Strategies for Mitigating Political Risks in Pakistan Case Study

Strategies for Mitigating Political Risks in Pakistan

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Introduction: Strategies for Mitigating Political Risks in Pakistan

Political risk is the possibility of damage to one's finances, economy, or society as a result of political decisions or actions. This can include governmental uncertainty, alterations to rules and regulations, terrorist attacks, hostilities, or other world issues that could affect a nation's or region's security (Sottilotta, 2012). Thus, it can be identified from the discussion that one of the main notions behind conducting this study is to provide insight on the topic of political risk and likely impact on FDI. For conducting the research, the selecting country is Pakistan and will discuss the types of political particular the country is facing. Based on the identified risk mitigation strategy will also be provided for those risk. The political risks that will be studied in this report will include:

1. Actions of host government
2. Currency inconvertibility
3. War
4. Bureaucracy

Identification of political risk and likely impact on FDI

Discussion about the political risks

In this segment of the study the above-mentioned political risks will be discussed through the lens of the selected country and will also show how it is impacting the FDI.

1. Actions of host government: Pakistan today faces a significant political threat as a result of the host government's actions. The nation has a history of political unrest, and the acts of the government can significantly affect the business climate and foreign direct investment in the nation. The unpredictable nature of government policy is one of the key difficulties faced by international investors in Pakistan. Foreign investors find it challenging to plan their investments since the government has a habit of making abrupt policy changes without prior notice. Because to this, it is extremely difficult for international businesses to operate in Pakistan (Nasreen, 2014). In addition, the Pakistani government has a track record of taking foreign assets without just recompense and nationalising industries. Due to this practise, foreign investors are less confident and many businesses are hesitant to invest in Pakistan. Many of these elements have played a role in the recent drop in foreign investment in Pakistan (Rajput, 2015).
2. Currency inconvertibility: Another main political concerns in Pakistan that can affect foreign direct investment is currency inconvertibility (FDI). Foreign investors' capacity to bring profits and capital home has been hampered by the nation's propensity for running out of foreign currency. Foreign investors may be hesitant to invest in Pakistan as a result of this uncertainty and danger because they are concerned about being able to access their money. In order to solve the problem of currency inconvertibility, the Pakistani government has put in place a number of measures, such as enabling foreign investors to convert their money and profits into foreign currency at a rate set by the market. These steps, however, have not been adequate to totally resolve the problem, and it is still very difficult for foreign investors to bring their money home (Bekaert, 2014). Also, the recent volatility of the Pakistani rupee increases the risk for overseas investors. Changes in the currency rate can have an effect on an investment's profitability and give investors reason for concern (Mirakhor, 2004).
3. War: Given its geographic position and continuous conflicts with its neighbours, especially India and Afghanistan, Pakistan has faced a political risk of war. There have been numerous conflicts and current military tensions as a result of India and Pakistan's long-standing dispute over Kashmir. Cross-border attacks and military operations have had a substantial negative influence on the stability of the region, adding to the conflict with Afghanistan's negative effects on Pakistan. Foreign investors may be hesitant to invest in Pakistan because of worries about security and stability due to the possibility of conflict in the region (Khan, 2005). The economy of the nation is also negatively impacted because resources are diverted from social and economic advancement to military operations. Furthermore, other political risks like currency volatility and political instability may be made worse by the possibility of conflict. It may produce an unstable business climate and deter foreign investment in the nation. In general, Pakistan faces a great deal of political and military risk, and minimising this risk is essential to fostering a secure and alluring business climate for international investors (Threlkeld, 2021).
4. Bureaucracy: Foreign direct investment (FDI) in Pakistan may be significantly impacted by the political risk of bureaucracy. Business operations in Pakistan can be challenging due to the bureaucracy's well-known for being demanding and time-consuming. For foreign investors, this may mean delays and higher expenses, which may deter them from making investments in Pakistan (Tanwir, 2010). The Pakistani bureaucracy is also rife with corruption, which can add further roadblocks for foreign companies. Although the government has taken some action to combat corruption, more has to be done to establish an accountable and effective bureaucracy. The difficulty of conducting business in Pakistan can be impacted by the bureaucratic red tape, which is a crucial factor for international investors to take into account when deciding where to invest. These difficulties may cause FDI to decrease, which could harm the economic and development of the nation (Aftab, 2020).

Likely impact on FDI

The political risks discussed above, such as government instability, currency inconvertibility, war, and bureaucracy, can have a significant impact on foreign direct investment (FDI) in Pakistan. These risks can create uncertainty for foreign investors, who may hesitate to invest in the country due to concerns about safety, stability, and profitability. Government instability can create a volatile business environment, which can impact FDI in Pakistan. Political instability can lead to changes in government policies, regulations, and laws, which can be detrimental to foreign investors. It can also lead to a lack of consistency in government decision-making, which can create uncertainty for businesses. Currency inconvertibility is another significant political risk that can impact FDI in Pakistan. It can make it difficult for foreign investors to access their funds, which creates a significant barrier to entry for foreign companies looking to do business in the country. This can result in a decline in FDI, which can have a detrimental impact on the country's economy. War political risk can also impact FDI in Pakistan. The risk of war creates uncertainty for foreign investors, who may hesitate to invest in the country due to concerns about safety and stability. It can also have a detrimental impact on the country's economy, as resources are diverted towards military operations and away from social and economic development. Bureaucracy is another political risk that can impact FDI in Pakistan. The complex and time-consuming bureaucratic processes in Pakistan can result in delays and increased costs for foreign investors. This can discourage them from investing in the country and create a barrier to entry for new businesses (MSc. Kruja, 2016).

