Previous Quarterly Editions
Expropriation Risk: 56 58 58 59 ►Political Violence Risk:73 74 74 74 ►Terrorism Risk:90 95 95 95 ►Exchange Transfer and Trade Sanction Risk: 55 55 55 64 ▲Sovereign Default Risk:66 66 66 74 ▲
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Partly for historical and diasporic reasons, Western influences have been consistently strong in Pakistan, both at elite and public levels. Traditionally, Eastern influence, in this case, in terms of Russia and China, has been weaker, though Islamabad has nonetheless cultivated strong strategic ties with some Eastern states, especially China.
Over the last five years, Eastern influence has increased, though Western influence remains strong. Chinese investment in Pakistan has surged, especially with the China-Pakistan Economic Corridor (CPEC). In addition, Chinese cultural influence within Pakistan has grown, including in media, education, and retail. Western investment in Pakistan is less visible than Chinese, but it remains, and Western cultural influence is also strong.
Pakistani elites also have strong personal and professional ties to the West. Furthermore, both the East and West exert influence on, and greater leverage over, the Pakistan state through the supply of security and non-security aid to Pakistan. Coming months may see additional Western engagement with Pakistan, now a more pro-Western government is in Islamabad, but that government must hold elections within the next year, and that government’s return to power is far from assured.
Pakistan is a battleground for US/China competition, partly because, through CPEC, Pakistan is the most operationalised part of Beijing’s Belt and Road Initiative of international infrastructure investments and deployments. Washington has pushed back against CPEC, offering a more equitable, transparent investment model, though it has not followed through substantively. Yet Washington recognises it is unrealistic to attempt to wean Pakistan away from Chinese influence, as it does elsewhere in Asia. Nonetheless, Washington does seek a more level playing field for investment into Pakistan, where China is currently the dominant actor.
The likely trajectory of China-Pakistan relations is more positive than Pakistan-Western relations, but Eastern and Western influences in Pakistan will likely remain equally strong. Pro-China sentiment is high among Pakistan’s public, ensuring receptivity to Chinese cultural and strategic influence. Sentiment over the West tends to be more negative, but centred around Western states’ policies, not peoples.
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Pakistan’s public companies continue to struggle financially, such as national carrier Pakistan International Airlines. These public firms are a major source of Pakistan’s public debt. There are no indications of any privatisation plans for any public firms, despite pressure from the International Monetary Fund (IMF) and key financiers.
However, foreign investment prospects have improved. The new government since April is more pro-West and has called for greater investment from the U.S. and European Union, and the intergovernmental Financial Action Task Force, which aims to stamp out terrorism financing, is expected to remove Pakistan from its ‘grey list’ in October, given Pakistan’s successful action plan. Nonetheless, while Chinese financing has decreased due to the slowing pace of CPEC-associated development projects, which may provide opportunities for other foreign investors, Chinese investment will not dry up.
Overall, however, Pakistan’s investment environment remains patchy, including heavy bureaucracy and a lack of pro-investment enabling legislation. In addition to the debt crisis, Pakistan is also suffering from inflation, due to the pandemic’s aftereffects including supply chain disruption and now the Russia/Ukraine crisis. The situation has been worsened by floods this year, causing perhaps USD30 billion in damage, rendering the IMF package of just over USD1 billion announced before the floods possibly inadequate.
The government may therefore announce new subsidies to regain public support, which could further drive debt and inflation. However, the IMF could step in to help further.
Political violence has reduced in recent months, but more turbulence is possible to end-2022. The April removal of Prime Minister Imran Khan in a no-confidence vote worsened already deep social-political polarisation, with Khan calling opponents traitors. Against this heated backdrop, it is unsurprising the new government, previously the opposition, has cracked down hard on media outlets perceived to be pro-Khan, also arresting several of his aides. Political violence has also been driven by Pakistan’s difficult economic situation. However, the new government is now de-escalating its crackdown, and Khan is pulling back on his rhetoric.
Triggers for unrest include Khan’s calls for an early election, with polls due for later 2023, and the likelihood the new government will disagree, since it would likely lose office. Khan could follow up earlier threats to march on Islamabad. The new government could also try to build a legal case against Khan that would see him disqualified from office. If so, Khan’s most hardcore supporters would probably respond with violence. The government is unlikely to take such a step, but it is nonetheless still possible.
The terrorism risk will continue to be high during the latter part of this year. Pakistan faces a major threat from the Pakistani Taliban, which has resurged since 2020. Pakistan will struggle to ease this threat in the months ahead. The Taliban in Afghanistan facilitated talks between Islamabad and the Pakistani Taliban earlier this year, but those talks collapsed.
Thus, Pakistan currently lacks a strategy to combat the resurgent Pakistan Taliban threat, which has seen rising numbers of attacks this year, with a 42% increase in terrorist attacks in Pakistan in 2021 compared to 2020, most of which being staged by the Pakistani Taliban.
The Taliban in Afghanistan have been unwilling to curb or expel the presence of the Pakistani Taliban in Afghanistan. Pakistan’s only option is, therefore, to restart talks, which it is unlikely to do given the Pakistani Taliban is not about to moderate its demands, or to use military force to target Pakistani Taliban bases in Afghanistan. The latter option could galvanise the Pakistani Taliban to scale up attacks even more in Pakistan, and complicate Afghanistan-Pakistan relations.
Pakistan has experienced soaring inflation for much of 2022, a challenge exacerbated by the rising global commodity costs triggered by the Russia/Ukraine crisis. After the crisis began, Pakistan’s central bank raised the interest rate from 9.75% to 15%. In August, the bank decided to hold the rate at 15% until mid-October. However, inflation rates continued to rise in September, and they could rise further in 2022, as Pakistan’s floods will negatively affect agricultural production and cause food shortages. This all suggests the bank may declare another rate increase when it next meets in October
Pakistan’s debt and liabilities have continued to mount. In fiscal year 2021, they increased by 15% from the previous year, while in fiscal year 2022, the country’s debts and liabilities increased an additional 25%. The same obstacles that have dogged Pakistan for decades remain, including high debt ratios, a small tax base, and poorly performing state corporations that the government has been unable to privatise.
The circa USD1 billion IMF package released earlier in 2022 aims to spur more austerity measures to reduce Pakistan’s debt, but the floods could reverse any progress. The floods’ economic impact will mean Pakistan will need to increase food imports to compensate for destroyed crops. The large-scale damage to cotton crops – nearly 50% may have been destroyed – will likely mean reduced exports of textiles, Pakistan’s main export. These developments will likely worsen Pakistan’s debt.
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