Syrian conflict: implications for Pakistan’s economy
By Usman Shah Thursday, September 05, 2013
While the Congress votes today (Thursday) on the possibility of the military strikes on Syria, speculation has already dented the economy of Pakistan.
“No matter how the story unfolds in the Middle East, the fallout is largely negative for the global economy,” an official at State Bank of Pakistan (SBP) stated.
Global oil price shot up to $115 per barrel when the supply from the Middle East contracted as Libya’s rebel guards are on a strike and blocked the main export terminal bringing the exports down and production below 150,000 barrels per day from 250,000 barrels per day from the country. Amid chaos in the Middle East and uncertainty regarding the military strikes and the UN sanctions on Iran and Syria, the oil supply has contracted considerably causing global oil price to shoot up.
“The recent hike in oil prices is mainly due to the political instability and anxiety about the war in the Middle East,” the SBP official said while talking to Daily Times.
A short while ago, the government of Pakistan had transferred the increase in the oil price to the general public. This was the third increase in oil price since the Pakistan Muslim League-Nawaz led government took over the helm of affairs. The government came under severe criticism from the opposition parties and they termed it as an ‘anti-public step’. Imran Khan criticised the government stating that such repeated price hikes continue to burden the ordinary citizens while most of the rich continue to evade their responsibility of paying taxes.
“The unsteady rupee and elevated global oil price will further put pressure on the government to increase fuel prices,” the sources said.
“The escalation of oil price will have a negative impact on the economy overall. The impact is inflationary as it will enhance the import bill, widening the fiscal deficit,” an analyst said.
Adding fuel to the fire is the fact that the rupee is constantly depreciating which is creating economic difficulties for Pakistan. In the month of August, the dollar increased by 2.56 percent to Rs 104.50 for buying against the local currency in the interbank market and 1.55 percent to Rs 104.60 for buying in the open market which is a wakeup call for the dignitaries who are at the helm of affairs.
Since the news of the possible military strike against Syria has erupted, the dollar continued to set new highs against the rupee from the start of September and it has already achieved Rs 105 mark in the open market.
Critics have also shown their concern on the massive government borrowing during the first 100 days of the government and termed it disastrous for the economy.
“Superfluous government borrowing from the SBP has brought the PML-N led government under severe criticism. The government has borrowed a record Rs 594 billion from the central bank during the first 45 days of fiscal year 2013-14, which is highly inflationary. This has added to the steep devaluation of the rupee,” an analyst said.
Recently, the government reimbursed the International Monetary Fund (IMF) an amount of $393 million as part of loan facility repayment. However, the government has to payback IMF an amount of $4.4 billion out of which $3.3 billion is due in FY14 due to which the local currency is under constant pressure.
With 8.0 percent tax-to-gross domestic product ratio, lack of foreign direct investment, poor growth rate, increasing inflation and expanding fiscal deficit, market pundits anticipate the rupee freefall to continue and will hit Rs 110 mark in coming months in both the markets.
The Syrian conflict has also hampered the sentiments of the people of Pakistan as they don’t want to witness another tragedy similar to Iraq and Afghanistan in an already effected Syria. The public backlash against the west’s Syria policy has the potential to enrage Pakistanis; resulting in vandalising public property and bringing the economy of Pakistan to a standstill.
However, the IMF’s Extended Fund Facility loan package is expected to approved on Wednesday after the board meeting which will create pathway for dollar inflows.
“It is believed that the next loan from IMF will be soon in September. This would result in the dollar influx and will give the government breathing space to combat the economic difficulties and will also help the country to recover from the loss caused by speculation over Syrian conflict,” the SBP official expressed.
Showing concern over reducing foreign reserves, he said, “The temporary ban on the gold import was not helpful to prevent rupee devaluation. However, the government has decided to facilitate jewellery exporters with duty-free imported gold on the condition that the gold is re-exported after conversion of the gold into jewellery. This would help us increase the foreign currency reserves and curb the current account deficit.”