Business Recorder (BR) Research
It is funny how history has come back full circle. In 1998, under the leadership of Nawaz Sharif, Pakistan did not compromise its nuclear programme despite strong pressure from the West and sanctions thereafter. The objective was to upgrade our security apparatus and prevent the balance of power from being shifted in India’s favour. Not that this column advocates nuclear warfare, or building nuclear arsenal at the cost of economic development, but the idea back then was to bolster our security and ensure sovereignty.
In 2015, it’s the same leadership, and yet another challenge has emerged to keep Pakistan’s sovereignty intact. However, the test in the Middle East is not as tough as was the case in 1998. Economic linkages with the GCC are currently far less than what we had with the West in 1998. Prima Facie the parliament has set an exemplary stance to uphold international peace and not indulge in someone else’s war.
Although, the premier was seemingly under great stress to honour the wishes of Middle Eastern kingdoms, as his own family and the country as a whole has strong economic, ideological and political linkages with the region. The vibes from Islamabad suggest that had the folks in Pindi nodded on sending troops to counter insurgency in Yemen, the parliament might not have been involved.
But previous proxy wars have brought nothing but ruin for this country and the armed forces are battling an existential threat within the borders. Cleaning up the internal mess serves Pakistan better than committing troops to an internal conflict in Yemen which may or may not pose an immediate threat to its neighbours.
Anyway, it may appear laudable that parliament understands these sentiments and refrained from extending further military help in the Yemen fiasco. However, prudence demands that political and more importantly economic linkages should be defining our foreign policy while prioritizing national security.
We may be slow at it but we are on the right track to diversify our trade and investment. In the first stage we primarily focused on the West for all economic ties; the next step was to add the Middle East in the portfolio and lately the focus has moved on to enhancing linkages with our neighbours especially China.
Trade:
The more we diversify; the stronger negotiation powers we will have. Forty percent of our trade in FY04 was with the West, which reduced to 25 percent by FY14. On the flipside, our trade with GCC countries has increased from 16 percent to 25 percent in the same period.
Another important region that emerged in the last decade is the Far East, especially China – its share has increased from 19 percent to 28 percent over the last decade. It is good that we are moving from the West and diversifying the risks across various regions. Diversification doesn’t mean that the overall pie is not growing – overall trade has grown by 2.5 times between FY04 and FY14, albeit constituting a shrinking share in global trade.
Within trade, the share of the GCC is expanding more in imports while our exports are largely tilted towards the West and somewhat inclined to the Far East. However, the share of exports to the West has declined from 52 percent to 42 percent in the last ten years while that to the Far East has increased from 11 percent to 18 percent. On the flipside, the share of GCC has stagnated around 13 percent.
Hence, by a mere look at trading pattern, it is evident that the Middle East (primarily UAE and KSA) is more dependent on us for their exports (mostly hydrocarbons) than us being reliant on them, although they extend these imports on a typical credit timeline of 1-6 months. It is less likely that the Middle East will decide to stop supplying oil to Pakistan given that global hydrocarbon demand is already suppressed. However, they may stop supplying oil on soft terms and that can obviously hurt us.
Also, in the less likely event that the Arabs stop supplying oil to Pakistan, alternative supplies will come at a relatively higher cost to the country.
Investment:
In terms of investments, Pakistan has never been a darling destination for GCC investors. Even in the best years of FY02-07, GCCs investment to Pakistan was less than 15 percent of the total and it remains low to date.
Back then, the West was the biggest source of FDI inflows in the country (FY07 share: 66%) and now China has taken the lead and all eyes and efforts are pointed at China. So we would not lose any major investment potential, by drawing the ire of the Middle East. Besides, all their existing ventures in telecoms and the financial sector are making good returns.
On the other hand, Pakistanis are heavily invested in real estate and other ventures in UAE. Many rich people go frequently to Dubai and spend lavishly on shopping and hoteling. The GCC air carriers flying in and out of Pakistan are adding to their profits, not ours. And the list of items that are spurring UAE economy can go on.
Remittances:
If there is any benefit that we are really getting from the GCC, it is the hefty inflow of home remittances. Remittances have grown many manifolds in the last 15 years – from $1.2 billion in FY98 to $15.8 billion in FY14. Of that tally, about $10 billion in FY14 came from GCC and its share is growing. Remittance is arguably, the only positive thing that has cushioned Pakistan against its growing trade deficit.
But can KSA, UAE and other Arab countries afford to deport more than 2.2 million Pakistanis as a reaction to Pakistan’s decision to not get embroiled in Yemen? And wouldn’t it choke their own economies? Well, the obvious answer is that the Arab countries can always get labour from India, Sri Lanka, Philippines, and so forth. These nationalities are already increasing their labour footprint in the GCC.
Gone are the days when only construction sector led GCCs economic growth, where Pakistan used to have an advantage. These economies are increasingly becoming service-led, where the aforementioned nationalities have a stronger footprint. Obviously, the GCC will not deport Pakistanis overnight. Nobody would want that kind of bad press. But in the long run, they could come up with policies that result in gradual deportation of Pakistani over the next two to three years. And if that happens, then the economic consequences for Pakistan could be tremendous. There could be an argument that we can improve our PRI efforts – i.e. increase remittance tie-ups in the US and the EU to offset the possible remittance decline from the GCC. But that too will take time to start yielding results.
Also, unlike the GCC those who go to the US or EU go either to settle or are already from relatively well to do families. Therefore their remittance inflows are usually less compared to those who are working in the GCC. This means that Pakistan’s reliance on GCC for remittance inflows will remain huge in the foreseeable future.
This is not to say that Pakistan should go to Yemen to ensure oil supply on softer terms and a healthy inflow of remittances. This country has fought enough wars for dollars. The purpose of this column is to highlight the likely economic consequences of Pakistan’s decision to stay out of the trouble brewing in the Middle East. The country’s political leadership should tread cautiously with backup plans for the economy while prioritizing national security.
This article originally appeared on April 16, 2015 in the Business Recorder (BR) Research.
