Previous Quarterly Editions
Expropriation Risk: 52 52 56 56 ► Political Violence Risk: 66 66 67 68 ▲ Terrorism Risk: 88 90 90 95 ▲ Exchange Transfer and Trade Sanction Risk: 55 64 55 55 ► Sovereign Default Risk: 66 66 66 66 ►
TREND ▲
Despite a shaky first half of 2021, marked by a COVID-19 surge and inflation, the outlook for the second half of the year is brighter. The Asian Development Bank and Fitch have projected growth of around 4% in Pakistan’s 2022 fiscal year, which began in July 2021. These mark notable increases from the 1.5-3% projected earlier this year. The heightened confidence can be attributed to Islamabad’s having weathered its COVID-19 surge earlier in the year, to new stimulus plans unveiled by Islamabad earlier this year, and to consequent higher business confidence. Remittances are also projected to remain strong. Islamabad estimates remittances over the next fiscal year will total USD31 billion, an improvement over the USD29.4 billion and USD23 billion in the previous two fiscal years.
TREND ►
Pakistan public companies continue to struggle financially, but Islamabad has no plans for any privatisations in the coming months. 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, and Pakistan stands a chance of being removed when the body next meets later in 2021.
Pakistan’s worsening security profile is another concern for investors. Most terrorist attacks in 2021, however, have been in rural areas near the Afghanistan border. There is a possibility that Pakistan will launch counterterrorism offensives later in 2021, raising the risk of more violence and instability, but such activities would likely take place away from urban areas, along the Afghanistan-Pakistan border.
Foreign firms, so long as they are not located near Pakistan’s western border, should not face major security risks -- and nothing nearly as serious as the particularly bloody era of 2007-14. However, regulatory challenges are 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 them. Pakistani research studies find that such regulatory conditions have deleteriously affected foreign direct investment inflows in recent years. These challenges will certainly persist in the coming months.
One silver lining for foreign investors is that Chinese financing, long dominant in Pakistan, could be reduced. The pace of development of projects with the China-Pakistan Economic Corridor has slowed down, and a Chinese economic slowdown threatens to reduce financing as well. Pakistan is often criticised for not providing a level playing field for foreign investors, but a reduction of Chinese financing could provide more opportunities.
The government has weathered a challenge from an opposition alliance that staged large (but largely nonviolent) protests last year. There is no foreseeable risk of major political violence in the coming months.
However, there is a risk that inflows of refugees from Afghanistan may stoke some social instability. Since the Taliban took over Afghanistan and declared an end to its war, Pakistan will not see large masses of refugees triggered by violence and war. However, a worsening economic crisis and a refusal to live under Taliban rule have caused refugee flows, and this will continue for the rest of the year.
Islamabad does not want many new refugees entering the country, mainly for fears they will place strains on the economy. Many Pakistanis harbour discriminatory views toward them and associate them with drug trafficking and terrorism. Most Afghan refugees in Pakistan are ethnic Pashtuns or Hazaras, communities that frequently suffer discrimination in Pakistan.
While Pakistan has hosted several million Afghan refugees for decades, they do face threats of violence. On the other hand, if Pakistan, as is likely, tries to limit the entry of refugees, this could anger Pashtun rights groups in Pakistan, especially the Pashtun Tahafuz Movement, a nonviolent but virulently anti-military group that has faced withering crackdowns by the Pakistani state. All this suggests a risk of social instability. The greatest issue could be large protests (for or against Afghan refugees) that could cause transport problems and trigger violent crackdowns from the state.
Finally, the Taliban victory could galvanise hard-line Islamist political parties such as Tehreek-e-Labbaik Pakistan (TLP), which could prompt them to stage protests in which they advocate for their chief causes, including aggressive enforcement of Pakistan’s blasphemy laws. TLP protests have turned violent in the past.
The terrorism risk environment has evolved sharply in recent months. Earlier this year, ethnonationalist movements were the main concern, with Baloch separatist groups carrying out attacks. But now the major threat is Islamist militancy, and especially the Pakistani Taliban. Last year, the group -- formally Pakistan’s largest terrorist threat until being degraded by counterterrorism offensives in 20214 -- was revitalised by a new leader who reunited splinter factions.
The Pakistani Taliban is ideologically and operationally aligned with the Taliban in Afghanistan, and the latter’s victory galvanised the Pakistani Taliban greatly. It has carried out dozens of attacks in Pakistan since the Taliban takeover. Most of them have been in rural areas along the border with Afghanistan, where the group’s leadership is based, but it claimed a few attacks in urban areas too. 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. But it has gained momentum, and it does have the capacity to strike in cities.
Pakistan’s central bank did an about-face in September 2021, raising its interest rate after slashing it in 2020. The bank said that additional rate increases could come in the months ahead, even after announcing in January that the rate would remain the same. The reason for this shift is the central bank’s view that Pakistan’s economy has bounced back more quickly than expected, against the backdrop of an easing in the severity of Pakistan’s COVID 19 crises.
Over the course of 2021, Pakistan saw a consistent pattern of rising levels of debt and liability. Pakistan central bank data released in February 2021 showed that Pakistan’s total debts and liabilities rose nearly 10% over the last year. In August 2021, newer central bank data found that debts and liabilities rose more than 8% between the recently completed 2020-21 Pakistani fiscal year and the one prior. 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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