Previous Quarterly Editions
Expropriation Risk: 55 53 55 55 Political Violence Risk: 65 62 64 62 Terrorism Risk: 92 90 90 88 Exchange Transfer and Trade Sanction Risk: 60 63 64 66 Sovereign Default Risk: 65 66 64 65
TREND ▼ OUTLOOK ▲
Less than three years after the end of the last one, Pakistan is close to finalising a loan programme worth six billion dollars with the IMF because the country's twin-deficit problem has seen foreign exchange reserves falling sharply. The recent overhaul of key economic decision-makers suggests that the government is already aligning itself with Fund requirements. In May, the head of the central bank was replaced by Reza Baqir, who left his post at the IMF to take the position, and the finance minister who had said in January that the government preferred to pursue other options than a return to the IMF was also replaced. The new economic team will need to take tough decisions in the face of rising pressure from domestic critics. In April, Prime Minister Imran Khan proposed meeting the expected revenue shortfall for fiscal 2018-19 through a tax amnesty, having strongly criticised a similar move by his predecessor at the same time last year, but now, as then, the move was clearly insufficient. The government knows it has no real alternative to meeting the political costs associated with IMF assistance. Beyond the economy, security remains the main concern for the government but the two are often intertwined. In May, the separatist Balochistan Liberation Army (BLA) claimed responsibility for the attack by three gunmen on a five-star hotel in Gwadar in Balochistan province, which makes up much of the southwest of the country. Four people were killed in what the BLA said was a targeted attack against Chinese and other foreign investors. The BLA condemns the China-Pakistan Economic Corridor (CPEC), which runs through Balochistan and uses the Gwadar port as a key maritime outlet, for exploiting Balochistan's resources. It killed ten Pakistani construction workers in Gwadar in May 2017 and attacked a bus carrying Chinese engineers in Balochistan's capital Quetta in August 2018, but the latest attack marks a significant escalation as it penetrated what should have been a highly secure building. Although Gwadar is also a crucial part of Beijing’s wider Belt and Road Initiative, Islamabad is increasingly nervous that an inability to handle the BLA, which is believed to be increasing its links with Islamist groups in South Asia, could put further Chinese investment at risk. Islamabad’s closeness to Beijing explains its relative silence on the treatment of Muslims in Xinjiang but Khan’s government expects to come under greater pressure to speak up. Against this background, the three-day visit by Malaysian Prime Minister Mahathir Mohamad in March was particularly welcome as it led to the signing of deals that could produce investments of up to 900 million dollars in Pakistan and may pave the way for greater engagement with ASEAN. Tensions with India look likely to subside slowly now that its election has concluded.
TREND ► OUTLOOK ▲
In March, the prime minister approved plans to create a security force of some 50,000 personnel to guard the country’s oil and gas exploration blocks, as some of those that the government is expected to auction later this year are in Balochistan. Islamabad has identified security risks as a significant drawback for prospective investors, but suggestions that it plans to pass on the costs of heightened security to companies would negate any benefits. Investors are also aware that Pakistan is on the Financial Action Task Force’s 'grey list' of jurisdictions with weak measures against terrorist financing. It must demonstrate compliance with a FATF action plan by September to be removed from this list. If it cannot do so, it faces sanctions that, as Khan himself acknowledges, the country cannot afford.
The case of Asia Bibi, the Christian woman whose acquittal by the Supreme Court on charges of blasphemy sparked violent protests across the country last October, ended quietly when she left the country in May. However, more protests are likely over economic issues once the expected impact of new IMF requirements begins to bite. The military is known to pressure media outlets not to carry certain news items but after harassment increased in the run-up to the 2018 election, Pakistani journalists are likely to face increasing intimidation from the country’s military and intelligence agencies. The result will be greater self-censorship in the media as various existing laws are increasingly used to crack down on critical press coverage, further imperilling free speech in the country.
On a two-day visit to Tehran in April, Prime Minister Khan agreed with President Rouhani that the two countries will form a combined rapid reaction force to combat militancy across their shared border, which divides the region inhabited by ethnic Baloch people. Pakistan now plans to fence its Iran border, as it is doing along its disputed Afghanistan border, but risks exacerbating local tensions by doing so. In April, more than 20 people were killed and 50 injured in a bomb blast in Quetta. The intended target appeared to be the Hazara community, a visible ethnic and Shia minority that has long been victim of attacks and targeted killings by various armed groups. Recent reports by NGOs, including one suggesting that over 500 Hazaras were killed in terrorist attacks in Quetta in 2012-17, may soon raise the profile of their plight.
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In May, the central bank raised its key rate from 10.75% to 12.25% as the rupee hit a record low of 150 to the dollar. It cited headline inflation at 7%, rising oil prices, and the expected impact of imminent IMF requirements as its reasons for acting. The move is necessary but will not help the government’s efforts to revitalise growth, which looks likely to be below 3% this year after being 5.2% in 2018.
TREND ▲ OUTLOOK ▼
While funding from allies such as Saudi Arabia in the latter part of 2018 brought Islamabad a short respite, a return to the IMF was inevitable as the risk of sovereign default grew. The fiscal deficit is expected to be above 7% this year on lower revenues, higher interest payments and additional military spending, while foreign exchange reserves are below 9 billion dollars and will only cover three months of imports.
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