Analysis Islamabad braces for negative fallout

Published: June 25, 2016
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Study reveals dearth of research to gauge inflation holistically . PHOTO: AFP

Study reveals dearth of research to gauge inflation holistically . PHOTO: AFP

ISLAMABAD:  

Britain’s decision to leave the European Union (EU) will have far-reaching implications for Pakistan both economically and politically, according to officials and independent experts.

Although Pakistan is closely watching developments in the wake of the historic referendum in the United Kingdom, economic and financial sector experts argue that the ‘country will be in choppy waters.’

Although there will be a formal reaction from Pakistan to Britain’s move in the next couple of days, economic experts say pressing issues that the country will have to grapple with in the coming weeks are how to protect its share of export earnings, foreign aid and remittances from the UK. Political analysts also foresee huge ramifications for around 1.2 million Pakistanis currently living in the UK.

“Just a few weeks after we celebrated the unprecedented victory of a person of Pakistani descent as mayor of London, we see Britain producing a diametrically opposite trend,” said Dr Ishtiaq Ahmed, Director School of Politics and International Relations at the Quaid-e-Azam University.

Ishtiaq, who is also a Jinnah Fellow at the Oxford University, said the over a million strong ‘identity crisis-ridden’ Pakistani-Kashmiri community will certainly face harsher times after Britain’s exit from EU. He added that the move will put in jeopardy Britain’s “peculiar multiculturalism creed.”

“Islamophobia will grow and all minority populations will suffer from the growth of ultranationalism,” he cautioned.

There are fears that Britain after leaving EU will introduce tougher immigration laws making it difficult for Pakistanis, especially students, to stay in that country.

Economic implications

The UK decision has immediately exposed Pakistan to many economic risks and the country may see slump in exports to the club of 27 nations and Britain, rise in prices of locally assembled cars and a slowdown in remittances.

Among the EU-bloc, the UK is Pakistan’s largest trading partner followed by Germany and Italy.

Pakistan’s auto importers from Japan and textile exporters to EU and Britain will be major losers of the UK decision. The imports of auto parts will become expensive due to appreciation of Japanese currency while the exporters will become uncompetitive due to fall in the value of British Pound Sterling and the Euro. A significant decline in oil prices will also hurt the earnings of the oil companies.

About 29% of the country’s total exports go to the EU and one-fourth of EU-bound Pakistani exports go to the UK, said Khurram Schehzad, Chief Commercial Officer at JS Global. He said that Pakistan’s exports will become expensive due to depreciation of the Euro and Pounds and beneficiaries will be India and China as both the countries will get competitive advantages over Islamabad.

Pakistan exports 7% of its total exportable goods to the UK, up from 5% of the pre-Generalised System of Preference Plus (GSP plus) status that EU granted to Pakistan in 2014 for ten years.

Any reduction in exports will have direct implications on the country’s external accounts. The current account deficit – the gap between external payments and receipts, which is already projected to widen due to Chinese imports will come under more pressure due to further fall in exports receipts.

“The GSP plus treaty will remain applicable to the UK for two more years after the UK notifies withdrawal under article 50 of the Lisbon Treaty”, tweeted Khurram Dastgir Khan, federal minister for commerce. He directed ministry officials to prepare a report on the impact of Brexit on GSP plus.

But experts said Pakistan does not enjoy the luxury of two years due to implications of currency devaluation on the country’s competitiveness. They said that in absence of any bilateral trade treaty, the country might have to find a way to deal with the UK.

The UK decision may also carry implications on remittances, which is a main source of balancing external accounts. During July-May period of this fiscal year, Pakistan received $2.27 billion remittances from the UK, which was 12.6% of the total remittances.

In recent years, the UK has surpassed the United States in terms of giving civilian aid to Pakistan. From July through March of this fiscal, Pakistan received $247 million in grant from Britain.

The current bilateral economic assistance agreement (2006-16) is due to expire in September this year, under which UK taxpayers committed 2.2 billion British pounds in assistance to Pakistan.

Published in The Express Tribune, June 25th, 2016.

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