Beyond conventional diplomatic efforts, Pakistan has yet to undertake a comprehensive national-level initiative to meticulously monitor, analyse and prepare for the potential ramifications of the escalating cycle of retaliation in the Middle East.

These potential effects encompass a surge in oil prices, displacement of the Pakistani workforce in the Middle East, deferment of work on the already-delayed Iran-Pakistan (IP) pipeline project, flight of investors from the region, supply chain disruptions and an increase in the logistic costs of trade.

The hierarchy in the ministries of commerce, finance, planning, and foreign affairs was approached to shed light on the country’s strategy to mitigate the economic repercussions of the unfolding situation in the Middle East. Given the challenges faced by Prime Minister Shahbaz Sharif’s government in maintaining stability, curbing inflation, and stimulating growth, this insight was deemed crucial.

Officials from the relevant ministries appeared reluctant to provide insight, as they lacked calculated projections regarding the potential impact on trade, investment sentiment, remittances, balance of trade, currency valuation and industry in the event of supply chain disruptions. Some indicated, by phone from Islamabad, that they were unaware if the government had assigned anyone to research the subject.

Given its reliance on energy imports and large expatriate population, Pakistan stands to suffer more than other Asian countries as tensions in the Middle East rise

In its formal response, the spokesperson’s office of the Ministry of Foreign Affairs stated, “The question regarding the economic impact of the escalating Middle East crisis on Pakistan falls under the purview of the Ministry of Commerce, and they may be consulted for further clarity.”

The global oil market initially surged but quickly stabilised following Iran’s retaliatory attack on Israel, suggesting that global efforts to prevent further escalation might be effective. However, some analysts caution that crude oil prices could still surpass the $100 per barrel mark soon, with current prices hovering around $83 per barrel and Brent at $87 per barrel. Such an increase could have grave implications for Pakistan’s balance of account and inflation.

Middle East conflicts have disrupted the mobility of both people and goods. Shipping sources indicate that sea and air freight rates and insurance costs for commercial containers may rise by five to 10 per cent. This increase is attributed to commercial liners opting for longer routes and higher insurance premiums due to elevated risks.

Babar Badat, former president and current board member of International Federation of Freight Forwarders Association and a recognised logistic expert, was not surprised at the inaction. “Various governments in Pakistan, irrespective of the leadership, have not been able to address the subject of international logistic capabilities, including shipping capacity.

“There is no national plan nor strategy to develop this area, and when we face rising freight costs, we spring into action post-event. Eventually, the nation ends up paying the price,” Mr Badat said, commenting on the lack of preparedness to deal with the unfolding situation.

He anticipated another freight cost increase that would impact Pakistan’s trade, both imports and exports. He couldn’t rule out supply chain disruptions, which could harm Pakistan’s economy, given its heavy reliance on imported raw materials and parts for most industries. He lamented the government’s lack of interest in the crucial logistic sector, especially shipping.

“Can you name any other country as large as Pakistan with a 1,100km coastline without a single container ship? Today 95pc of trade (excluding bulk) is carried in containers. Pakistan’s trade, therefore, is 100pc dependent on foreign carriers.”

Talking about cross border trucking he said, “While our national fleet may be around 3,00,000 trucks, internationally compliant trucking fleet is very small. Besides, most countries have a significant (40-60pc) portion of their exports within their region. Our regional trade stands at barely 6pc. The lack of a regionally compliant trucking fleet inhibits the potential for trade growth in the region.”

“Pakistan is one of the few countries which does not have transport and logistics ministry, therefore lacks a focal forum to bring these issues to the fore,” he added.

According to media reports, 77pc of Pakistani expats (4.7 million) reside in the Middle East. In an extreme scenario, war fears could trigger reverse migration. Even in less dire circumstances, unrest, growing market anxieties and suppressed economic activity may reduce the quantum of remittances from the region — a crucial resource for Pakistan’s foreign exchange reserves, the current account and rupee valuation. Over half of the country’s nearly $30 billion annual remittances originate from the Middle East.

Amid threats of tougher Western sanctions on Iran following recent strikes, the fate of the IP project, seen as a major step towards achieving energy security, is likely to be deferred once more to steer clear of the pitfalls of collaborating with a nation sanctioned by the West.

Furthermore, footloose investors and fund holders are reportedly weighing the risk of further retaliations, with many opting for more secured options in stable locations. The more apprehensive investors are moving funds to safe havens — hard currencies, government securities and gold.

Without prior background research, the topic of debate regarding the strategy was not even raised in official and business circles. While many analysts and fund managers downplayed the potential threats to Pakistan’s economy, a few indicated that the situation could once again thrust Pakistan in the global spotlight. They referenced the Soviet Union’s 1979 Afghanistan invasion and the 2001 United States terrorist attack in this regard.

“If the government strategically leverages Pakistan’s unique position adjacent to Iran and holds influence in Saudi Arabia and the UAE, it could potentially assume a diplomatic role in the troubled region on behalf of the developed world. This could yield rich dividends for Pakistan,” suggested a keen watcher who preferred to remain anonymous.

Most business bodies expressed discomfort with the government’s apparent lack of foresight regarding the escalating regional crisis. They fear that Pakistan, due to its geography and close commercial and diplomatic ties in the region, maybe more adversely impacted than other Asian nations.

Abdul Aleem, Secretary General of the Overseas Chamber of Commerce and Industries, highlighted the impact saying, “Given Pakistan’s heavy reliance on energy imports from the region, any disruption in oil could lead to higher domestic energy prices, affecting industries, transportation, and overall economic activity.

“Additionally, the presence of a significant number of Pakistani expatriates working in Gulf countries means escalating tensions may jeopardise job security and remittance inflows.

“Moreover, regional peace is crucial for attracting foreign direct investment (FDI), and any disturbance could negatively impact FDI inflows across the region, with implications for the balance of payments and exchange rate stability.”

Ehsan Malik, CEO of Pakistan Business Council, echoed similar sentiments, stating, “The anticipated rapid decline in inflation, followed by a reduction in the policy rate, may be tempered by the rising cost of oil due to the recent escalation of tensions in the Middle East.”

The background research for this story unveiled a fresh cycle of volatility and uncertainty in global markets following Iran’s pre-announced direct strikes on Israel.

Published in Dawn, The Business and Finance Weekly, April 22nd, 2024

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