KARACHI: The State Bank has finally broken its silence on the momentous changes activated in the world economy following Britain’s historic referendum of June 23rd, saying in an email to Dawn that the UK and EU economies hold “significant importance” for Pakistan’s external sector.

In the central bank’s view, Pakistan’s economy is exposed to the fallout from Brexit from three major directions: remittances, currency volatility with its attendant impact on trade, and the financial markets.

“Together, these economies constituted 28.2 per cent of Pakistani exports in FY15. UK is the fifth largest source of workers’ remittances for Pakistan whereas remittances from the European Union, although smaller, are also an important source of foreign exchange for the country.”

Remittances and exports are the two largest sources of foreign exchange for Pakistan. In the past – such as the great financial crisis of 2008 – volatility in global markets negatively impacted exports, but remittances continued rising.

Matters might be a little more serious on the currency front.

“Brexit has already led to depreciation of pound against other major currencies, particularly the dollar” says the State Bank, adding that thus far the “impact against the Pak rupee has not been that significant.”

The pound has fallen from a selling price of Rs154.6 on June 23rd, the date of the referendum in which British voters opted to “leave” the EU, to Rs143 today, although most money changers are not selling on that price even though it is indicated on their boards. In the black market, pounds are available for Rs146 and above in some outlets, although that rate changes day to day.

According to a few exchange companies, the inflow of sterling in the open market has practically stopped, with all parties preferring to hold the currency in the hopes it will regain its value in a few days. This has led to shortages in the open market, with money changers advising those who have to send pounds to their children studying in the UK to send dollars instead and make the conversion there.

If the volatility in international currencies persists, it could have negative consequences for Pakistan’s exports, says the State Bank, especially if it involves a “sustained appreciation of the rupee in real terms.”

“Further, exports may also be affected with reduced demand in the wake of any slowdown in the UK economy post Brexit. Reduced economic activity and immigration curbs in the UK may also moderate flow of remittances.”

Beyond the direct impact through exports and remittances, the central bank sees a potential indirect impact through capital flows into the country.

“Brexit could also affect Pakistan’s economy indirectly via its impacts on global financial markets and capital flows. Increased uncertainty may lead to portfolio investment outflows and increased market volatility” the bank says.

Additional impacts could accrue if there is a more general slowdown in global growth, the central bank says, pointing out that any reduction in demand in Pakistan’s export markets is likely to be balanced out with lower commodity prices, especially oil. Under those circumstances, “the overall net impact may be positive for the external sector.”

At the moment though, exporters are already feeling the impact but they argue it is still too soon to say whether it will last. A few exporters confirmed to Dawn that some of their customers are already renegotiating the terms of their existing contracts, while new contracts are pricing in the different exchange rates. Sentiment in the financial community remains cautious. Most people say it is “too soon to say” what impact there will be, and a few point out that Brexit has yet to get underway in earnest.

Published in Dawn, July 5th, 2016