Index Trend Previous Quarterly Editions
Expropriation Risk: 53 Political Violence Risk: 62 Terrorism Risk: 90 Exchange Transfer and Trade Sanction Risk: 63 Sovereign Default Risk: 66
Risk Temperature 70 (High) -1
TREND ▼ ▲
Imran Khan’s party, Pakistan Tehreek-e-Insaf (PTI), emerged from the July 25 general election as the single largest party in the National Assembly. Shehbaz Sharif’s Pakistan Muslim League-Nawaz (PML-N), which formed the previous government, came second, with Bilawal Bhutto Zardari’s Pakistan Peoples Party (PPP) third. Several independent candidates and religious parties also won seats. The election result was delayed and several parties alleged vote rigging, claims which the Election Commission of Pakistan (ECP) denied and were not corroborated by election observers. The PTI also performed well in provincial elections that took place on the same day, winning in the PML-N’s Punjab heartland and the PPP stronghold of Sindh while dominating its own ground in Khyber Pakhtunkhwa. Although Khan denies suggestions that he enjoyed the support of the country’s powerful military, it is likely that both the army and the intelligence services wanted him to win narrowly, forcing the PTI into a weak multi-party coalition government headed by a prime minister who was in a fragile position. Instead, the PTI did better than opinion polls predicted. By wining 149 seats of the 172 needed for a majority, it has been able to form a governing coalition that has fewer partners and so is less prone to splits. It particular, it has avoided the need to reach out to hardline religious parties. The PML-N, which now forms the opposition, does not seem likely to work closely with the PPP against the PTI government. Khan faced his first challenge almost immediately with the state of the economy. Having campaigned strongly for increased social spending without clearly indicating where the addition resources would come from, he has inherited a current account deficit that grew by more than 40% in the 2017-18 fiscal year that ended in June and foreign exchange reserves that are down to the equivalent of two months' imports. But there appears to be no more enthusiasm for higher taxes in the new parliament than the previous one, leaving Khan to choose between muddling through, turning to the IMF once again and enduring the fiscal conditions attached to a new loan, or having Pakistan rely still further on support from China. The size of the current account and budget deficits make the first option unfeasible, and Khan needs a bailout package of at least 12 billion dollars in place, possibly from multiple sources, by the end of the year. Beijing may now be seeking a more strategic presence in the country in exchange for further help. The IMF is prepared to help again but is likely to require a further devaluation of the rupee, faster privatisation of loss-making state-owned enterprises with resultant job losses, and much greater clarity on the terms of the China-Pakistan Economic Corridor (CPEC) project, the accounting details of which remain opaque. Washington has already asserted that any new money from the IMF would simply be used to pay off debts owed to China. The Trump administration, which accuses Pakistan of not doing enough to curb militancy across its borders and recently suspended military payments and aid, may choose to hinder Islamabad’s talks with the IMF.
Expropriation Risk 53 (Significant) TREND ▲ ►
The new finance minister, Asad Umar, accepts the need to revive and accelerate the country’s moribund privatisation programme and extract more tax revenue from those on higher incomes, who are adept at tax avoidance. The PTI sees the private sector as central to achieving its campaign pledge of creating ten million jobs and building five million low-cost housing units over the next five years, and will work to attract greater investment. However, the prospect of more strained relations with Washington may make some potential investors cautious, while others remain concerned about the country’s chronic power shortage.
The army deployed three times as many as troops on election day as in 2013
Political Violence Risk 62 (Medium-High) TREND ▼ ►
Violence increased during the final weeks of the campaign. On July 13, 150 people were killed by a suicide attack on a campaign rally in Balochistan province, with the Islamic State group claiming responsibility. Other rallies suffered similar, though less deadly, attacks in Khyber Pakhtunkhwa province and its capital Peshawar. The army deployed three times as many troops on election day as in 2013, and polling was relatively peaceful despite another attack in Balochistan. The new prime minister is likely to face more protests similar to, or larger than, the Islamist Tehreek-e-Labaik Pakistan (TLP)’s anti-blasphemy march in August. He will want to show that the government can contain any unrest without alienating the protestors.
Terrorism Risk 90 (Extreme) TREND ▼ ►
In July, Washington withheld 300 million dollars in Coalition Support Fund (CSF) payments to Islamabad over what it regards as inaction by Pakistan against militants who attack Afghanistan. These funds are reimbursement for the use of facilities in counterterrorist operations and facilitate Pakistan’s acquisition of military training and equipment. China remains concerned about the security of its 30,000 citizens working on infrastructure projects in the country.
Exchange Transfer and Trade Sanctions Risk 63 (Medium-High) TREND ▲ ►
Although the rupee lost 20% of its value between last December and August, it is still widely seen as overvalued and a further devaluation is likely to be a condition of any new IMF loan. Although the central bank held its interest rate steady at 5.75% last year, three rises during the first half of 2018 took it to 7% in July as the falling rupee increased concerns about inflation, which has reached 5.8%. Foreign reserves are down to nine billion dollars.
Sovereign Default Risk 66 (Medium-High) TREND ▲ ▲
By the end of the 2017-18 fiscal year in June, the current account deficit had reached 18 billion dollars, nearly 6% of GDP, and the budget deficit was close to 7%. Despite a post-election loan of two billion dollars from China and four billion dollars from Saudi Arabia, the risk of sovereign default is high and the country will need to put together a convincing bailout package before year-end. Assistance from the IMF would require the government to bring down the budget deficit through a combination of spending cuts and tax rises.
