Country Risk Analysis for Pakistan

Aug 31

The frontier market of Pakistan has experienced some setbacks in growth in recent years due to both political instability and economic uncertainty. In 2008, Pakistan agreed to an International Monetary Fund standby arrangement due to a crisis in its balance of payments. Economic issues have been exacerbated somewhat by the depreciation of the Pakistani rupee coupled with high inflation.

Pakistan

Despite some recent stabilization of the economy, outside investment remains sluggish. Textiles represent the primary export and agriculture either directly or indirectly employs up to two fifths of the population. Regional conflict and ongoing tension with neighbors Afghanistan, Iran and India add political complications to growth and investment opportunities in the region.

Pakistan was 143rd in the world for education expenditure as of 2009, investing roughly 2.7% of GDP. The average male will complete about seven years of education, which is slightly more than females. Despite these low education statistics, investments in communication infrastructure have placed them #9 in the world for mobile phone availability and #20 for internet users. This connectivity outside of Pakistan has produced some employment opportunity for the more educated workers.

Economic Risk

The country’s lack of growth has made it difficult in the past to pay on it’s moderate debts. In one case this lead to an intervention by the IMF, as stated above. The flagging economy and reticence on the part of foreign investors have reduced liquidity, which further dampens growth opportunities.

The relatively weak position of the economy has also reduced leverage, which further limits growth opportunities, both domestically and internationally. Without the needed leverage or liquidity, entrepreneurship and growth for existing companies is severely limited.

Political Risk

A significant driver preventing growth in Pakistan is found in its relationship to its neighbors. External conflicts, such as the ongoing border dispute with India regarding the Kashmir territory in the north, have resulted in three wars. This ongoing conflict peaked when the two nations began carrying out nuclear weapons testing in the late 1990’s.

Domestic insurgents, primarily in the tribal regions on the border with Afghanistan, are a continuing struggle for both political and military leaders. This domestic issue is further complicated by political instability in Afghanistan and the withdrawal of US troops from the region.

While the political situation in Iran may currently be stable, the increasing antisemitic rhetoric and military posturing threatens to destabilize the entire region, which would have a significant impact on Pakistan’s economy. Iran’s recent involvement in the civil conflict in Syria is producing even more uncertainty for the region, which threatens to spill over the border into both Afghanistan and Pakistan.

Tepid relations with allies resulting from conflicting priorities have added strain to diplomatic avenues. As an example, the discovery in 2011 that Osama bin Laden had been living in Pakistan, in close proximity to a military base, prompted the US to question whether the Pakistani government was complicit in harboring the fugitive. With respect to global terrorism, Pakistan is most often aligned with global interests. This is one case where their priorities have come into question, further eroding international investor appetite.

Risk Assessment High

The current economic and political factors described in this analysis combine to make current investment in Pakistan high risk. Mounting tensions throughout the region complicate Pakistan’s efforts to stabilize its economy. As a result it remains an unattractive option to foreign investors.

One comment

  1. Zafar Iqbal Qureshi /

    Precise and realistic risk assessment of Pakistan. However, it is very sketchy and does not reflect internal politico- religious intolerance in domestic politics.

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