Pakistan

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Pakistan – February 2022

Pakistan lags behind its Middle East and North African (MENA) counterparts on measures of per capita income and creditworthiness. Infrastructure investments through projects in the China-Pakistan Economic Corridor (CPEC) and significant increases in power supply supports a stronger growth outlook than regional countries, while measures of the business climate are in line with peers. The government’s securing of a 39-month US$6 billion Extended Fund Facility (EFF) arrangement in July 2019 from the IMF supports external financing needs and the government’s reform agenda; however, the pandemic has exacerbated existing structural issues. Weak public and external finances and geopolitical tensions remain key risks to the outlook.

The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2022 and 2026. Business climate is measured by the World Bank’s latest Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.

Economic outlook

Like in many emerging market economies, the pandemic took a severe toll on Pakistan’s economy. After a 0.5% decline in real GDP in 2020, growth of 3.9% resumed in 2021, as fiscal and monetary stimulus, strong remittances and limited lockdowns lifted household consumption and private investment. The Pakistani economy is estimated to grow at 4% in 2022 according to IMF projections, benefitting from the resumption of IMF-led reforms that enhance export competitiveness and strengthen the financial performance of state-owned enterprises, particularly in the energy sector. On the downside, rising inflation and unemployment remain major hurdles to growth in economic activity and incomes.

Longer term, economic prospects remain robust. Infrastructure investments through projects in the CPEC and significant increases in power supply will help address some of Pakistan's economic constraints and strengthen its growth potential. The country’s young and growing population presents both opportunities and challenges. Adequate infrastructure, stable governance and productive investments will be needed to create employment opportunities. The IMF projects real GDP to expand between 4.5% to 5% per year on average over the next five years. But such prospects face downside risks from insufficient IMF-led reform progress, high debt constraining government spending, and instability in the political and security environment.

After rising steadily over many years, GDP per capita fell through 2019 and 2020 in part due to lost jobs and incomes due to the COVID-19 pandemic. Poverty incidence rose. Economic reopening supported the return to work for most informal workers and rising incomes in 2021. The government remains committed to assisting workers affected by the pandemic, reducing poverty and income inequality, strengthening social safety nets and promoting human capital development. The so-called “Ehsaas program”, launched by the government in March 2019, promises eligible families essential supplies at steep discounts and unconditional direct cash transfers.

Country risk

Country risk in Pakistan is high. The OECD country grade is 7. The three major ratings agencies have sub-investment grade sovereign credit ratings. This indicates a high risk that Pakistan will be unable and/or unwilling to meet its external debt obligations.

The World Bank ranks Pakistan 108th out of 190 economies in the ease of doing business survey. Compared to the rest of the Middle East, businesses operating in Pakistan find it more difficult to enforce contracts, pay taxes, register property and get electricity. But resolving insolvency and protecting minority investors is easier relative to regional peers.

Pakistan underperforms most of the Middle East region on the various measures of governance. Political stability remains an ongoing challenge. Corruption is perceived as high and widespread. Strengthening institutions and governance is a priority of the government. Measures such as enhancing the independence of anti-corruption bodies and improving the capacity of banks to report anti-money laundering practices will likely help in this regard.

The risk of expropriation in Pakistan is high. This stems from long delays, lack of transparency, consistency and impartiality in the legal system which makes it difficult for private enterprises to seek legal recourse from the government. To reduce expropriation risks, most foreign investors include contract provisions that provide for international arbitration.

Political risk is high, notwithstanding the recent democratic transfer of power between civilian governments. A large military influence and volatile security situation remains a constraint on the political and business environments. In addition, cross-border terrorism and a decades-long dispute over Kashmir will remain major risks to Pakistan-India relations.

Bilateral relations

Pakistan was Australia’s 40th largest trading partner in 2020. Total goods and services trade amounted to a little more than $1.7 billion in 2020, remaining at similar levels to prior years, notwithstanding disruption from the COVID-19 pandemic. The Australia and Pakistan Joint Trade Committee (JTC) serves as the official forum for discussing bilateral trade and investment. Australia’s main goods exports to Pakistan include vegetables, fertilisers and crude petroleum. Pakistan’s growing population presents great potential for Australia’s agricultural exports and the services sector. Major goods imports from Pakistan include made-up textiles, crude petroleum and rice.

Pakistan has extensive energy resources, including in oil, natural gas and coal. This presents a wide range of opportunities for Australian businesses in oil and gas, power and infrastructure. Snowden Mining Consultants, BHP, SMEC and CE Bartlett are Australian companies that have conducted business in mining and infrastructure projects in Pakistan.

Pakistani student enrolments in Australian institutions rose during the past two years, supported by remote learning. But tourist arrivals fell sharply in 2020 and 2021 owing to international border restrictions. The ongoing pandemic points to another year of uncertainty for tourism, and broader services exports, in 2022.

Bilateral investment between Pakistan and Australia is small. Trade and investment opportunities may exist in education, agribusiness, food and beverages, infrastructure and energy and resources.