Pakistan: Risk Assessment
Business Climate Rating1
Higher growth despite the obstacles
Growth is expected to accelerate during the 2014/15 tax year. Falling prices for energy, transport, and food, as well as higher remittances from the diaspora, will boost consumption, by far the main pillar of activity. Growth will, nonetheless, still be held back. The country is facing a difficult political, social and security context, with electricity shortages, a poorly educated workforce which is vulnerable to infectious diseases due to a lack of sufficient vaccination coverage, weak investment associated with weak credit growth, as well as an ineffective public sector. It is also exposed to climate risk with implications for agriculture: the floods in September 2014 hit the rice and cotton harvests.
Inflation is expected to fall, thanks to the drop in the price of energy and food, but is likely to rise again as the cuts in subsidies on these products begin to bite. Moreover, the rupee's exchange rate with the dollar, which has been stable since 2013, could fall, making imports more expensive. In the face of this eventuality and given that the drop in inflation is due to reversible external factors, the central bank will probably keep its key rate close to 8%.
Weak financial situation
Faced with worsening public and external accounts, Pakistan asked for and was granted an IMF loan of $6.6 billion in September 2013. Drawdowns, available until September 2016, will be conditioned by the progress of reforms comprising, in particular, a decrease in the budget deficit sufficient to allow for a reduction of the substantial debt, two thirds of which is domestic. The program includes plans to broaden the tax base by abolishing numerous exemptions and improving tax collection by supporting the provincial administrations charged with collection. Tax revenues represent only 14% of GDP. Privatisations are also on the menu, even if there are no plans at this stage to privatize the loss-making railways, airlines and steel industry. The State needs to reduce its use of central bank credit by issuing, instead, Islamic bonds - Sukuk - on the markets. Finally, reform of the energy sector, which is both in deficit and inefficient, is expected with cuts in subsidies, the construction of Chinese-financed coal-fired power plants and the conclusion of an agreement with Qatar for the supply of gas.
The trade in goods is in deficit due to oil and gas imports which are not offset by the sales of rice, yarn, fabric and made-up cotton articles. Trade of services, which is underdeveloped, shows a low deficit. The cost of servicing the foreign debt (24% of GDP and mainly public), is relatively low due to favorable terms granted by public creditors, as is dividend repatriation due to weak foreign investment. Remittances from emigrant workers (8% of GDP), large numbers of them in Saudi Arabia, the United Arab Emirates, the United States and the United Kingdom will help limit the current account deficit, which the authorities finance through the IMF loan and the recent $2 billion loan from the IBRD, the issuance of Islamic bonds (known as Sukuk) and privatizations. Foreign exchange reserves represent only 2.5 months of imports.
Persistent climate of insecurity
Prime Minister Nawaz Sharif of The Pakistan Muslim League, in power since his party's overwhelming victory in the 2013 legislative elections, has appointed his supporters to key posts in the powerful national army and the judiciary, thus ensuring a more stable government than his predecessors which should allow him to hold onto power until the next elections in 2018. The main opposition parties are the former ruling party, the Pakistan People's Party, the Pakistan Movement for Justice led by Imran Khan, which recently engaged in violent protests against supposed election rigging, and the Muttahida Quaumi Movement (or All Pakistan Muttahida Student Organisation) which controls the city of Karachi and whose headquarters were raided by the paramilitary forces due to its alleged involvement in organized crime.
Despite military operations against the Taliban movement, the Tehrik-i-Taliban Pakistan (TTP), in the north west (north Waziristan), extremist Islamist militants, divided but increasingly influenced by the ideology of Islamic State, are still able to cause harm through regular murderous attacks against the minorities (Christians, Shiites,…), the security forces, the supporters of moderate Islam, mobile health personnel…
Government action is compromised by the good relations with the Afghan Taliban, who are sometimes difficult to distinguish from other Taliban groups and are present in the same area. Moreover, Pakistan uses its good offices to mediate between the Afghan Taliban and the Afghan government, aiming to stabilize the situation of its western neighbor in view of the withdrawal of American troops. To the east, there are regular, sometimes bloody, skirmishes with the Indian Army, not only along the Kashmir line of control, but also on the international border further to the south. In the north, the country's traditional Chinese ally, keen to circumvent the Islamist threat to its west and to build a road and rail corridor to the Arabian Sea, is investing in the development of infrastructures. Because of the country's position and its role as a nuclear power, the United States, despite the ideological differences, provides financial and military aid.
- New IMF loan granted in September 2013
- Strategic location in Asia likely to attract support from the international community
- Considerable immigrant workers' remittances
- Weak infrastructures
- Vulnerability to weather conditions
- Vulnerability of public finances
- Dependence on expatriate's remittances and price of raw materials
- Regional geopolitical tensions
- Extremism, violence, poverty, child labor, illiteracy