infrastructure is already slowing amid concern in Beijing that Pakistan’s ability to absorb new projects is already stretched to capacity.
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For Imran Khan, the COVID-19 crisis detracts the need to proceed with IMF-required austerity measures so 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. Imran Khan has enlisted help from the military to pressure the media to reduce coverage of his critics. The COVID-19-related restrictions on large-scale gatherings continue, although mosques have been given some leeway as Khan seeks to avoid protests from religious conservatives.
TREND ▲ OUTLOOK ▲
The Balochistan Liberation Army (BLA) claimed responsibility for an attack on the Pakistan Stock Exchange in Karachi at the end of June 2020 in which two security guards and a policeman were killed. The four attackers were killed by security forces before they could enter the main building and take hostages, which was apparently their aim. Attacking such a high-profile target in Karachi, the country's financial centre and capital of Sindh province, is a growing strategy for the BLA, which seeks greater autonomy or even independence for the province of Balochistan. As the government manages to curb its activities within the province, the BLA is looking to strike targets of wider significance to the Pakistani state and economy.
The central bank was already expecting lower growth in fiscal 2020-21 due to slower growth in services and a contraction in large-scale manufacturing. In response to the impact of COVID-19, the bank has slashed its benchmark interest rate by a total of 625 basis points over five cuts since March 2020, with the rate ending June 2020 at 7%. However, this still leaves the rate higher than in most other countries that are trying to respond to the economic crisis through monetary easing.
Helped by the G20 Debt Service Suspension Initiative, Pakistan has managed to reschedule 2.4 billion US dollars of the 8.9 billion US dollars it owes in debt servicing in 2020. This should save it the equivalent of almost 1% of GDP. But with the fiscal deficit likely to approach double figures for 2019-20, significantly above the target of 7.5%, the long-delayed overhaul of the country’s tax system is more important than ever. The fact that the public debt-to-GDP ratio reached 88% during 2019 underlines the importance of broadening the tax base.
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