Although the escalating geopolitical tension between Russia and Ukraine is thousands of miles away from Pakistan, its economic fallout has started spilling over into the geographical boundaries of Pakistan as well. Pakistan has already been buffeted by the risk of war, as local prices for gasoline, food, commodities, steel, and semiconductor chips are witnessing a sharp increase. While Pakistan is on the path of recovery from the covid-19 pandemic, the ongoing geopolitical tensions are likely to result in a general price increase, deteriorating current account and fiscal balances, and the stifling of economic growth.
Historically, Pakistan has had modest bilateral economic ties with both Russia and Ukraine in the past. In 2021, the value of trade with Russia was $711 million including $537 million in imports from Russia. Similarly, bilateral trade between Pakistan and Ukraine was valued at $800 million in 2021, with Pakistan receiving $739 million in imports. Consequently, Pakistan’s wheat import will be directly affected by the crisis since it arrives from Ukraine and accounted for 39 percent of the country’s total imported wheat in the previous fiscal year. However, the indirect cost of the crisis in terms of global energy and commodity supply chains is expected to outweigh Pakistan’s direct trade losses with Russia and Ukraine.
On the face of it, the conflict has already shaken economies across the world in numerous ways. For instance, sanctions imposed by the United States and Europe on Russia are likely to disrupt energy supplies from the world’s largest supplier. As a result of which, the energy prices have already soared to over seven-year highs. After spiraling as high as $101.95, the Brent crude futures contract lost $1.15, or 1.2 percent, to close at $97.93 a barrel. This is a major setback for an oil-importing country like Pakistan, as the commodity accounts for a sizable share of its imports. According to analysts, a $10-20 per barrel increase in oil prices over a few quarters is projected to deplete our national reserves by $1-2 billion, thus further shrinking the country’s purchasing power.
The government must take appropriate measures to protect the economy from the potential effects of the current Russia-Ukraine conflict. The economy is already under strain as a result of the government’s recent agreement with the IMF to impose harsh conditions such as the elimination of tax exemptions, an increase in the petroleum levy on fuel and electricity prices, and the removal of fiscal and monetary stimulus for the industry. A discourse with stakeholders and opinion leaders in Pakistan is required to devise a comprehensive policy to avert the likely consequences of the looming crisis
The impact of the crisis on the prices of oil, gas, and other supplies is a grave concern. Inflation in Pakistan has already surpassed a two-year high of around 10 percent, placing strain on the government combating on multiple economic and social fronts. This will further aggravate the inflationary pressure and hit the consumers badly, resulting in the rise of poverty and discontinuity in economic policies.
In case Europe opts to replace natural gas from Russia, the world’s largest gas supplier, with its LNG to meet its energy requirements then LNG prices will shoot up. This might affect Pakistan, as the economy relies on LNG to generate electricity, and the foreseen upsurge would result in an increase in local electricity costs, placing the country further under inflationary compression.
Inflationary pressure can lead to a “wage-price spiral,” in which individuals demand greater wages to meet rising living costs, inducing businesses to raise prices across the board to cover extra costs. From a macroeconomic perspective, the central bank is under pressure to raise interest rates even higher. This will exacerbate economic instability, particularly if inflation continues to rise and the central bank responds by drastically raising interest rates.
Government expenditures may reduce in real terms as a result of the price hike and disruption in the food value chain, decreasing the number of government services and development spending. Furthermore, if businesses are apprehensive that they will not be able to raise prices enough to compensate for higher wages, they may be compelled to lay off their workforce, resulting in increased unemployment. A prolonged crisis poses a greater danger of pushing the economy into stagflation, which is characterized as high inflation combined with slow economic growth.
The government must take appropriate measures to protect the economy from the potential effects of the current Russia-Ukraine conflict. The economy is already under strain as a result of the government’s recent agreement with the IMF to impose harsh conditions such as the elimination of tax exemptions, an increase in the petroleum levy on fuel and electricity prices, and the removal of fiscal and monetary stimulus for the industry. A discourse with stakeholders and opinion leaders in Pakistan is required to devise a comprehensive policy to avert the likely consequences of the looming crisis.