Pakistan Country Risk Outlook

31 May 2019

Pakistan Country Risk Outlook The conditions of a loan agreement with the International Monetary Fund (IMF) are likely to weigh on Pakistan’s near-term growth performance, but will narrow the budget deficit. Contractual risks may rise as the Pakistan Tehreek-e-Insaf party’s (PTI) commitment to Belt and Road Initiative (BRI) projects appears uncertain. Opposition to Chinese investment in Pakistan will continue to elevate terrorism risks, particularly in Balochistan.

Security Environment

Chinese investment in Pakistan under the BRI banner continues to generate opposition, elevating security risks in Balochistan. On April 11, 2019, an attack occurred on a hotel in Gwadar, Pakistan, and was claimed by the Balochistan Liberation Army (BLA).

The group stated that the attack – which left five dead after gunmen stormed the hotel with firearms – was in the name of liberating the Balochistan province from the state of Pakistan, and Chinese-linked projects.

This attack was one of over a dozen attacks carried out by the group against Chinese projects in the last year.

In the medium-term outlook, there will be a heightened risk of damage to assets and infrastructure, as well as to the safety of personnel, for investors in Chinese initiatives throughout Balochistan.

Other international businesses which have buildings in close proximity to Chinese projects are also at risk of collateral property damage.

Pakistan Country Risk Outlook BLA attacks are generally firearm assaults through a team of gunmen. However, the use of small person-borne improvised explosive devices (PBIED) cannot be ruled out, if the group continue to gain momentum.

As a result, the scale of damage which BLA could inflict through their attacks may increase in the 12-month outlook.

Urban areas in the Balochistan province are particularly likely to be targeted, given the concentration of projects with Chinese participation in these areas. The town of Gwadar is especially likely to become a target.

The town is the location of the flagship port of the China-Pakistan Economic Corridor (CPEC) and has been the target of the most recent BLA attacks. International shipping companies and suppliers will face a particularly elevated risk of collateral property damage in this area.

Trading Environment

Pakistan faces a challenging macroeconomic outlook, as the government is forced to address structural imbalances. The Pakistani government’s fiscal position is weak, owing to a significant government debt to GDP ratio, which is forecasted at 71.6% in 2019.

The country has faced a brewing balance of payments crisis, holding only USD 8 billion in reserves in February 2019 and foreign loans in excess of US$90 billion. In May 2019, the Pakistani government reached an agreement with the International Monetary Fund (IMF) for a US$6 billion loan to be disbursed over the next 39 months, which will alleviate the country’s hard currency shortage.

The exact conditions of the agreement are not yet known, but are likely to include stringent measures to reduce the fiscal deficit from an estimated 6.6% of GDP in 2018.

This is likely to undermine Khan’s election promises to strengthen the welfare state. In the wake of the agreement, the rupee dropped in value by 3.6% against the dollar. The IMF deal is expected to include a market-determined rate for the currency, which many believe to be overvalued under the current central bank controlled float.

Since the election of Prime Minister Imran Khan in August 2018, the PTI has worked to unlock higher economic growth rates, as promised in Khan’s election manifesto. Pakistan’s agriculture sector has been particularly targeted by the PTI, and average annual growth in wheat production is forecasted at 0.5% between 2019 and 2023.

This expected production growth is largely due to government efforts to reduce input costs and funding towards irrigation improvements. Similarly, average annual growth in cotton production is forecasted at 2.5% between 2019 and 2023.

However, economic adjustments are likely to weigh on the short-term growth outlook. Pakistan’s real GDP growth is forecasted at 4.4% in 2018/19, down from 5.4% in 2017/18.

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Investment Environment

Pricing outlook website PakistanChina’s BRI is driving investment in Pakistan. In particular, the US$62 billion CPEC is supporting investment in Pakistan’s Gwadar Port, energy initiatives and infrastructure.
However, in recent months, the PTI has notably moderated their commitment to the Chinese initiative. The government has reportedly diverted US$171.6 million away from the original US$62 billion budget towards alternative projects. These funds were originally pledged to CPEC infrastructure projects.

Although it is highly unlikely that the PTI would cancel CPEC initiatives – particularly as the Gwadar port is already operating– the willingness of the party to redirect funds allocated by their predecessors is concerning for international investors.

Contractual risks are particularly likely to affect international investors in Pakistan’s construction sector, who are most at risk of having funds redirected towards alternative projects.

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5 Key Takeaways

  • An attack by the Balochistan Liberation Army (BLA) on a hotel complex in Gwadar, Balochistan killed 5 people in April 2019
  • The US$62 billion China-Pakistan Economic Corridor is supporting investment in Pakistan’s Gwadar Port, energy initiatives and infrastructure
  • The Pakistani government’s fiscal position is weak, owing to a significant government debt to GDP ratio, which is forecasted at 71.6% in 2019
  • In May 2019, the Pakistani government reached an agreement with the International Monetary Fund (IMF) for a US$6 billion loan to be disbursed over the next 39 months
  • Pakistan’s real GDP growth is forecasted at 4.4% in 2018/19, down from 5.4% in 2017/18.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Bolivia, Turkey, Ukraine, and Maldives all of which have been the subject of recent enquiries from our client base.

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  • Eleanor SmithEleanor Smith

    Eleanor Smith is a Senior Political Risk Analyst within Marsh JLT Specialty’s Credit Specialties team. At Marsh JLT Specialty, Eleanor analyses developments in political risks, and advises clients on their effect in a range of sectors. Eleanor is also responsible for delivery of World Risk Review, JLT’s country risk ratings platform, to clients and prospects.

    Eleanor has a first-class degree in History with Spanish from UCL, and a Masters in International Public Policy from the same institution. With experience in a range of sectors, including diplomatic missions and not-for-profit, Eleanor can help clients understand their risk exposure.

    If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on
    +44 (0)121 626 7837.

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