Pakistan Country Forecast

No End to Instability

An already unstable political situation has become even more precarious in recent months, amid growing domestic insecurity, an increasingly strained relationship with the US, embarrassing military failures and reports of an attempted coup, and mounting evidence of serious economic mismanagement…
The expansion of the governing coalition with the inclusion of the PML-Q in May has fortified the positions of President Asif Ali Zardari and Prime Minister Yousaf Raza Gillani, but the main opposition PML-N is pressing for early elections, and given the fragility of the governing alliance headed by Zardari’s PPP, the possibility that presidential and parliamentary elections might be held before they fall due in September 2012 and January 2013, respectively, cannot be ruled out…
PML-N leader Nawaz Sharif is attempting to boost his leverage by tapping into widespread popular discontent with the PPP-led regime, and he has also become an outspoken critic of the military, which has seen its public image badly tarnished by the early May assassination of Al Qaeda leader Osama bin Laden in Abbottabad. The generals’ insistence that they had no idea Bin Laden had taken up residence just a short distance from a large military training facility and no prior knowledge that the US was planning an operation to take out the terrorist leader have tested the credulity of the population and, it would seem, outraged some junior officers enough to provoke a mutiny…
Numerous Barriers to Achieving Economic Potential
As relations with the US have grown tense, Pakistan has begun cozying up to China. However, officials in Beijing appear to have commitment issues. Like the US, China recognizes the pitfalls of becoming too deeply enmeshed in the Pakistani milieu, and unlike the US, China can afford to maintain a safe distance…
The chronic problems that have long held economic performance below potential will continue to be evident in the near term. Security concerns will deter investment, rampant corruption will siphon off funds that might otherwise have been put to productive use, power shortages will disrupt manufacturing operations, and high inflation will dampen the positive contribution of private consumption…
The post-flood rebuilding program holds the potential to boost public consumption and investment, but the uncertain timetable for the disbursement of IMF and donor funds points to reduced benefits on that score in the current fiscal year…
Over the medium term, economic performance will reflect the level of political stability, which will be a key factor in determining whether Pakistan continues to enjoy access to international financial support. Whether the government is capable of making effective use of whatever support it does receive remains an open question, the answer to which will go a long way toward determining the outlook for medium-term stability in Pakistan. All things considered, there is ample cause for pessimism in that regard…
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 over the medium term, but pressure to tighten fiscal and monetary policies will slow the pace of expansion to an average of 3.8% per year through 2016, far below the level required to alleviate the country’s socio-economic problems…
The persistence of fairly large budget and current account deficits will contribute to chronic currency weakness, despite sizeable inflows of international financial support, which will combine with the inflationary impact of the gradual lifting of price caps and subsidy cuts to produce average annual inflation of 7.5% per year through 2016.

Economic Forecasts for the Three Alternative Regimes