Pakistan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large internal market buoyed by dynamic demographics
- Substantial remittances from expatriate workers
- Inexpensive and plentiful labor
- Positive outlook for economic corridor with China
- Important provider of Islamic finance
- Very tense geopolitical environment and high degree of domestic insecurity (terrorism)
- Widespread informal economy (40% of GDP) and weak fiscal resources (16% of GDP)
- Energy dependency
- Inadequate sanitation, agriculture, and education infrastructure
- Province of Balochistan is lagging far behind on development as is the countryside generally
- Frequent shortages of electricity and water
- Underdeveloped financial system
- Poor sectoral diversification and concentration in a few low value-added sectors
- 40% of labor force works in agriculture and thus depends on the weather and on world prices
One of the Most Dynamic Economies of South Asia
Economic momentum should be maintained in 2018 thanks to still dynamic domestic demand. Despite the fall in remittances from expatriate workers in 2017, because of the slowdown in construction in the GCC countries, which accounts for 62% of the total, consumption was still the main contributor to the economy (92% of GDP). In 2018, the recovery of growth in the UAE (22% of flows) should lead to firmer growth. Investment also picked up in 2017, benefiting from renewed business confidence following completion of the IMF assistance programme at the end of 2016. FDIs increased despite a tough business climate and should continue to increase in 2018. The China-Pakistan Economic Corridor (CPEC) set up between the Chinese region of Xinjiang and the Port of Gwadar (southwest Pakistan) is expected to bring in substantial flows of Chinese investment thus improving transport infrastructure and electricity generation. This is reflected not only in strong momentum in the construction sector, but also in services (60% of GDP) and industry. Inflation will edge upwards but will continue to depend on fluctuations in the rupee and oil prices.
Weak Public and External Accounts
Thanks to the measures recommended by the IMF, the budget position improved markedly during the period of the latest financing agreement between 2013 and 2016. The fiscal deficit (excluding grants) fell from 8.5% to 4.6% of GDP. However, this trend has reversed. This is explained by a less sustained increase in tax receipts (both at federal and provincial level) linked to higher spending in the run-up to the impending parliamentary elections. This could be temporary with fiscal efforts likely to resume after the elections. The public debt, mainly domestic and denominated in the local currency, will remain high in 2017-18 and continue to put pressure on the banking system leading to a crowding out of private business investment.
The current account deficit deepened in 2017 because of an increase in the trade deficit. While exports declined, imports of oil and goods needed for implementing the Economic Corridor increased. The current account deficit is expected to widen again in 2018. The trade deficit remains the main contributor to the imbalance. This is explained by weak Pakistani exports (less than 10% of GDP), of which more than half are comprised of textile products (home linen, clothing, cotton), the rest broken down between agricultural products (cereals) and a small share of manufactured products. Increased competition from low-cost countries in the region has led to slow export growth, which comes on top of strong Pakistani economic demand resulting from growing economic activity and investments associated with the CPEC. However, remittances from expatriate workers will continue to offset the trade deficit. The remaining deficit, associated with services and outgoing dividends and interest payments, is financed through borrowing, drawing on reserves (down by the equivalent of two months of imports in late 2017) and, increasingly, by FDIs linked to the Economic Corridor.
Persistent Insecurity on the Eve of Elections
2017 was marked by heightened political uncertainty following the dismissal of Prime Minister Nawaz Sharif by the Supreme Court and that of the Finance Minister on suspicion of corruption. The Prime Minister was replaced by Shahid Khaqan Abbasi, also from the Pakistani Muslim League-Nawaz (PML-N). This climate of uncertainty is expected to continue until the September 2018 elections. The election results will depend on the performance of the Nawaz government, which strengthened by a comfortable parliamentary majority, will need to defend its record. The elections will take place in a climate marked both by terrorist attacks by the Pakistani Taliban and the rise in Islamic fundamentalism. This was illustrated in late November 2017 by the resignation of the Justice minister following the blockade of Islamabad by several thousand Islamist militants unhappy with the change to the oath taken by all election candidates. It is also reflected in the success in the mid-term elections of the parties close to Islam and the outbidding between the traditional parties (PML-N, Pakistan Movement for Justice or Tehreek-e-insaf led by Imran Khan and the Pakistan People’s Party). The army, which has stepped in several times in the past, remains the ultimate arbiter, while the external situation remains precarious. Although relations with India will remain tense over Kashmir, China will continue to be the main economic partner with a growing number of projects included under the China Pakistan Economic Corridor. In the west, relations with Afghanistan are characterized by flare-ups in tension, as in 2017 following Pakistan’s mass expulsion of Afghan refugees.