Pakistan: Risk Assessment

Country Rating1

Rating: D

Business Climate Rating1

Rating: D

Risk Assessment2

Insufficient growth in view of demography

In 2013, as in 2012, Pakistan’s growth will be driven by household consumption. The 20% increase in civil service salaries in the last budget and transfers from expatriate workers (mainly United Arab Emirates and United States) will contribute to the rise in consumption. Growth, at about 3.5% of GDP, will be insufficient, considering the large number of people entering the job market. Indeed, 50% of Pakistanis are under 20. Growth needs to be 7% so that the unemployment rate remains stable. Besides, the fall-off in international trade will again dampen activity in 2013 through the decline in exports. Frequent electricity cuts as well as the climate of insecurity will also harm production. Moreover, imports will again be affected by energy costs, which alone accounted for the size of the trade deficit in 2012. Pakistan has, however, some important advantages. It abounds in labor and the Baluchistan region has rich natural resources (gas, oil). Furthermore, the country borders on Asia and the Middle East and is a neighbor of India and Iran. The expansion of regional trade is an opportunity for the country, which has a young population. Nevertheless, Pakistan does not exploit its advantages. As a sign of these structural weaknesses, investment (11% of GDP in 2012) has been falling sharply since 2007 (21%). In 2013 inflation will again be above 10%, despite stable energy and agricultural prices. The high level of inflation is partly explained by the funding of the sovereign debt by the Pakistani Central Bank which leads to expectations of price rises.

Precarious financial situation

Credit to businesses is affected by the burden of public debt held by the banks. Credit to the private sector thus fell from 65% of loans in 2007 to 37% in 2012. Moreover, the growing proportion of non-performing loans, linked to the 2010 floods, ties up capital, which cannot then be invested in the economy. Local bank assets are now strongly concentrated on Pakistani government bonds, judged to be safer. Moreover, the increase in securities held by the banks reflects the country’s growing debt. In 2012 the public deficit reached 8.5% of GDP and will again approach 8% in 2013 due to the forthcoming general elections, for which the date has not been fixed yet. Besides, Pakistan’s account balance, in which only the transfers from expatriate workers can play a mitigating role, is in deficit. Capital flows are, moreover, insufficient to fund the current account deficit. Pakistan’s currency has been depreciating and the government had to intervene on the foreign exchange markets. Foreign exchange reserves are currently inadequate. Consequently the country could be compelled to ask for further international aid in 2013 in order to repay the IMF loan agreed in 2008.

Unstable political and security situation

Pakistan will remain prey to considerable political instability and will remain exposed to very high geopolitical risks in the provinces of Baluchistan and in Kashmir, on the border with Afghanistan. The risk of the government being overthrown by the Talban seems now to be contained, with NATO concentrating its resources to prevent the destabilization of a country that is a nuclear power. The entente with the United States deteriorated in 2011, particularly after the operation against Osama Bin Laden. The breaking-off of diplomatic relations seems unlikely, however, given Pakistan’s dependence on international financial aid. However, Pakistan is now turning to new partners, such as China, which are less critical than the United States.

The general elections planned for March 2013 will probably be postponed for 6 months as allowed by Pakistan’s constitution. The outcome is uncertain: President Zardari (Pakistan People’s Party) is at the center of a corruption affair, which could weaken him. A new political force, the Pakistan Movement for Justice (PMJ), seems capable of taking over the country’s governance. The PTI was founded in 1996 by Imran Khan, close to certain conservative fringes, who now has solid support from the military. He has, moreover, obtained the rallying of many politicians from all the big parties and made the fight against corruption the main issue of his campaign.

Pakistan has one of the lowest World Bank governance ratings in the world. It is, for example, 212th out of 215 for political stability and 179th for corruption.

Strengths

  • Strategic position in Asia favouring the support of the international community
  • Big transfers from expatriates in the Gulf States and the United States

Weaknesses

  • Regional geopolitical tensions
  • Persistent political instability
  • Deficiency of agricultural and educational infrastructures
  • Frequent breakdowns in electricity supply

1Country and Business Climate Ratings courtesy of Coface (08/2013)
2Risk Assessment and methodology courtesy of Coface (08/2013).

Glossary