Shell, which has a retail footprint and lubricants business in the country, announced plans to offload its 77% stake in Shell Pakistan following losses incurred in 2022 due to the devaluation of the Pakistani rupee, and overdue receivables. 

The oil giant’s exit is a major blow to Pakistan as the country continues to haemorrhage foreign exchange reserves and rapidly lose the confidence of foreign multinationals.

“A lot of Western companies have left already, the Americans have pulled out a lot of their firms,” says Pramit Pal Chaudhuri, head of the south Asia practice at Eurasia Group, a political risk consultancy.

Walt Disney had pulled out of Pakistan a decade ago and VavaCars, which is backed by Dutch energy and commodity trading company Vitol, decided to shut its Pakistani operations last year. US pharmaceutical giant Eli Lilly and German pharmaceutical firm Bayer exited Pakistan in November 2022 and June 2023 respectively. 

“The UK firms have really held up because they have been there for the longest time. That’s why Shell’s exit was a big shock because the company has been in Pakistan since its independence,” Mr Chaudhuri says. 

Pakistan’s economy has been battered by significant commodity shocks from the war in Ukraine, the tightening of external and domestic financing conditions, and political instability following the ousting of former prime minister Imran Khan in April 2022. 

“We are definitely seeing growing concerns from multinationals since April 2022,” says Noriko Takasaki, Asia security director at International SOS, a health and security service firm. “The increase in security issues has tested organisations, but that, coupled with the country’s fiscal policy has increased the complexity for foreign businesses to operate.”

Low growth, depleted foreign exchange reserves and high inflation have led to Pakistan receiving its 23rd bailout from the IMF. In July 2023, the fund injected around $3bn to support the Pakistani government’s economic stabilisation programme. The “stand-by arrangement” followed financial support injections from Saudi Arabia and the UAE of $2bn and $1bn, respectively, to Pakistan’s central bank only a few weeks earlier.

A band-aid solution?

Despite the relief provided by the IMF, UAE and Saudi Arabia, many multinationals see the bailout as a band-aid solution that fails to address any of the country’s underlying structural problems. 

“The recent IMF relief package is seen as a temporary measure,” says Ragyeshri Sudaroli, manager at APAC Assistance, a risk management company based in Singapore. “It provides some relief, but isn’t enough to reassure investors and foreign businesses right now because it’s only so long before companies can smoothly function in a country where the foreign exchange reserves are dwindling.”

According to Fitch Ratings, Pakistan’s foreign exchange reserves hit a 10-year low in February 2023 when net liquid reserves stood at just $3.8bn, or less than a month of imports, down from a peak of more than $20bn at the end of August 2021.

The cash-strapped central bank responded by blocking access to foreign reserves, thereby also hindering the import of manufacturing materials, which has caused a major headache for foreign firms and brought supply chains and factories to a halt.

“Many companies would run into these problems where even small amounts of money required for container movement were being blocked by the central bank,” says Mr Chaudhuri. “So companies have been forced to shut down their assembly lines one after another because of these import issues.”

Toyota closed its production plant for two weeks from July 21, citing the difficulties in importing raw materials. In previous months, Honda and Indus Motors were also forced to halt their assembly lines for an initial two weeks, but extended this several times because of continued severe supply chain disruptions.

Krisjanis Krustins, director of sovereigns at Fitch Ratings, tells fDi: “Pakistan’s current account deficit could widen more than we expect, given continued reports of import backlogs, the dependence of the manufacturing sector on foreign inputs and reconstruction needs after last year’s floods.

“However, we expect a modest recovery for the rest of fiscal year 2024 on new external financing flows, although these flows will also lead to a renewed widening of the current account deficit.” 

China: the largest investor

The economic instability has also given rise to political insecurity and rising unrest. Much of the violence has been targeted at Chinese organisations, which have become major investors in the country since the launch of the $45.6bn China-Pakistan Economic Corridor initiative in 2014. 

Beijing’s top diplomat has demanded additional security for Chinese nationals operating in the country, who have been the target of local extremists while working on a multitude of port, rail and highway infrastructure and natural resource extraction projects.

“The Chinese have been painted as the boogeyman for the insurgencies and this is a big problem because China is by far the largest foreign investor in Pakistan,” says Eurasia Group’s Mr Chaudhuri. “They are getting very nervous about the security situation in the country.”

Notable attacks include the killing of three Chinese academics and their Pakistani driver in a suicide bomb attack in April 2022. Nine Chinese engineers working at the Dusa hydropower plant were killed in a bus blast, which the Chinese embassy in Karachi labelled as a terrorist attack, one year earlier. 

China has major natural resource extraction projects in Pakistan that are primarily located in the country’s Balochistan province, which has been a historical hotbed for insurgencies. 

The province is an important source of gold, copper and natural gas resources, and China’s mining activity has been viewed by locals as exploitative with their presence seen as contributing little to local communities. Canadian gold mining company Barrick has also expressed interest in setting up a project in Balochistan, but has been deterred by the violence in the region.

“In the past 10 to 15 years, Barrick has been trying to pick up a goldmine in Balochistan, but has been running around in circles because there are so many security and political red flags involved,” says Mr Chaudhuri.

Weathering the storm

Despite Shell’s exit and a slew of other multinationals expressing concerns about the viability of operating in Pakistan, some companies will attempt to ride out the storm.

“Companies with fixed assets such as Mitsubishi and Sumitomo who have very large gas reserves in Pakistan will find it harder to pick up and leave and are in it for the long haul,” says Mr Chaudhuri. “Shell was basically retail, so it was easier for it to roll up and move out.”

This article first appeared in the August/September 2023 print edition of fDi Intelligence