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July 4, 2016

Brexit — Implications for Pakistan


July 4, 2016

The world is reeling from the seismic vote by British electorate last week to opt out of the European Union. Britain’s credit rating has been downgraded; sterling has been pounded; global stock markets have gone in tailspin shedding trillions of dollars in a few days; commodity prices including oil have plummeted. Uncertainty prevails as the nations across the globe examine, forecast and visualise the final shape of things. The implications for the global system and individual nations will continue to unfold with the emerging developments after the activation of Article 50 of the Lisbon Treaty.

The British exit (Brexit) from European Union has profound implications for Pakistan due to the importance of Great Britain for Pakistan.

Britain is the third largest home to Pakistani diaspora in the world after Saudi Arabia and UAE. Around 1.7 million people of Pakistani descent live in United Kingdom which is more than the combined population of Pakistani diaspora in rest of Europe. Pakistani community in UK is relatively affluent and entrepreneurial having strong economic linkages with Pakistan; they send around $2.7 billion annually in remittances to Pakistan and are important source of FDI inflows into Pakistan.

In European Union, UK is Pakistan’s largest trading partner. Nearly a quarter of Pakistan's exports to EU (textiles, garments, leather goods, sports goods and food items) land in UK; besides consumption in UK, a significant portion is further supplied to Continental Europe.

Brexit might not have a profound impact on bilateral Pak-UK political relations but would have significant import for Pakistan at multilateral fora. At the EU institutions, where Pakistan has been traditionally reliant on British support, Pakistani diplomacy would be challenged to proactively befriend non-British influential member states where Pakistani diaspora has insignificant electoral influence over MPs.

It is believed that a UK, free from the EU, will be keen to improve its trade relationships with Commonwealth partners. IMF forecasts that by 2019, Commonwealth will overtake the EU in world's economic output. At Commonwealth, Pakistan will be outweighed by India due to the latter's large market size and economic importance.

In the wake of Brexit vote, sterling has already depreciated by 10% in value to its weakest point since 1985. A similar impact on Euro is being felt due to the worries about the impact of Brexit on the Euro Zone economy. The depreciation of pound and euro would make Pakistani exports more expensive in EU and British markets. Already, owing to the euro depreciation against dollar in 2015, Pakistan’s exports to EU decreased by 11% in dollar terms despite an increase of 9% in euro terms, thereby neutralising the GSP Plus advantage. The depreciation of both sterling and further depreciation of euro would amplify the negative impact on Pakistan’s exports to EU and UK.

As the referendum has stoked fears of a domino-effect in other Eurosceptic member states, the EU would not be keen to offer an "amicable divorce" to UK, as the sweeter the deal, the more attractive the exit would become for the other countries contemplating exit. In case of the final deal concluding on loss of UK's duty-free access to the Common Market, the significant portion of Pakistan's exports to the continental Europe routed through UK will be affected.

Pakistan's GSP Plus status could face multiple challenges. Pakistan would lose its strongest advocate at EU institutions to keep the GSP Plus status intact during periodic reviews. A fresh lobbying effort would be required to secure such unilateral concessions from the divorced UK, which may or may not be forthcoming. Once out of EU, UK will have to negotiate market access afresh with all countries of the world. Pakistan might not feature high on UK's priority list to commit its negotiating resources during the coming years.

There is a real danger of UK sliding into a technical recession. The damaging uncertainty on the final shape of the deal between UK and EU would lower investment activity and growth could slow down. The recession in UK coupled with a weakening pound could reduce Pak-UK bilateral trade and investment. If the recession triggers a fall in consumer demand in Britain, Pakistan's exports to UK will be affected. The investers may move the capital to growing economies – Pakistan may be one of the beneficiaries due to the linkages through Pakistani diaspora. Conversely, the reduction in incomes and savings ensuing from recession would reduce the surplus capital available for investment and remittances to Pakistan by the diaspora.

At present, Britain has pledged 0.7% of its Gross National Income (GNI) to development aid. Confronted with a slow/negative growth, the government may adopt an inward looking approach and cut down on development assistance to the developing countries including Pakistan. Even if UK does not go back on the promise, the fall in GNI due to recession would reduce the amount of money available for aid in real terms.

The environment in which the campaign for Brexit referendum was conducted has left the inter-racial and interfaith harmony significantly bruised. The sluggish economy, weakening currency and increase in unemployment have the potential to foment racism and Islamophobia in which Pakistani diaspora could be at the receiving end.

To conclude, the world is cognizant of the enormity of challenges which the Brexit is going to generate. Pakistan cannot afford to apathetically sleep walk into the crisis. A proactive approach is required to identify the nature of challenges and develop a dynamic response mechanism.

The writer is Joint Secretary (Exim) Ministry of Commerce

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