Grey swans on the horizon

Updated January 17, 2020


The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

BRITISH thinker and author Nassim Nicholas Taleb has described Black Swan events as occurrences that are highly improbable yet catastrophic in their impact. Grey swan events can be described as high-risk, moderate probability events that have the potential to either remain ‘white swans’, and hence pose no risk, or convert to ‘black swans’ with disastrous consequences. (It is important to emphasise this is my definition, and it differs somewhat from the standard ie conventional definition used in the financial markets).

While many commentators have termed the recent assassination by the US of Gen Qassem Soleimani as a ‘black swan’ event, by my definition it could be described as a grey swan since its probability was not insignificantly low, and arguably growing progressively since 2015, however discounted it may have been by the protagonists. The global, regional as well as domestic environment Pakistan faces on multiple fronts is dominated by ‘grey swans’. Here are some of the main ones.

Read more: Qasem Soleimani — the general who became an Iran icon by targeting US

Geopolitics: The risk environment Pakistan faces is dominated by geopolitical/regional risks. Three risks stand out. Chief amongst these, of course, is the threat of any further escalation between the US and Iran sparking an all-out regional conflagration. While the protagonists appear to be observing a strategic pause for now, with the balance of risks indicating both sides preferring to avoid an open conflict, this situation could change with another brazen miscalculation and flouting of international law by the US (or Iran).

The consequences for the region, including Pakistan, of yet another conflict in the Middle East involving the US and its regional allies would be disastrous. The resulting instability could last for a very long time with serious unintended consequences. At the very least, it would lead to a super-spike in the international price of oil, as well as for the wider energy cluster, the choking off of foreign direct investment and other private capital flows to, and from, the region, and the flight of capital from the region. The resulting impact on the economies of the Gulf countries will have a knock-on impact on labour markets — and potentially on remittances sent by non-resident Pakistanis (NRPs). Remittances from NRPs are almost as large as Pakistan’s export earnings, and around 60 per cent of these emanate from the GCC countries.

The overall environment is likely to remain non-benign in 2020.

The other ‘grey swan’ risk is for a war to break out between Pakistan and India. Strident fascistic nationalism in India is on the rise, and the collapsing Indian economy is making for a toxic brew. While the brave and admirable nationwide pushback from secular Indians against recent moves by the BJP government against Kashmiris in India-held Kashmir, as well as the targeting of its Muslim citizens via the CAA, may impose a measure of restraint on the launch of external aggression, the internal situation in India is providing a worrying level of casus belli for its leadership. The dangerous rhetoric from the Indian army brass is also becoming more strident, and the situation calls not just for vigilance but for international moves for de-escalation.

The third global risk may be anchored in wider geopolitics but is more economic in its immediate area of operation and impact. The US-China trade tensions are reinforcing other factors at play that have been cooling the pace of economic activity in the world’s two largest economies, in particular, China. China is not only the second-biggest economy in the world, but over the past many years has truly been the main engine of global economic growth. It absorbed nearly $2 trillion of goods from the rest of the world in 2019, or around 10pc of global exports (excluding China). It is the biggest export market for over 40 other countries, ranging from the likes of Australia, to South Korea, Taiwan, South Africa and Brazil — and among the top three export destinations for many other countries, reinforcing the direct first-order effects on the global marketplace.

Since these countries directly affected by China’s slowdown are important export destinations on their own for other countries, it amplifies the knock-on effect on the entire world economy. That in turn will mean the prospects of sluggish exports from Pakistan. One potential positive from the situation for Pakistan could be lower international commodity prices, as global demand is impacted.

Domestic politics: One potential risk that appears to be increasingly coming to the fore in recent days, especially after the passage of the extension in service chiefs’ tenure bill in parliament, is in the domain of domestic politics. The government, which has paid a significant political cost so far in furthering the IMF-led economic stabilisation agenda, appears to have expended precious political capital in seeing the army chief’s extension through. Not surprisingly, PTI’s political allies in the fragile coalition it heads have started expressing disaffection and are demanding a greater share of the spoils. At the same time, navigating the passage of the army chief’s extension bill through parliament has meant making compromises in the government’s accountability drive that could see the opposition off the hook — further weakening the government’s ability to govern.

Economy: The materialisation of the foregoing risks will impact the economy in obvious ways. Higher oil prices, lower foreign direct investment, diminished access to private capital could be compounded by the flight of ‘hot money’ invested in onshore government securities. Equally significantly, how domestic politics plays out could impact the reform impulse of the government; any weakening of the same could threaten the successful continuation of the IMF programme. The FATF challenge is another grey swan to contend with, though, overall, Pakistan appears to have made significant progress on a broad front in a relatively short period of time, and is likely to escape any downgrading of its status.

The bottom line appears to be that 2020 could see the continuation of the challenging environment the PTI government has had to contend with since taking office in 2018.

The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, January 17th, 2020