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Ongoing Ukrainian Conflict: Inverse Economic Impacts on Pakistan

Russia's war on Ukraine intensifies consequently the costs and shortages of food items and energy sources in Pakistan. Although the battle is presently contained within Ukraine, it is projected that it will continue longer than expected and spread outside of Ukrainian borders.

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Pakistan’s economy will be impacted by the ongoing geopolitical tensions that are increasing in the context of the Russia-Ukraine issue, two significant agricultural providers in the global food supply chain. Ukrainian wheat and other crucial commodities have been further hindered from reaching many states by Russia’s embargo on Ukrainian ports. As a result, numerous states have already reported food shortages, and Pakistan had to locate a new source of wheat. In the event of a shortfall, the government may be forced to purchase costly wheat as the stocks will be out of service in a short time.

Russia’s war on Ukraine intensifies consequently the costs and shortages of food items and energy sources in Pakistan. Although the battle is presently contained within Ukraine, it is projected that it will continue longer than expected and spread outside of Ukrainian borders. If so, the majority of developing countries from Africa and Asia, including Pakistan, will confront significant difficulties. Pakistan has historically had cordial business ties with both Russia and Ukraine. In 2020, Pakistan experienced severe wheat shortages as a result of poor management and exports made in anticipation of a big crop. Due to this, the government was forced to permit private enterprises to import wheat in order to stabilize prices and build up stocks.

Read more: Ukraine wants stronger defense of grains export corridor

Problems for Pakistan

Pakistan is currently constrained to buy costly LNG, over the course of 2020–2021, wheat imports from the two states exceeded 2.1 megatons. In addition to raising LNG prices to a record high, Russia’s invasion of Ukraine has put a strain on the world’s supply chain. As a result, LNG companies have broken a promise in their agreements with Pakistan in order to access profitable European markets, which has generated immediate problems for Pakistan. Furthermore, Pakistan’s imports of coal, LNG, and fossil fuels from Ukraine have stopped. Therefore, Pakistanis will experience frequent energy crises amid food insecurity and obstacles to other services in the upcoming months.

Since the beginning of the war, the price of oil has increased to above $100 per barrel, and supply and development have been hindered. Future fuel price increases would be unwelcome for Pakistan’s economy since they would further deplete its foreign exchange reserves. The fact that Pakistan was importing steel from Ukraine has also badly impacted the construction industry. Pakistan has already seen significant economic consequences as a result of the intensifying conflicts between Russia and Ukraine. Prices for steel, food, raw materials, gasoline, and semiconductor chips are all sharply rising locally. As a result, there are chances of geoeconomic instability, which might lead to social turmoil and further deplete the country’s resources. Pakistan is in a complex diplomatic position due to maintaining equilibrium in diplomatic and economic relations with both Russia and the West.

Pakistan already struggles with political unrest, high inflation, and sluggish economic growth after the COVID-19 pandemic. The crisis would have a direct impact on Pakistan’s import of wheat because it comes from Ukraine and made up 39% of the country’s entire import demand for wheat during the previous fiscal year. There is high volatility in oil prices globally after the Ukraine conflict, and disruption in supply and demand is inversely affecting Pakistan’s economy, which is already in IMF overborrowing. Additionally, oil prices are probably going to increase further if Western states impose additional sanctions on Russian oil imports. A scenario like this could result in a sharp depreciation of the Pakistani rupee, pushing the State Bank of Pakistan (SBP) to tighten its monetary policies.

There is little doubt that Pakistan’s economy will be impacted by the ongoing geopolitical tensions that are increasing in the context of the Russia-Ukraine issue. Pakistan could experience worsened current account and fiscal balances, a halt to economic growth, and increased economic vulnerability amid political instability in Pakistan. A horrific number of people are dying in the war, and it will undoubtedly continue to have an effect on global trade, particularly the energy markets. This is bad news for Pakistan, a country that already struggles with political unrest, high inflation, and sluggish economic expansion.

Read more: Ukraine will soon receive US air defense systems

The United States, the European Union, and other countries have reinforced sanctions against those connected to the Russian regime. More specifically, the United States has prohibited the importation of Russian natural gas and oil, and the UK will phase out Russian oil by the end of this year. Furthermore, in order to become energy independent of Russia, the European Union, which currently imports 25% of its oil and 45% of its gas from Russia, wants to switch to other energy sources in the near future.

Energy costs are rising globally as a result of this disruption in Russian energy supplies, which are the largest in the world. This is a major setback for Pakistan, an oil-importing state that also imports various basic food commodities. This could reduce a country’s national reserves and lower the country’s purchasing power, even if it is only a supplement. This conflict has the potential to have a devastating effect, with rising electricity costs, central banks raising interest rates, consumers demanding higher wages to cover rising living expenses, companies raising prices to cover higher wages, and workforce reductions leading to job losses.

In order to ensure, its survival, the country must, in addition to strengthening regional ties, carefully assess its strategic position in regard to the regional and global context and make well-timed, and diplomatically balanced decisions that may not impact the country’s food security and energy sources. Pakistan will be forced to boost its imports in order to keep up with market prices if wheat prices rise as a result of prolonged tensions. As a result, the conflict in Ukraine is probably going to make things worse and cause Pakistan’s inflation to increase. Pakistan should take into consideration various impacts after this unending Ukrainian conflict, like a temporary ban on luxury imports and the arrangement of an oil credit facility to get through the difficult period of high oil prices, face the temporary shocks in the country’s economy, and avoid overly subsidizing the products used for energy and food purposes.

 

Mujeeb-ur-Rehman is a research fellow at Balochistan Think Tank Network. The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.