Pakistan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large domestic market, with dynamic population growth
- Significant remittances from abroad
- Cheap and plentiful labor
- Positive outlook for economic corridor with China
- Extremely tense geopolitical climate and serious domestic insecurity (terrorism)
- Inadequacy of healthcare, agriculture, and educational infrastructure
- Energy dependency
- Frequent electricity and water outages
- Poor sector diversification and concentration on a few low added value sectors
Economic recovery has been made possible with IMF aid program launched in 2013
With the IMF aid program and the low level of oil prices, the country’s macroeconomic performance improved in 2016. Growth will remain buoyant, bolstered by household consumption, with substantial remittances from workers abroad. However, the low rate of employment among women in the economy and the inadequacy of the country’s electricity production, even though this is being rectified, will hamper efforts to eliminate poverty. Public investment will increase with higher public revenues, resulting in particular from improved tax collection efficiency. Benefiting from a fall in long-term interest rates and a rapid expansion in private sector credit (+26% between 2016 and 2017), Pakistan should experience a strong boost to private investment in 2017, as well as in 2018, although at a slightly slower rate. In addition, the China–Pakistan Economic Corridor (CPEC) created between China’s Xinjiang region and the port of Gwadar (southwest Pakistan) should help to ease the way for substantial Chinese inward investments, helping to improve transport infrastructures and the country’s capacity to produce electricity. There will be a moderate rise in inflation with the rise in oil prices but mostly related to the high level of volatility of the rupee. The level of inflation will also depend on the quality of the cotton harvest and whether or not electricity prices rise. There will be high levels of growth in the industrial and service sectors (respectively 21% and 59.2% of GDP) thanks to improvements in electricity supplies.
The budget deficit is shrinking whilst the current account deficit is widening
Since 2013, the budget deficit has been gradually reduced as a result of the measures required under the terms of the IMF three-year arrangement. Revenues (15.2% of GDP), whilst still low, will improve slightly thanks to improvements in the tax collection, whilst spending (19.6% of GDP) will fall with the large-scale cuts to subsidies made possible thanks to low oil and gas prices and increases in electricity prices. Public debt however, which is essentially, internal and denominated in the national currency, is expected to remain high. Despite the ending of the IMF program in September 2016, the deficit is likely to continue falling, debt to stabilize and the cost of this fall.
The current account deficit, which was intended to be eliminated on completion of the program, will worsen in 2017 and 2018. Increased competition within the textile sector from Vietnam, Bangladesh and India, combined with climatic events impacting on cotton production (down 27.8% in 2016) will continue to limit textile sector exports in 2017. The size of the trade deficit is a reflection of the historic weakness of Pakistani exports (less than 10% of GDP). More than half of these are textile sector products. 19% are agriculture products, half of which is rice and the rest mainly fruits and sugar. Manufactured products account for only 16% of exports, consisting mainly of chemical products, cement, animal skins and leather products. The level of diversification is low. The current account deficit is therefore expected to worsen in 2017 thanks to the size of the trade deficit, despite an expected increase in remittance from workers abroad, government borrowing and FDIs.
Continuing climate of insecurity
The next legislative elections will be held in September 2018. The outcome of these will depend on the achievements of Nawaz Sharif’s government which, with its comfortable parliamentary majority, will have to answer for the progress made in his first term of office. Politics in Pakistan are always subject to a high degree of instability fostered by the opposition parties, in particular Pakistan Tehreek-e-Insaf (PTI), and the Panama Papers scandal which implicated members of the government, as well as of the Prime Minister’s family. The Government has also had to deal with religious fundamentalist (the Pakistani Taliban) and their frequent terrorist attacks. Pakistan finds itself in a difficult external security context. Its relations with India are tense, most notably with regards to Kashmir, where the two armies are face to face. In the west, its relations with Afghanistan are hampered by the problem of the Taliban, with both countries accusing the other of sponsoring to provoke its neighbor. Relations with its traditional US ally are suffering because of mutual suspicions concerning the fight against Al-Qaeda and the Taliban. Finally, the democracy conceals weak governance marked, in particular, by corruption. The business climate has been seriously undermined in this context of political instability, violence and terrorism. On top of an acute issue of corruption, there is the problem of obtaining legal recognition of rights before the Courts, administrative complexity and the extremely slow pace in issuing building permits.