Pakistan: Sociopolitical tensions are growing amid persisting economic crisis and before upcoming elections

Event

Protests and strikes are spreading across the whole country as the cost-of-living crisis continues to bite. The recent government decision to raise electricity costs – to meet IMF requirements amid extremely poor public finances – was particularly criticised. Pakistan is still struggling against an economic crisis with no end in sight, which will be a dominant topic in the next general elections.

Impact

Pressures are rising further on the new temporary government. One month ago, PM Shehbaz Shariff gave the reins of government to Anwar ul Haq Kakar, a politician from Balochistan, as caretaker PM until general elections are held. The general elections date is not known yet but it will probably not be before the first quarter of 2024. While the outcome of the elections is very uncertain, opposition leader and the country’s most popular candidate, former PM Imran Khan, is barred from participating after he was sentenced to 3 years in prison in August due to corruption charges.

In the meantime, the caretaker government will strive to get the balance right between street pressures and IMF requirements. In June, Islamabad secured a 9-month USD 3 bn loan from the IMF – with an immediate disbursement of USD 1.2 bn – to support the balance of payments and avert a sovereign default, thereby committing to meet key requirements from the IMF. Lower electricity subsidies was one of the required measure to support Pakistan’s weak fiscal position and power sector, but as expected the measure is very unpopular. Indeed, persisting high cost of living, combined with high inflation (27% in August) and one of the world’s weakest currency this year so far (the Pakistani rupee has depreciated by more than 30% vis-à-vis the US dollar) weigh on poor socioeconomic conditions. Therefore, government policies will remain very challenging in the run-up to the next elections and beyond. The liquidity situation has temporarily improved since July, after various financial support (particularly from the IMF, China, Saudi Arabia and the United Arab Emirates) allowed foreign exchange reserves to swell to the equivalent of 6 weeks of imports.

However, given high debt servicing ahead, prohibitive access to financial markets and ongoing recession, pressures on the government, liquidity, rupee and sovereign debt are not going to abate any time soon. Therefore, Credendo’s high country risk ratings are expected to remain unchanged in the coming months.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com