Pakistan: Risk Assessment

Country Rating1

Rating: D

Business Climate Rating1

Rating: D

Risk Assessment2

Growth dragged down by numerous weaknesses

Growth will experience a slight decline in 2013/2014 because of low investments, a decline in public spending, the deterioration of the security environment and multiple blackouts’ consequences. Household consumption will keep on being the main growth engine and will remain driven by increased transfers of the Pakistani diaspora thanks to the global economy recovery. However the IMF fiscal targets as part of its new $6.6 billion loan approved in September 2013 could dampen activity. This sluggish growth should lead to a further rise in unemployment, particularly for the youth: as 50% of Pakistanis are less than 20 years, growth should reach 7% annually to absorb new entrants to the labor market and to keep the unemployment rate stable. Despite its vast natural resources, notably in Balochistan (natural gas, oil, shale gas), Pakistan cannot enjoy these benefits because of the gradual decline in investment, particularly linked to a still very difficult security environment, and a lack of available funding. These investment shortages cause frequent power cuts. Inflation will remain high and will continue to be under threat of a further rupee depreciation which could be triggered notably by upcoming debt repayments but also by a rise of raw materials prices.

A still unstable financial situation

The public deficit is expected to decline slightly thanks to the signing of a new agreement with the IMF causing significant fiscal efforts: improving tax collection and a more effective allocation of resources, particularly through a reduction in energy subsidies. However public finances remain in a precarious state and debt does not decrease. Indeed, the country still suffers from significant deficiencies in terms of tax collection and public spending efficiency. The tax base remains too narrow and the economy is hampered by a significant tax evasion. The current account deficit is expected to stagnate, the increase in the deficit - the growth of exports due to the rupee depreciation is far exceeded by the upsurge of imports - is covered by the very good performance of remittances and the $322 million compensation received under the Coalition Support Fund from the United States. Washington also plans to grant financial aid totaling $1.6 billion in the coming years especially in the military sector. Nevertheless the risk of foreign currency liquidity crisis increases. Indeed foreign exchange reserves barely cover one month of imports. The fall in foreign currency reserves is notably caused by the high demand for U.S. dollars as part of the maturing of many loans and the lack of FDI inflows.

Persistent insecurity climate

The Pakistan Muslim League-N (PML-N) has widely won the parliamentary and presidential elections in May and July 2013 respectively. The large majority obtained by Prime Minister Nawaz Sharif and his party will allow him to enjoy greater flexibility to deal with the many issues the country faces (Taliban insurgency, energy challenge, sluggish growth). However, he could clash with the Army if his choices run contrary to their interests. The replacement of the Chief of Staff Ashfaq Kayani by Raheel Sharif on November 27, 2013 and the announcement of the coming judgment of former President Pervez Musharraf for treason seem to underscore its willingness to exclude the Army of the political arena. Moreover, disagreements between the federal and provincial governments still represent a major political stability brake. Pakistan will remain prey to a high level of political instability and exposed to geopolitical risks in the provinces of Balochistan and Kashmir. The elimination of the head of the Pakistani Taliban, Hakimullah Mehsud, and his replacement by the hardliner Maulana Fazlullah confirm the current deadlock in the discussions with the Tehrik-e-Taliban Pakistan (Pakistani Taliban forces coalition born in 2007). The return to power of the leader of the Pakistan Muslim League, (PML-N), N. Sharif, was positively welcomed by the Indian government. The Pakistani role for the preservation of the stability in the region will remain critically important for Washington. The release of $1.6 billion assistance in October 2013 highlights the value given by Washington to a country whose government is bound to take over the fight against terrorism following NATO departure from Afghanistan at the end of 2014.

Strengths

  • New loan from the IMF granted in September 2013
  • Strategic position in Asia favouring support from the international community
  • Sizeable expatriates’ transfers

Weaknesses

  • Low investment, frequent breakdowns in energy supply
  • Vulnerable public finances, low level of foreign exchange reserves
  • Regional geopolitical tensions, persistent climate of insecurity
  • High external vulnerability, deteriorating balance of payments

1Country and Business Climate Ratings courtesy of Coface (10/2014)
2Risk Assessment and methodology courtesy of Coface (10/2014).

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