FORECASTS OF RISK TO INTERNATIONAL BUSINESS
Turmoil Financial Transfer Direct Investment Export Market
18‑Month: Very High D+ B C-
Five‑Year: High C- C C
KEY ECONOMIC FORECASTS
Years Real GDP Growth % Inflation % Current Account ($bn)
2008-2012(AVG) 3.2 13.9 -5.05
2013(F) 3.8 8.0 -2.30
2014-2018(F) 3.9 8.2 -4.10

Strong Mandate Will Not Guarantee Stability

The Pakistani electorate delivered a convincing victory for the PML-N at a general election held in May 2013, and further gains in subsequent by-elections and the addition of independent lawmakers have provided Prime Minister Nawaz Sharif’s government with a comfortable majority in the lower house of Parliament.  A three-year lending deal approved by the IMF in early September will help to stave off an immediate financing crisis, and the hope is that Sharif’s legislative muscle will enable his government to fulfill the terms of the agreement, which include an overhaul of a tax administration made overly complex by provincial government jurisdiction, as well as other structural reforms that, if implemented, would contribute to improved business efficiency.  The interest of investors has been piqued by promises of a fresh privatization push as the government takes steps to reduce the large budget deficit, but successfully selling off loss-making state firms will prove no mean feat in the light of the weak finances of many of the companies slated for sale, the opposition of entrenched trade unions, and the uncertain cooperation of a corrupt and inefficient court system.  The new government has also taken on the task of addressing crippling energy shortages that have stunted economic productivity and exacerbated social discontent.  Alleviating the problem will require investment in generating capacity and other infrastructure that is to be financed with funds made available through deep cuts in spending on subsidies.  To its credit, the government has bitten the bullet on subsidies.  However, with businesses passing on the cost of higher electricity prices to consumers, inflation is forecast to spike in the final quarter of the year, creating a heightened risk of social unrest, an especially unwelcome prospect in a country such as Pakistan, where political violence poses a constant threat to domestic stability.

Numerous Barriers to Achieving Economic Potential

The government will need to realize savings equivalent to 0.5% of GDP—or roughly $1.7 billion—to hold the deficit to the 5.8% of GDP target for the 2013/2014 fiscal year.  The 30% hike in electricity tariffs that went into effect on October 1 is projected to reduce government spending by close to that amount all by itself, but achieving the target will be difficult if disappointing growth contributes to a shortfall in revenues.  Any semblance of economic health hinges on continued access to international financial support, but barring an unlikely reduction of corruption, it is open to question whether the government is capable of making effective use of whatever support it does receive.  Growth in services, particularly in the trade and transport sub-sectors, will help to offset the weakness of the manufacturing sector and weather-related volatility in agricultural output, but pressure to tighten fiscal and monetary policies will slow the pace of expansion to an average of 3.9% per year through 2018.  The persistence of fairly large budget and current account deficits will contribute to chronic currency weakness, complicating efforts to contain inflation.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST
REGIMES & PROBABILITIES PML-N
70%
PML-N Coalition 20% Military
10%
RISK FACTORS CURRENT  
Turmoil High Same SLIGHTLY MORE MORE
Investment
  Equity Moderate Same SLIGHTLY MORE Same
  Operations High SLIGHTLY LESS SLIGHTLY MORE MORE
  Taxation High SLIGHTLY MORE SLIGHTLY MORE Same
  Repatriation Low Same Same Same
  Exchange Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Trade
  Tariffs High Same Same Same
  Other Barriers High Same Same SLIGHTLY MORE
  Payment Delays Moderate Same SLIGHTLY MORE MORE
Economic Policy
  Expansion Very High Same SLIGHTLY MORE SLIGHTLY MORE
  Labor Costs Low Same Same Same
  Foreign Debt Very High SLIGHTLY MORE SLIGHTLY MORE MORE
SUMMARY OF FIVE-YEAR FORECAST
REGIMES & PROBABILITIES *PML-N Coalition 50% PPP Coalition
35%
Military-Civilian 15%
RISK FACTORS BASE  
Turmoil High Same Same SLIGHTLY MORE
Restrictions
   Investment High SLIGHTLY MORE SLIGHTLY LESS Same
   Trade High SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS
Economic Problems
   Domestic High SLIGHTLY MORE Same MORE
   International High Same SLIGHTLY LESS MORE
   * When present, indicates forecast of a new regime

For more information on Pakistan, check out the Full Report!