How Pakistan’s economy could take a hit from regional tensions
The news arriving from both the United States and Iran indicates that in the coming days, things may move towards de-escalation.
While President Trump maintains his stance and continues to justify the killing of General Soleimani promising economic sanctions, Iran has claimed it is initiating higher levels of uranium enrichment. The latter has also exhibited it could be a threat to US assets in the region with the Jan. 8 attack on American bases in Iraq which injured eleven US troops according to the Pentagon.
While Iran may not want a prolonged war given its current economic conditions, the evolving developments are bound to give rise to some actions and reactions by countries in the region. It is being said that once again, operations through proxies could intensify.
Limiting Iran’s nuclear program may get even more difficult as China, France, Germany, and Russia will find it hard to bring Iran back for dialogue in the near future. For Pakistan, a key priority is to see the Afghan reconciliation process become a success which in turn brings greater peace to the region as a whole. Achieving this was never possible without Iran and will now get even harder.
But it is not just Afghan peace which is at stake here from Pakistan’s perspective.
Islamabad is finding it hard to keep the economy stabilized and to find a path towards economic growth and job creation in the medium to long term. Any regional disturbances could affect this pursuit through several channels. To start with, a volatility in oil prices could result in balance of payments implications for Pakistan. In fiscal year 2018-19, the country had imported $14 billion worth of oil and petroleum products. Some portion of this was also on deferred payment facility, allowed to Pakistan given its friendly relations with Saudi Arabia.
Of greater concern are Pakistan’s imports from the region which also include oil, gas, raw material and machinery for industry. Last year, these imports were registered at $14.6 billion. In the event of regional instability, finding alternatives for such a large value of imports could be problematic.
Dr. Vaqar Ahmed
Any downslide in the GCC economic performance could also have implications for Pakistani workers abroad and remittance inflows. According to official estimates, more than 2.2 million Pakistani workers are in Saudi Arabia, with another 1.2 million in UAE. Pakistani workers are also present in Qatar, Oman, and Bahrain. During July to December months of ongoing fiscal year 2019-20 (FY20), these workers had collectively contributed $6.1 billion, to the great relief of Pakistan’s economic managers.
Several Pakistani private and public companies enjoy foreign investment from investors of Middle East origin. Prolonged tensions in the region also mean that the ability of GCC investors to engage in the region gets hurt as it makes it difficult for them to make calculated assessments of the risks and challenges to assets and profits. During July – December FY20, GCC countries contributed $32 million to overall foreign investment in Pakistan. These contributions arrived mainly from Bahrain, Saudi Arabia and the UAE.
Some of these countries are also Pakistan’s major trading partners. Pakistan’s exports to Middle Eastern countries during 2018-19 stood at $2 billion. Some of this merchandise also went to Iran and Iraq, where the situation could remain volatile in the coming days. Of greater concern are Pakistan’s imports from the region which also include oil, gas, raw material and machinery for industry. Last year, these imports were registered at $14.6 billion. In the event of regional instability, finding alternatives for such a large value of imports could be problematic.
Both Saudi Arabia and UAE have also been approached by Pakistan for securing support on the matter of Financial Action Task Force (FATF) – closely looking at Pakistan’s promise to put in place anti-money laundering and counter-terrorist financing measures. It is important for the country’s image and economy to come out of the FATF grey-list at the soonest. This, however, also requires a diplomatic push by friendly countries in the region which have influence in FATF’s International Co-operation Review Group.
While Pakistan has made it clear that it will not join any war in the region, it still remains to be seen if it can carve a role for itself and help mitigate US-Iran tensions. This is far from easy as several believe that Pakistan is too strangled up in its own economic problems and may not be able to position itself well enough in the conflict.
– Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.