Pakistan: Balance of payments pressures are rising

02 August 2018

The Pakistan Tehreek-e-Insaf (PTI) emerged as the largest party in general elections held in July 2018, and is set to form a coalition government with Imran Khan as prime minster. Due to significant balance of payments pressures, Pakistan may seek an International Monetary Fund (IMF) bailout in the coming months.

Security Environment

Former cricketer Imran Khan is expected to become Pakistan’s prime minister in August 2018 after the PTI defeated the ruling Pakistan Muslim League-Nawaz(PML-N) in general elections. However, opposition parties have accused the PTI of conspiring with the country’s powerful military apparatus to rig the vote, and sporadic protests are likely. The risk of violent demonstrations will remain elevated, particularly in Punjab and Islamabad.

Foreign businesses are unlikely to be specifically targeted, but roadblocks are common and police are likely to use baton charges, elevating death and injury risks for bystanders. In November 2017, 10 protesters were killed and hundreds injured during an attempt by police to disperse an Islamist rally in Islamabad.

While the overall security environment has improved since an army offensive against militants in the north of Pakistan began in 2014, Islamist terrorism continues to pose a threat. In March 2016, over 70 people were killed in a suicide bombing in Lahore that was claimed by a group affiliated with the Taliban. In addition, separatist militants operate in Balochistan and may carry out improvised explosive device attacks on energy infrastructure and construction projects.

Trading Environment

Pakistan’s macroeconomic profile has deteriorated since it exited a three-year IMF programme in 2016, and economic imbalances mean that growth is likely to slow in the medium term. While real GDP expansion is set to remain fairly high in 2018 at 5.8%, growth is primarily being driven by the China-Pakistan Economic Corridor, which is creating balance of payments pressures due to a rising import bill. Stubborn fiscal deficits have inflated general government debt to a forecasted 71.3% of GDP in 2018, while the current account deficit is forecasted to reach 5.7% of GDP in fiscal year 2017-2018.

Capital controls may be imposed in the short-to-medium term, particularly as foreign reserves have fallen sharply from 17.56 billion in 2016 to USD 10.1 billion in June 2018, providing just 2 months of import cover. As a result of high fiscal deficits and the rising cost of oil imports, Pakistan faces significant balance of payments pressures. The PTI’s victory increases the probability that Pakistan will seek an IMF bailout in the coming months, particularly as the party is less inclined to rely on Chinese financing than the outgoing PML-N. An IMF loan is likely to entail caps on public expenditure, which is likely to cause an economic slowdown.

CPS Subscribe banner

Investment Environment

There are opportunities in the power sector as Pakistan seeks to resolve energy shortages amid rising demand for electricity. The China-Pakistan Economic Corridor has generated investment in infrastructure projects, and Pakistan’s construction sector is forecasted to grow at an annual average of over 8% between 2018 and 2027.

Pakistan’s power capacity shortage is estimated at almost 4.5 GW, and USD 5.8 billion worth of coal projects are scheduled for completion by early 2019. However, significant contractual risks remain. In November 2017, Pakistan announced that the China backed USD 14 billion Diamer-Bhasha hydroelectric dam had been cancelled due to disagreements between the two countries over the project terms.

The risk of contract alteration will rise once a government is formed by the PTI, which has pledged to tackle corruption and is likely to review large infrastructure and energy projects. Pakistan’s precarious finances will also pose contractual risks, as the government has failed to maintain its payment schedule for construction work on the Karachi-Lahore highway in recent weeks.

While the risk of expropriation is low, Pakistan’s inefficient judiciary complicates contract enforcement, and around 3 million legal cases are pending. An on-going money laundering investigation that has implicated a number of Pakistan’s senior politicians and business executives underscores the country’s high legal and regulatory risks. The Financial Action Task Force, an international anti-corruption body, placed Pakistan on its ‘grey list’ in June 2018 for failing to curb financial crime and terrorism financing.

Pakistan: Balance of payments pressures are rising
* Pricing is dependent on the nature of the insured and the strategic level of the project. Underwriters remarked that capacity is constrained.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Pakistan, Cameroon, Colombia and Niger all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review Rating August 2018

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

Download Risk Outlook

For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email