Easing bottlenecks improve Pakistan’s economic outlook

A medium-sized, fast-growing economy is hardly the first thing that comes to mind when one hears of Pakistan. The country is associated with security and energy crises, disruptive insurgencies, poverty, and government mismanagement. Even though Pakistan continues to be plagued by these issues, the economic outlook for the country has improved.

2015 was a stable year for the economy, and easing bottlenecks and a renewed commitment to the reform agenda have been pivotal in reshaping the macroeconomic outlook. Lower oil prices also aided economic stabilization efforts. Pakistan made progress in three main areas:

  1. Stable civil-military relations: General stability in civil-military relations allowed the government to focus on effectively managing the economy. Prime Minister Nawaz Sharif and General Raheel Sharif provided stable leadership for the country, and the military remained subtle in exercising power over the civilian government.
  2. Progress on economic reforms: The Sharif government, with support from the IMF, restated its commitment to implementing structural reforms and easing bottlenecks in the economy. The progress made in 2015 includes a lower budget deficit, larger forex reserves, and lower spending on energy subsidies.
  3. Improving macroeconomic fundamentals: Pakistan’s macroeconomic fundamentals also benefited substantially from low oil prices in 2015. The country’s bill for oil imports fell by 40% in the six months between July and December 2015. Further dips in oil prices in 2016 will allow the government to gradually ease pressures in the energy sector by removing costly subsidies without hurting consumers.

This progress has highlighted the investment opportunity that exists in the country, specifically linked to the consumption sector. As the world’s sixth-largest country by population, consumption expenditure is the primary driver of Pakistan’s economy. With inflation expected to remain low in 2016, discretionary spending is likely to rise for the next 12 to 18 months, benefiting consumer-focused industries.

Pakistan Population and Growth

Two major risks remain:

  • Pakistan continues to rank third on the Global Terrorism Index, after Iraq and Afghanistan. The terrorism threat is still the greatest risk in the country, which is home to a number of strong domestic terror groups.
  • Energy shortages and blackouts remain a concern in Pakistan, hurting economic progress by restricting production and causing factory closures, which lead to rising unemployment and social unrest.

Despite these risks, an improved medium-term outlook combined with increasing economic optimism are encouraging multinationals to reassess Pakistan’s market potential. Going forward, we expect Pakistan’s growth trajectory to be determined by three major trends: the performance of its two largest provinces, Punjab and Sindh; the pace of implementation of structural reforms; and the investment in the energy and infrastructure sectors. Watch for our upcoming post on these three trends and their impact on multinationals.

For an in-depth analysis of this topic, FSG clients can access the full report on the client portal. Not a client? Contact us to learn more.

Tagged on:

Leave a Reply

Your email address will not be published. Required fields are marked *