Previous Quarterly Editions
Expropriation Risk: 52 52 52 56 Political Violence Risk: 66 66 66 67 Terrorism Risk: 88 88 90 90 Exchange Transfer and Trade Sanction Risk: 55 55 64 55 Sovereign Default Risk: 66 66 66 66
TREND ▼
A renewed dependence on International Monetary Fund (IMF) assistance limited Prime Minister Imran Khan’s ability to stimulate a struggling economy during the second half of 2020. In March 2021, Pakistan then experienced a new COVID-19 surge that raised concerns about even greater economic difficulty. Late 2020 brought high inflation, including double-digit costs for food and key commodities. The IMF projects stagflation well into 2021. Gross domestic product growth projections for the next fiscal year (July to June) range from 1.5-3%.
The outlook for 2021 is gloomy. While Pakistani officials have spoken of major policy shifts that will reorient Pakistani foreign policy away from geopolitics to geoeconomics, Pakistan is in no position to become a major South Asian economic actor- not just because of unrelenting inflation, high debt and sputtering industries from energy to microfinance, but also because of longstanding structural constraints such as elite capture of key industries and a reliance on textile exports that are globally uncompetitive.
One silver lining is remittances, a key contributor to the economy. Pakistan is projected to receive record levels of remittances this year. State Bank of Pakistan data show a total of nearly USD2.3bn in remittances in February 2021, with year-on-year growth of nearly 25%. The state bank attributes this increase to orderly exchange market conditions and policy measures that encourage inflows through formal channels. Moody’s estimates that remittance inflows will keep increasing in the coming years.
TREND ▲
As Pakistan relies increasingly on non-tax revenue streams, it is looking again at privatisation- the cabinet approved the sell-off of loss-making Pakistan Steel Mills in June 2020. However, the timing for a renewed push is far from ideal. Pakistan International Airlines, the national airline which remains state-owned despite prolonged efforts to sell it, became even less attractive in mid-year 2020 when the European Union prevented it flying into EU states for six months. This followed Islamabad grounding 140 of the airline’s pilots on suspicion that they may have falsified their qualifications.
Prospects for foreign investment also 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. The most recent FATF plenary, in February 2021, ruled that Pakistan would remain on the grey list for at least several more months.
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. FATF has said that Islamabad has made progress with its ‘Action Plan’ that must be completed to leave the grey list, and Pakistan stands a chance of being removed when the body next meets in June 2021.
One country that is less concerned about the FATF is China, but Chinese investment in Pakistan’s infrastructure is already slowing amid concern in Beijing that Pakistan’s ability to absorb new projects is already stretched to capacity.
TREND ►
The government confronted a major political challenge starting in September 2020, when an 11-party opposition alliance known as the Pakistan Democratic Movement (PDM) launched a campaign to unseat the government. The movement was nonviolent, however, staging large but peaceful protests that criticised the government and powerful military in withering terms, with the grievances revolving around the government’s economic policies and the military’s undemocratic activities.
Meanwhile, a smaller anti-government movement, the Pashtun Tahafuz Movement (PTM), largely comprised of ethnic Pashtuns decrying state discrimination and other excesses, was also active in 2020. While the PTM is nonviolent, the state cracked down hard on it through arrests and travel bans.
Prospects for political violence are relatively low for 2021. Nonetheless, hard-line Islamist political parties periodically hold protests that close roads in major cities and sometimes turn violent. Tehreek-e-Labbaik Pakistan, which aggressively advocates Pakistan’s blasphemy laws, staged street rallies in April 2021 in Lahore and several other cities that killed several police officers and wounded hundreds more.
Otherwise, the main risk is a scenario under which sustained food inflation provokes street protests that turn violent. Such inflation-fuelled protests could be organised by the PDM. However, the PDM suffered a major blow in April 2021 when five of its parties split off to form a new alliance. The PDM threat to the government has now been drastically reduced.
The main terrorist threat in Pakistan is not Islamist militancy, but rather ethnonationalist movements. The Balochistan Liberation Army (BLA), which seeks an independent Balochistan, claimed responsibility for an attack on the Pakistan Stock Exchange in Karachi in June 2020. Also in 2020, the BLA announced a new partnership with a Sindhi nationalist group, and both pledged to carry out attacks on the state- and on Chinese infrastructure projects, a favourite target of the BLA in Balochistan.
This means that the terrorist threat in Pakistan will be influenced to a significant extent by the intensity and frequency of Chinese infrastructure development in Pakistan. Such projects have declined in recent months, as Islamabad’s economic struggles have prompted it to avoid taking on new Chinese loans. However, given Pakistan’s strong alliance with China, it will eventually go back to Beijing for financial assistance.
Nonetheless, the threat of Islamist militancy, while much reduced, remains. The Pakistani Taliban, which led a campaign of terrorist violence until being weakened by counterterrorism operations in 2014, staged a comeback in late 2020 and early 2021. The group’s new leader brought several splinter groups back into the fold of the parent organisation, and the group staged a series of attacks on Pakistani security forces in areas near the border with Afghanistan. It also claimed an attack near the luxury Serena Hotel in the Balochistan province capital of Quetta in April 2021- one of the most sophisticated assaults that the group has pulled off in recent years.
The central bank was already expecting lower growth in fiscal year 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 slashed its benchmark interest rate by a total of 625 basis points over five cuts after March 2020, with the rate ending June 2020 at 7%.
In January 2021, the bank announced that it would keep that same rate, to address inflation and the pandemic-hit economy more broadly. However, this still leaves the rate higher than in most other countries that have tried to respond to the COVID-19-related economic crisis through monetary easing.
Helped by the G20 Debt Service Suspension Initiative, Pakistan managed to reschedule USD2.4bn of the USD8.9bn it owed in debt servicing in 2020. However, Pakistan state bank data released in February 2021 showed that Pakistan’s total debts and liabilities rose nearly 10% over the last year. The same obstacles that have dogged Pakistan for decades- high debt ratios and a small tax base- remain in effect. A main source of Pakistani debt, poorly performing state corporations, including several that the government has attempted but failed to privatise, remains a major problem.
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