Previous Quarterly Editions
Expropriation Risk: 55 55 57 57 Political Violence Risk: 64 62 65 66 Terrorism Risk: 90 88 88 88 Exchange Transfer and Trade Sanction Risk: 64 66 67 66 Sovereign Default Risk: 64 65 65 66
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Pakistan entered 2020 still needing to convince the intergovernmental Financial Action Task Force (FATF) that it has strengthened its measures against terrorist financing. Islamabad is desperate to avoid being put on the organisation’s ‘blacklist’, as the resulting international sanctions would derail efforts to revive the economy. The government of Prime Minister Imran Khan failed in its bid to have the country removed from the FATF ‘grey list’ in October 2019, but was given additional time to show some evidence of progress in implementing new policies designed to strengthen its ability to prevent terrorist financing. The new FATF vote in February has three possible outcomes: removal from the grey list, continuation on the grey list, or transfer to the blacklist. Pakistan needs the support of only three out of FATF’s 37 members to avoid the backlist, and backing from China, Turkey and Malaysia looks assured despite the danger of Islamabad getting caught in tensions between Riyadh and Kuala Lumpur. A continuation of its current grey list status is the most likely outcome, with most members not yet convinced of Islamabad’s will or capacity to improve, but this still means significant problems in 2020 because it will complicate relations with the IMF. In mid-2019, the Fund finalised a new extended facility of six billion dollars to help Pakistan deal with its latest macroeconomic crisis. If the FATF continues to monitor Pakistan, the IMF is likely to reconsider its financing assurances for 2020. This would be a significant blow given that the government expects to see inflation easing during the year and has just managed the first current account surplus in four years. The austerity policy already required as a condition of IMF assistance has put Khan under intense pressure, especially from supporters of Nawaz Sharif, the man he replaced as prime minister with the military’s support. However, as the army hierarchy will ensure that Nawaz and his support base in the Punjab does not rally the political opposition to Khan, the main threat in 2020 appears likely to come from the Jamiat Ulema-e-Islam-Fazl (JUI-F) and its leader Fazal-ur-Rehman. His demands that Khan resign for mishandling the economy could gain traction if there is no tangible evidence of improvement in the coming months, although his equally trenchant criticism of the military’s role in politics may put the JUI-F at risk. Meanwhile, Khan may benefit, domestically at least, from his stand against Indian moves in the disputed region of Kashmir. Islamabad has had little success so far in generating international condemnation of the Modi government’s actions, but renewed unrest in the spring would put India under greater international scrutiny. Maintaining good relations with China remains crucial for the economy, and Beijing will urge restraint as it worries about the infrastructure investments already made under the China-Pakistan Economic Corridor (CPEC) agreement, which covers an area from Kashmir to the Arabian Sea and is a key part of the China’s Belt and Road Initiative (BRI).
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Despite Imran Khan’s two-day visit to Beijing in October, China may be slowing the pace of its investments as it worries that Pakistan is already stretched to capacity, or beyond, in completing the current CPEC undertakings. No new projects were announced at the latest meeting of the CPEC Joint Cooperation Committee in November. The austerity requirements linked to the IMF loan agreed in mid-2019 should help to put the economy on a sounder footing. The government already raised gas prices, which triggered political protests, but the stated aim of increasing tax revenue by 25% during the fiscal year that ends in June continues to look very ambitious. In 2019, a World Bank arbitration tribunal ordered the government to pay several billion dollars in damages to a joint venture between Canada's Barrick Gold and Chile's Antofagasta in settlement of an expropriation claim from 2011.
At the start of 2020, the main threat of political violence is associated with Jamiat Ulema-e-Islam-Fazl (JUI-F) and its leader Fazal-ur-Rehman, who is both a cleric and a skilled politician. In November he led supporters on a five-day march on Islamabad followed by a two-week sit-in on the capital's main highway while calling for Khan's government to resign. It is clear that the austerity policies required by the IMF have won him considerable backing. With the military’s help, Khan continues to pressure the media to reduce coverage of his critics but the prospect of more coordination between opposition parties in the legislature will rise during 2020 as cuts to subsidies and other fiscal measures begin to bite. Any serious outbreaks of anti-government protests are likely to meet a heavy-handed response from the security services.
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If unrest in Indian-administered Kashmir intensifies in the coming months, Pakistan's military may find it hard to resist involvement. Pakistan denies accusations that it supports militants who attack India, but these proxies enable it to counter a larger enemy. India, in turn, will see any militant attack on its troops or civilians as the direct responsibility of Islamabad and use this as an excuse for staging its own cross-border raids. The presence of Islamic State looks likely to become a growing threat in the medium to long term, especially in Balochistan province, now that its heavy recent defeats in Afghanistan are pushing IS fighters across the border into Pakistan.
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The central bank held its benchmark interest rate at 13.25% in November, signalling the end to a series of rises during 2019 to protect the currency and check rising inflation. The rupee recovered by about 5% against the dollar in the second half of 2019 after hitting a record low in May, but inflation looks likely to stay in double figures for at least the first few months of 2020.
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A long-delayed overhaul of the country’s tax system, which has one of the narrowest bases in the world, is part of the latest IMF requirements, although government revenue projections for 2020 are not realistic. There is little reason to think that the Khan administration can be any more effective in this area than its predecessors, but the fact that the public debt-to-GDP ratio reached 88% during 2019 underlines the importance of change.
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