THE Brexit decision immediately impacted our financial markets but with low intensity and limited scope.

“As time goes on, we’ll feel Brexit waves often fondling and frolicking with our financial system and sometimes hitting soft spots,” says a former deputy governor of the State Bank of Pakistan. “In a few months the impact (of Britain’s distancing from the EU) will be visible in the entire economy.”

Soon after the Brexit vote, KSE-100 index shed 848 points or 2.22pc at the end of the trading session after witnessing a steeper intra-day decline. Most observers linked it to panic selling for no good reason and termed it just a reflection of a meltdown in global markets.

In the interbank market, pound sterling nosedived to Rs146, on the first working day after the news of Brexit went viral, from Rs155 a day earlier. “There were no significant local factors behind it except that the banks which were long in pound sterling, sold them for the greenbacks,” says the treasurer of a local bank.

In the open currency market, the sterling tumbled to Rs143.95 from Rs155.20. Here an additional local factor was also at play. “Some currency speculators were hoarding the British pound anticipating that Britain would not decide to leave the EU. As their hopes were dashed they resorted to panic selling,” according to the head of a local forex company.

“Pakistan Stock Exchange remains exposed to occasional hits of highs and lows, depending on whatever the local investors’ are made to believe, as the global markets continue to show the full effects of the Brexit decision in the next two years,” says a former chairman of the defunct Karachi Stock Exchange. “On the other hand, foreign investors might make more hasty decisions after the Brexit, sometimes benefiting us and sometimes hurting us, depending upon how individual Asian bourses attract them in the changed global investment scenario.”

“As time goes on, we’ll feel Brexit waves often fondling and frolicking with our financial system and sometimes hitting soft spots,” says a former deputy governor of the State Bank of Pakistan

The presence and penetration of foreign banks in Pakistan has weakened over the last decade and as such no direct impact of Brexit should be felt in our banking system. “But the way banks invest their foreign currency assets abroad, and even the composition of the investment basket of our central bank’s forex reserves, is going to change; though in both cases sterling-based assets don’t make up much of their investment portfolios,” says the treasurer of a large local bank well-versed with the subject.

The circumstances that led Britain to part ways with the EU were marked by a growing feeling among Britons that remaining in the fold of the EU could mean losing in the great game of changing economics less for their own weaknesses and more for others’ follies.

“Keeping this in mind, we’ll have to see now how the EU minus Britain sails in the rough waters of changing global economics and how well Britain itself fares,” says a senior official of the Ministry of Finance.

“The performance of the EU and Britain and the way they sort out issues related to trade and migration will set the tone for competitiveness between US and China, and between US, China and the rest of the world. Pakistan is a dot on the global economic radar that is destined to become more visible now. US and China stand to gain through Brexit and it is in their interest to allow us to feed on some of these gains.”

This, he says, was the crux of the economy-related discussions at an inter-ministerial meeting held in Islamabad a few days after the Brexit. The meeting, chaired by Prime Minister’s Advisor on Foreign Affairs Mr. Sartaj Aziz, noted key post-Brexit developments including the devaluation of the Chinese yuan and the ongoing race among global investors to shift sterling-based assets into dollar or bullion-based assets. About 1pc yuan devaluation is aimed at offsetting any likely negative impact in Chinese export competitiveness after the sterling hit a 31-year low.

“Now, if Pakistani exporters can increase supplies to China of semi-finished industrial goods that, after value-addition, are exported to the EU, US and Britain; and if our government succeeds in securing the continuation of GSP plus trade concessions from the UK, that is one big way of benefiting indirectly from Brexit,” according to a senior official of the ministry of commerce. It’s a separate story, that except for the first six-months after getting the GSP plus status back in 2014, our exports to the European Union have been on the decline.

The pound sterling has shed more than 9pc value in the international market since Britons voted for UK’s separation from the EU on June 23. This is going to lure Asian investors, including Pakistanis, to invest in British real estate and other cheaper assets.

One big challenge for the SBP and the government is to ensure that local ill-gotten money residing in Pakistan is not rushed there through violation of forex rules, bankers and officials of exchange companies say.

The financial sector of Britain, in particular, and its economy, in general, is currently going through an initial phase of panic and shock. “I fear that our home remittances from the UK might also decline both due to impending economic troubles there and also because Britain-based Pakistanis might be tempted to use part of their savings in purchasing low-priced local properties,” says a former central banker.

But since our labour exports to Britain have risen in the recent past, this factor may continue to mitigate any adverse impact on remittances from there for the time being.

Published in Dawn, Business & Finance weekly, July 4th, 2016