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An acute crisis is edging closer in Pakistan. For some time now, the security situation has been progressively worsening, with foreign exchange reserves declining and political instability deepening.

This assessment was issued to clients of Dragonfly’s Security Intelligence & Analysis Service (SIAS) on 6 March 2023.

  • Economic and security trends for Pakistan are worsening
  • We assess that a sharp deterioration of the political and security situation is unlikely between now and summer 2023
  • The likelihood of a sudden crisis will most probably rise in the run-up to a general election due in October

The negative trends are now converging and exacerbating an already-challenging operating environment. This has led clients to ask us about the likelihood of the security, political and governance situation markedly worsening this year. We assess that a major crisis or sharp deterioration in the situation is unlikely (25%) between now and the summer.

The most likely outcome for Pakistan is a gradual deterioration over the coming three months to the point at which an acute crisis will then become more likely. Our assessments are based on the current trajectory of those negative security, political and economic trends, which we have a high degree of confidence will continue over the next three to six months. Beyond the summer (June to August) and in the run-up to the October general election, these are likely to worsen faster. That is why the chance of an acute crisis will probably rise (to 40% by October).

Methodology note on scenarios and indicators for Pakistan

We have identified three broad scenarios for how we assess the situation in Pakistan to develop over the coming six months. These encapsulate a range of other scenarios that indicate a general continuation of the current situation, a worsening outlook, and an improvement with declining levels of risks.

We have outlined how we anticipate the current conditions might evolve into each scenario. We have projected timeframes and provided a set of indicators. We have also made two forecasts of the likelihood of each indicator coming to pass or continuing without resolution: the first in the next three months and the second in six months. The convergence of several indicators – rather than one in isolation – would suggest that a given scenario is becoming more likely.

These three broad scenarios are also not necessarily entirely mutually exclusive either. One has the potential to lead to another, particularly as new events unfold and probabilities shift over time. The political, economic, and military situations that shape the risks may progress or deteriorate at different speeds. This is also why the percentage probabilities together add up to more than 100%.

1. Drifting towards a crisis

Consistent | Three months: 70%, six months: 55%

This scenario, which we assess to be likely (70%) in the coming three months, entails a gradual worsening of the security and economic situation, in line with trends over recent months. While safety and security risks would remain high, a crisis that fundamentally worsens the risks of operating a business in the country would be averted.

The Tehreek-e-Taliban Pakistan (TTP), the most capable terrorist group in the country, is likely to pose a pressing security threat over the coming months. There were more TTP attacks in 2022 than in any year since 2011. Seemingly emboldened by the Taliban takeover in Afghanistan, the TTP has mounted increasingly frequent attacks countrywide, including bombings in major cities, such as in Quetta and Islamabad in recent months.

In this scenario, the TTP would continue mounting attacks in urban areas countrywide, but not pose as large of a threat as it did in 2008 when the security forces often struggled to prevent high-impact and mass-casualty attacks in Islamabad. We assess that there is likely to be a heightened threat from the TTP during the period leading up to provincial elections in Punjab and Khyber Pakhtunkhwa provinces, which are due within the next three months.

The economy is likely to continue deteriorating. Intense flooding last year caused at least $16 billion of damage, according to the World Bank. A source in the financial sector in Lahore last week described the economic crisis to us as ‘unprecedented’. Forex reserves are currently only enough to cover three weeks of imports and Pakistan has to pay more than $20 billion in debt repayments this year. With a declining textile sector and weak exports and remittances in recent months, the government appears to have little means of paying this without external support.

A recent depreciation in the rupee has caused higher commodity and fuel prices. That is likely to sustain a high civil unrest risk countrywide. Prime Minister Shehbaz Sharif last month said the ‘economic challenge is unimaginable’. A journalist at a prominent national newspaper in Lahore last week told us that there are signs that unrest is becoming ‘increasingly likely’ due to high levels of unemployment and a rising cost-of-living crisis.

The Pakistan Tehreek-e-Insaf (PTI) opposition party, led by former prime minister Imran Khan, is likely to continue capitalising on the economic and security situation to lead mass protest campaigns in the coming months. After Khan accused the government of being behind his attempted assassination in November 2022, PTI supporters burnt tires, blocked roads, and threw rocks at police in major cities, such as Lahore. These protests are likely to increase in size and frequency in the run-up to the general election due by October.

Indicators of the continuation of this scenario

  • The IMF continues not to approve a bailout for Pakistan (three months: 40%, six months: 30%)
  • Food and fuel prices remain very high (three months: 85%, six months: 70%)
  • Frequent power cuts (three months: 80%, six months: 70%)
  • Regular opposition protests with isolated incidents of violent unrest (three months: 80%, six months: 90%)
  • A sustained high level of terrorist attacks, particularly in Khyber Pakhtunkhwa province (three months: 90%, six months: 75%)
  • Continued limited shortages in medicines and manufacturing parts (three months: 65%, six months: 70%)

2. An unanticipated stabilisation

Improving | Three months: 20%, six months: 15%

We assess that it is highly unlikely that the economic and security situation improves in the next three to six months. Even an IMF bailout and loans from international creditors would unlikely be enough for Pakistan to avert an economic downturn over the coming six months. This is because this would at most provide temporary economic relief but would not resolve the unsustainability of the current economic model.

