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Friday, May 26, 2023

UN body: Ukraine war has strongly impacted Pakistan’s economy

UN policy paper listed 12 Asian countries to face severe consequences due to their economic structure

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The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) in a Policy brief titled “the War in Ukraine: Impacts, Exposure and Policy Issues in Asia and the Pacific” warns that 12 regional countries could be hit harder because their economic vulnerability as these countries are exposed to higher energy and food prices, smaller external financial inflows, rising financial costs and a sudden shift in business sentiments.

The listed countries includes Armenia, Cambodia, Georgia, Kazakhstan, Kiribati, the Maldives, Pakistan, Samoa, Solomon Islands, Sri Lanka, Tajikistan and Vanuatu.

In terms of energy, the policy paper says Cambodia, Pakistan, Solomon Islands and Vanuatu are considered more exposed to rising energy prices than other Asia-Pacific countries. In case of both Pakistan and Sri Lanka, the external debt stock and debt service ratios exceed the threshold values. Pakistan is more exposed to external debt and banking sector, the report says.

In the wake of mounting economic uncertainty, international investors are shifting towards safe-haven markets, causing a rise in risk premiums in developing countries worldwide. Through these transmission channels, the war would result in weaker economic growth, wider fiscal and current account deficits and higher financing costs in the region.

Read more: Russia-Ukraine conflict and it’s consequences

In this view, that most Asia-Pacific countries are net energy and food importers and that food and energy items account for up to 40 per cent of the consumer price index basket in many economies, the region’s average headline inflation rose to 7.3 per cent in March 2022.

Likewise, inflation rate in Pakistan edged up to 13.4 per cent in April 2022, which is more than double the central bank’s inflation target. In addition to weighing down overall household consumption, rising food and energy prices will disproportionately affect poor households.

The paper suggested certain policy options that the countries need to adopt. First, it says that the countries should introduce at least temporarily, trade liberalization and facilitation measures for affected products as short-term policies in the area of trade and investment. Secondly, it suggests that the countries can accelerate digital trade facilitation which can help cut trade costs, shorten delivery times, and reduce losses of perishable agricultural products.

Moreover, it says that regional countries should explore sustainable fiscal and financial policy options to boost fiscal space and promote policy credibility. They can cut temporarily consumption taxes on necessary items, and expand the scale and coverage of national emergency financing mechanisms to cope with economic shocks. At the same time, public debt management practices could be enhanced to better manage growing debt stocks and benefit from lower borrowing costs.

Since the outbreak of the Ukraine war, region recorded mixed export performance in recent months, but export growth is expected to moderate in the coming months. More broadly, weaker export earnings and declining investment inflows together with adverse terms-of-trade could lead to significant balance-of-payments pressures in some countries.