As easing bottlenecks improve Pakistan’s economic outlook (see our last blog post), multinationals are beginning to reconsider Pakistan’s position in their emerging markets portfolios. Even so, the country’s continued progress is not guaranteed. Going forward, we believe the level of opportunity in the country will be determined by three important trends. These will be crucial for multinationals to monitor as they begin to develop and implement a successful Pakistan strategy.
- Economic activity will remain highly concentrated: The performance of two key provinces will determine the overall outlook of the country. Punjab and Sindh contribute more than 92% of economic output and contain 79% of the country’s population. Furthermore, even within these two provinces economic activity is fairly concentrated in and around the major cities of Lahore, Faisalabad, Multan, and Karachi. Multinationals should evaluate opportunity in these markets and capitalize on economies of scale as a result of these concentrated consumption centers.
- Structural reforms will dictate the pace of economic recovery: The central government has reconfirmed its commitment to implementing structural reforms that will increase efficiencies and remove bottlenecks in the economy. The government aims to take advantage of the current environment of low oil prices to remove subsidies and make the energy sector more efficient. Other important reforms include expanding the tax base, reducing the budget deficit, increasing forex reserves, and privatizing loss-making public sector enterprises. Multinationals should closely monitor the passage of these crucial reforms as the pace will determine timelines for investment.
- Investment in infrastructure and energy will take priority: Energy and infrastructure bottlenecks are by no means unique to Pakistan, but the effects of these inefficiencies are exaggerated in the country. The government has therefore focused on these sectors to drive growth and attract investment. The China Pakistan Economic Corridor (CPEC) is a major development in this regard. The Chinese government has promised US$ 46 billion in investment in Pakistan’s energy and infrastructure sectors. The Gwadar port, in the south of the country, will be upgraded as part of the project. A land route from Kashgar in China’s Xinjiang province to Gwadar is also making headlines. It will connect the western provinces of China to Pakistan, allowing the world’s second-largest economy to leverage Pakistan’s strategic location and secure economic trade linkages. There are risks, though, as the corridor passes through Pakistan’s troubled western province of Balochistan. Despite this, if executed successfully the CPEC will change the economic landscape of Pakistan.
The overall outlook for Pakistan’s economy will be determined by how these trends play out in the future. As the economy gradually recovers, using these three trends to evaluate medium- to long-term market potential should be an integral part of any Pakistan strategy.
Photo Credit: pakistantoday.com.pk