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Brexit impact on Pakistan’s economy

Published on 18th July, Edition 29, 2016

 

Though most of the analysts round the world are debating the impact, repercussions and fallout after the Britain’s decision to leave the European Union (EU) would have on global economy, yet they agree to the point that the development will heighten market uncertainty globally.

Is the United Kingdom’s exit from the EU is going to have a negative impact on Pakistan’s economy? The officials believe that Pakistan has excellent economic and trade relations with the EU and multi-dimensional cooperation in different fields under a medium term strategic framework. They strongly hope that concessions available to the country under Generalized System of Preferences (GSP) Plus status would continue either under the new arrangements worked out between the UK and EU or through bilateral arrangements with the Britain. Some analysts, however, argue that the country’s exports, mainly textile-related exports, to the EU are likely to plummet after UK exits the 28-nation trading bloc.

Pakistan’s stock market immediately reacted to the UK’s decision to exit from EU and tumbled over 1,400 points in the aftermath of UK’s referendum. The analysts are however hopeful that the country’s recent reclassification to MSCI Emerging Markets is likely to absorb the impact of Brexit crisis in the long run. It is true that global markets have also taken a toll with the UK’s decision to leave the EU. As a result of global uncertainty and concerns over a recession in UK, the global oil prices have dipped.

Bonds concern

There are concerns that how will Pakistan generate $1.750 billion through the international Eurobond and Sukuk bond in the current fiscal year 2016-17, started from July 1, after the Brexit crisis has tumbled the international debt/bond market. The country also plans to launch Eurobond in the current fiscal year to bridge financing gap on the external front.

Finance Minister Ishaq Dar believes that there would be no impact on the already launched bonds, as either the investor would wait for maturity date or exit through the stock exchange sale without having any liability on the resource of the Government of Pakistan before due maturity.

The analysts, however, argue that the Brexit would have impact on future bonds because the international investors would remain in wait and see mode. Foreign investors would be less interested especially after the country comes out of the IMF program.

Affects on export

It is also a fact that the country’s exports are only 7 percent of its total Gross Domestic Product (GDP). The exports are however important for Pakistan to increase its foreign exchange reserves and reduce its dependence on foreign debt. The burden of IMF loan would further enhance the country’s debt servicing obligations, thereby squeezing the resources meant for developmental projects. The country’s rising external debt and liabilities have further burdened the economy.

Every time, the country’s entry into an IMF program caused a significant economic slowdown and the government faced a major challenge in managing a slowing economy.

Pakistan’s textile industry accounts for two-thirds of the country’s exports. In view the growing size of the sector, the textile industry has remained the core source of foreign exchange earnings for the country. The industry, which has a potential to invest $1 billion per annum, demands a congenial environment.

Pakistan’s exports to the EU, the country’s largest trading partner, will indirectly be affected by the Brexit crisis, which raises concerns among local exporters fearing that political uncertainty in Europe and depreciation of the euro and the pound sterling could slow down their exports in the coming months. A sliding euro and pound will make the country’s exports relatively expensive, which may result in decline in demand.

 

The exporters are also concerned about the GSP Plus status awarded by the EU to Pakistan in December 2013 for the next 10 years. The country’s exports have increased over $1 billion per year due to the GSP Plus status. Will the country continue to enjoy the same benefits under GSP in the post Brexit period? Will the country be able to get the same duty concessions from the UK after its exit from the EU? Pakistan textile exports’ share to the UK was $1.2 billion out of total its $11.6 billion exports to EU during the first 11 months of current fiscal year.

Increase in exports is imperative for sustainability of external sector. In this regard, much-needed boost to Pakistani exports may come through US economic recovery and through further gains in EU’s GSP-Plus scheme.

The country mainly exports textiles and clothing products to the EU, accounting for over 60 percent of the total Pakistani exports to the EU, followed by leather products, which account for 13 percent of the total Pakistani exports. However, structural bottlenecks in the textile sector remained a major risk to exports outlook.

Future outlook not good enough

Pakistani government believes that Britain’s exit from the EU may not have any immediate economic impact on Pakistan economy urging Pakistani exporters to improve their competitive advantage to compensate for the recent fall in the value of the pound sterling.

The exporters and manufacturers are really disappointed with the way the government has handled the industry. The government should focus on enhancing the country’s competitiveness and take steps to make this sector competitive in the global market.

Despite the country’s textile industry has a potential to double its export from $13 billion to $26 billion, yet it is unable to do so due to the higher cost of doing business. The energy tariff in Pakistan is 14 cent as compared to 7.3 percent in Bangladesh, 8.5 cent in China and 9 cent in India. Reduction in cost of doing business can further provide 3.5 million additional employment opportunities in the country.

A comparison of Pakistan with other states in the region does not forecast a satisfactory future outlook of the country’s textile industry. The annual textile export growth in Bangladesh is 20 percent, India 12 percent and China 12 percent whereas in Pakistan is 3 percent.

With such speedy growth, Bangladesh has increased its share in global textile trade from 1.09 percent in 2006 to 3.3 percent in 2013. Similarly, India increased from 3.4 percent to 4.7 percent, China from 27 percent to 37 percent while Pakistan has dropped from 2.2 percent to 1.8 percent.

The country’s share may further reduced to 1.5 percent by 2020 if the sector was not made competitive in the region in respect of power supply, reducing cost of doing business and giving relief in taxes.

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