An excerpt from my recent article published at SeekingAlpha.com.
Pakistan goes back some 5,000 years and has a storied history of assimilating European, Asian, and Arab influences over millennia. Today, Pakistan has an equally interesting future that should be promising, but it’s also debilitated by some serious problems. In this article, we’ll unpack what’s right and wrong with Pakistan.
What’s wrong with Pakistan
Pakistan has been plagued by corruption for decades. A procession of government officials, including two prime ministers, have been accused or found guilty of bribery, misappropriation and other malfeasance. The culture of corruption has led to woeful underinvestment in education, infrastructure, and even sanitation.
In August of 2018, there was a shift in government power favoring the Pakistan Tehreek-e-Insaf party (the PTI) led by prime minister Imran Khan. Though the party ran on promising social welfare, it ended up succumbing to austerity measures imposed by a $6 billion bailout package from the IMF, the 13th such package since 1980.
The package comes with terms, including letting the Pakistan Rupee (PKR) free-float, raising benchmark interest rates, implementing fiscal belt-tightening, and overhauling tax policy to increase tax revenue. Clearly, these changes are restrictive and likely to impede near-term economic growth.
As a result, both the IMF and the World Bank have been revising down growth forecasts, both institutions see growth slowing to a 2% handle. They also see inflation continuing to rise, it has already spiked into double digits following the devaluation of the PKR, shown below vs USD.
Pakistan Inflation Rate
USD vs PKR
In a worst-case scenario, these issues could boil over into an outright financial crisis and major recession for Pakistan. Markets have responded accordingly, punishing Pakistani stocks. Pakistan has one of the worst-performing stock markets in the world year-to-date.
Things could always get worse, but it’s worth considering what no-one is talking about right now – what could go right for Pakistan?
Read the full version of this article at SeekingAlpha.com.
Victor K. Lai, CFA
The Bellwether Blog 