These political risks can have a significant impact on FDI in Pakistan. For example, Pakistan has historically struggled to attract significant levels of foreign investment due to concerns about government instability and war. In 2020, Pakistan received $2.56 billion in FDI, which is lower compared to other countries in the region, such as India and Bangladesh. Moreover, the COVID-19 pandemic has also impacted FDI in Pakistan, exacerbating the impact of the political risks discussed above. The pandemic has created additional uncertainty and risk for foreign investors, who may be hesitant to invest in the country due to concerns about the health and economic impacts of the pandemic. Additionally, the Pakistani government can take steps to create a more attractive business environment for foreign investors. This can include providing incentives for foreign investors, such as tax breaks and subsidies, improving infrastructure and transportation networks, and creating a more skilled and educated workforce (Akbar, 2013).

Ways in which companies can mitigate the political risks

The concept of mitigating political risks refers to the measures that companies take to minimize the negative impact of political instability, uncertainty, and conflict on their business operations and investments. Political risks can take various forms, including government instability, currency inconvertibility, war, terrorism, and bureaucracy, among others. These risks can have significant economic and financial consequences for companies operating in countries with unstable political environments, as they can disrupt business operations, reduce profitability, and even result in the loss of investments. To mitigate political risks, companies must take proactive steps to assess, manage, and adapt to changing political environments. This can include conducting a thorough analysis of the political landscape, building relationships with key stakeholders, implementing contingency plans, and diversifying investments across multiple countries. Companies may also use financial instruments such as currency hedging to protect against the impact of currency inconvertibility and invest in insurance policies that cover political risks. Mitigating political risks is crucial for companies seeking to operate in countries with unstable political environments. By taking proactive measures to manage political risks, companies can reduce the impact of political instability on their operations and investments, and ensure their long-term success in the country. To secure their investments and maintain their long-term success in Pakistan, businesses can take a number of steps to mitigate the political risks mentioned above. The following table lists some strategies businesses can use to reduce these risks:

Companies can take additional steps to reduce political risk in Pakistan in addition to these mitigation options. By giving staff training and education, for instance, businesses can contribute to the development of local capacity while reducing the negative effects of bureaucracy and political unpredictability. Also, businesses can make investments in CSR programmes that address Pakistan's social and environmental problems in an effort to foster better relationships with the community and lower the likelihood of conflict. It is crucial for businesses to adopt a comprehensive strategy for reducing political risk in Pakistan. This entails forging solid connections with important stakeholders, carrying out comprehensive risk analyses, and investing in tactics that increase resilience and adaptability in the face of shifting political contexts. By taking these measures, companies can minimize the impact of political risk on their investments and ensure their long-term success in Pakistan.

Conclusion

In conclusion, political risks can have significant economic and financial consequences for companies operating in Pakistan. Government instability, currency inconvertibility, war, terrorism, and bureaucracy are some of the major political risks facing companies operating in the country. These risks can disrupt business operations, reduce profitability, and even result in the loss of investments. Despite these risks, Pakistan remains an attractive destination for foreign investment due to its large market size, strategic location, and natural resources. By taking proactive measures to manage political risks, companies can reduce the impact of political instability on their operations and investments and ensure their long-term success in the country.

References

Aftab, N. ( 2020). Pakistani Bureaucracy: Crisis of Governance, Prospects and Recommended Reforms. Hazara University.

Akbar, M. (2013). The Impact of Political Risk on Foreign Direct Investment. International Journal of Economics and Finance 5(8).

Bekaert, G. (2014). POLITICAL RISK SPREADS. NATIONAL BUREAU OF ECONOMIC RESEARCH.

Khan, A. U. (2005). The Terrorist Threat and the Policy Response in Pakistan. Stockholm International Peace Research Institute.

Mirakhor, A. Z. (2004). Foreign Currency Deposits and International Liquidity Shortages in Pakistan. International Monetary Fund.

MSc. Kruja, A. (2016). The Impact of Political Risk on Foreign Direct Investment. ILIRIA International Review 4(2).

Nasreen, S. (2014). Political Risk and Foreign Direct Investment: Evidence from Pakistan Economy. Lahore College for Women University.

Rajput, A. (2015). Impact of Political, Social Safety, and Legal Risks and Host Country Attitude towards Foreigners on Project Performance of China Pakistan Economic Corridor (CPEC). COMSATS University Islamabad.

Sottilotta, C. (2012). Political Risk: Concepts, Definitions, Challenges . Conference: LUISS School of Government Annual Conference 2012 "Investing in the Age of Political Risks"At: LUISS Guido Carli, Rome.

STILLER, D. F. (2015). Political risks: How to effectively mitigate political risks, deal structure, financing and political risk insurance. Clifford Chance Deutschland LLP.

Tanwir, M. (2010). Pakistani Bureaucracy and Political Neutrality: A Mutually Exclusive Phenomenon? Pakistan Development Review 49(3), 239-259.

Threlkeld, E. a. (2021). Afghanistan-Pakistan Ties and Future Stability in Afghanistan. USIP.