An IMF bailout is more likely than not. It would probably avert a debt default. Sharif said the government will ‘agree with the conditions’ of the IMF. In recent weeks, the government has adhered to several IMF conditions, such as raising taxes and letting the rupee float against the dollar. According to financial analysts cited in the international media, an IMF bailout would encourage other creditors to provide debt relief and restructuring for Pakistan. Based on other bailouts we agree with that conclusion.

Regardless of whether Pakistan secures bailouts and debt restructuring from international creditors, the cost-of-living situation is unlikely to materially improve. Years of economic mismanagement and declining exports and remittances mean the economy will remain precarious. Fuel prices have risen in recent months and the government has had to raise interest rates and let the rupee float against the dollar to curb high inflation (which reached a 50-year high this month) and attain an IMF bailout.

There are few prospects of the critical terrorism threat level improving in Pakistan in the coming months. The state has little capability to handle the growing threat from the TTP. A police officer in Khyber Pakhtunkhwa cited in Reuters said, ‘the biggest problem is the number of personnel, which is a little low’. China could plausibly offer military aid. But its priority is to protect its investments in the country and would probably be in return for more military basing and intelligence access, based on international media reports.

Indicators that this scenario is becoming more likely

  • The IMF agrees to a bailout (three months: 60%, six months: 70%)
  • Pakistan attains financial support from international lenders (three months: 60%, six months: 80%)
  • The cost of fuel and food decreases (three months: 10%, six months: 15%) 
  • A reduction in terrorist attacks countrywide (three months: 10%, six months: 15%) 
  • Opposition protests decline in frequency (three months: 20%, six months: 10%) 
  • China provides military support to Pakistan’s counter-terrorism operations (three months: 15%, six months: 20%)

3. An acute crisis transpires

Worsening | Three months: 25%, six months: 40%

We assess an acute crisis before the elections to be somewhat doubtful (40%) for now. This is one reason why our crisis risk level is currently high. Such a scenario would entail extended periods of intense civil unrest albeit with the military and government still in control. Terrorist groups would also probably take advantage of the turmoil to increase the frequency and brazenness of their attacks countrywide, further undermining state legitimacy. An acute crisis like this would make it much more difficult to operate in Pakistan.

Severe and prolonged shortages of fuel and food, along with regular power cuts and worsening crime in major cities, would lead us to raise our civil unrest risk rating for Pakistan to severe. Based on the civil unrest following a debt default in Sri Lanka last year, an acute crisis in Pakistan would most likely occur when widespread shortages of medicine and food lead to large-scale spontaneous gatherings of protesters in cities. If the police forcibly disperse protesters, violent clashes between them would become likely.

In a scenario of a complete breakdown of law and order, a military coup would become likely. The military remains very powerful and has conducted several coups, most recently in 1999 against the Sharif family, who again hold leading positions in the current government. A critical indicator for this would be if there is a visible split between the military and the government. For example, the army chief said that the government is incapable of preventing militancy or overtly expressing support for Imran Khan.

Indicators that this scenario is becoming more likely

  • The IMF continues not to approve a bailout for Pakistan (three months: 40%, six months: 30%)
  • The police fatally wound several protesters during a protest in Islamabad (three months: 40%, six months: 70%)
  • The government announces delays to the general election (three months: 20%, six months: 35%)
  • Reports emerge of mass layoffs of factory workers (three months: 40%, six months: 50%)
  • The price of fuel rises rapidly again (three months: 40%, six months: 65%)
  • Nawaz Sharif returns to Pakistan (three months: 15%, six months: 30%)
  • TTP attacks increase in scale and frequency in major cities in Islamabad and Punjab province (three months: 65%, six months: 80%)
  • Foreign governments advise citizens not to travel to Pakistan for non-essential reasons (three months: 10%, six months: 20%)

Indicators that this scenario is liable to occur at short notice

  • Foreign governments advise citizens to leave Pakistan immediately (three months: 5%, six months: 10%)
  • Widespread unrest in major cities lasts over a week (three months: 15%, six months: 35%)
  • Textile companies become bankrupt (three months: 55%, six months: 45%)
  • Reports of mass food shortages in major cities emerge (three months: 50%, six months: 40%)
  • The authorities detain Imran Khan (three months: 25%, six months: 40%)
  • Imran Khan calls for a mass gathering in Islamabad (three months: 40%, six months: 60%)
  • A mass-casualty terrorist attack in Islamabad (three months: 5%, six months: 10%) 
  • The military/army chief publicly declares it has no confidence in the current government (three months: 5%, six months: 10%)
  • Police officers join protesters in a demonstration in Islamabad (three months: 20%, six months: 40%)

Outlook for after summer

A sudden crisis will probably become even more plausible in September and October. The assessments above are focused on the coming six months. But beyond that point, there are a number of other converging factors such as summer heatwaves and power cuts along with structural economic issues that are likely to deteriorate. As a source in the financial sector in Lahore told us, ‘policymakers are curing cancer with aspirin’. This is why we currently assess that the risk of an acute crisis in the run-up to and during the election will rise even further (to 40%).

Image: Pakistan’s former prime minister, Imran Khan, speaks while taking part in an anti-government march in Gujranwala, Pakistan, on 1 November 2022. Photo by Arif Ali/AFP via Getty Images.