Citing “a number of positive developments over the course of the past 12 to 18 months,” MSCI said it would include Pakistan on its 2016 review list.
News that Pakistan is being considered for inclusion in the MSCI emerging markets index will be seized upon by a government desperate for international recognition of what it says are its achievements in stabilizing the Pakistani economy.
The government of Prime Minister Nawaz Sharif, who came to power in June 2013, inherited low growth, high inflation, a foreign-exchange reserve crisis and crippling electricity shortages. Since then, inflation has dropped sharply and foreign exchange reserves are more comfortable.
The government is now on a mission to boost economic growth from the anemic 3% that it inherited to around 7% by the end of its five-year term. The IMF expects GDP growth to hit 4.3% this year and rise to 4.7% in 2016.
Pakistan has already achieved recognition among frontier-markets analysts, including Renaissance Capital, which describes the country as “the best undiscovered investment opportunity in emerging or frontier markets.”
However, considerable challenges remain. The country is woefully short of electricity, for example, while plans to seriously boost the paltry tax revenues are also yet to come to fruition.
Tax revenues currently stand at around 10% of GDP.
The IMF, which rescued Pakistan with a $6.6bn loan program in 2013, agrees that progress is being made. The multilateral said last month that “strong implementation of reforms… will transform Pakistan into a dynamic emerging market economy.”
Pakistan is banking on help from China, which has a $46bn investment plan intended to address the country’s energy deficit and put in place other infrastructure for industrialization that it is hoped will change Pakistan’s economic trajectory.
The Karachi stock market has delivered stellar performance in recent years. Since the May 2013 election, it has gained more than 70%. News on the possible inclusion in the emerging markets index—a decision on that will be made by MSCI next year—had little immediate impact on the market on Tuesday.
Pakistan was last in the MSCI emerging markets index in 2008 and brokers said its re-inclusion would be positive.
“Not only size of passive fund flows will increase, many large [emerging markets] funds may return back to Pakistan,” Karachi brokerage Topline Securities said in a note on Tuesday.
Additional reporting by Dan Keeler.
