BREXIT – Implication on Pakistan

People of Great Britain voted out the pro EU sentiments in a referendum by 52 percent to 48 percent on June 23, 2016 which was called by the PM David Cameron who wanted Britain to remain in EU. As a result he announced his resignation. The voting was done to decide on Britain Exit from EU, therefore it is in general known as Brexit.

The European Union is a political economic union of 28, now 27, countries. Initially Germany, France, Belgium, Italy and Netherlands formed the first federation of Europe after the World War II in 1952. Later on England, Ireland and Denmark joined the group in 1973. The last country which joined EU was Croatia in 2013.

The EU is a single market system which was developed through standardized rules of free goods, labor and capital mobility through Schengen Visa. They have common trade policies and several coherent policies of agriculture, fisheries, and justice and home affairs. It is governed through the 7 different institutions.

EU member countries have GDP worth of €16.63 Trillion and their intra EU trade is €2.8 trillion. Due to joint trade agreements trade share among EU countries is higher. UK is one of those countries whose exports to EU member states did not change much in the last one decade but imports have increased by €40 billion.

Economists, financial experts and bookies were predicting different impacts of Brexit on Britain, EU and other countries which are economically and financially integrated with Britain and EU. During the first day of BREXIT polls, stock markets of all the countries had witnessed decline. UK stock market declined initially by 8 percent, though recovered later on but overall it declined by 3.15 percent in the entire day. Similarly Nikkei index down by 7.9 percent, while Hang Seng by 2.9 percent, Euro index by 8.6 percent while Dow index by 3 percent. Pakistan stock exchange reacted to Brexit very strongly today at one point of time it declined by 3.7 percent but later on recovered 1.5 percent to net loss by 2.2 percent.

Second panic attack hit UK’s currency which depreciated by 9 percent in one day. In short to medium run, depreciation may lead to improvement in trade balance until prices of exports do not increase. Apart from depreciation since UK’s market inside the EU was quite integrated with EU member countries thus there is a fear that UK may face repercussions of moving out of EU. Though it is fair to assume that companies which are currently trading their products with Britain will not stop their trading abruptly unless there are some bureaucratic hurdles are attached to Brexit.

Considering the level of integration these day, though not to the extent of EU, every country will be hit by Brexit, Pakistan may not be exception to it. However, lack of open policies as well as constraints to investment in Pakistan the effect on Pakistan may not be very substantial, nonetheless, few target areas need to be studied. On the other hand other open economies are expecting more business with Britain after Brexit.

Pakistan receives 13 percent of remittances from UK. Brexit may effect in two ways (i) Due to depreciation in exchange rate people may need to send more in Pound Sterling, therefore there are good chances that remittances may increase. Contrarily, recipient households may need to cut down their expenditures which will directly affect our GDP growth and (ii) In case of job loss due to Brexit, even in the short run, the flow of remittances will be reduced to Pakistan. Therefore we may face little higher current account balance than otherwise.

In addition to that, Pakistani exports to EU are 29 percent out of which 7 percent goes to Britain. Due to massive depreciation of British currency, which may take 6 months to go back to its old value, and possible decline in overall income of the British people (British GDP) Pakistani exports are less likely to increase unless Pakistan exchange rate is also depreciated which is currently overvalued. If in case, Euro depreciates as well then Pakistan may face decline in their exports to EU, which would be more alarming. Nonetheless, Pakistan will keep on enjoying GSP plus status to EU.

Having said that, there are good chances that due to depreciation Germany, France and other EU member countries may not to be able to exports their products to Britain. Thus Pakistan has good chances to exploit this opportunity and increase its exports to Britain. Nonetheless, it depends on the products UK imports from EU as well as the negotiations between the two governments on the tariffs.

Although the amount is not very significant, nevertheless, share of FDI from UK is around 6 percent in total FDI we receive every year. Decline in the economic activity may reduce FDI from UK to Pakistan.

Britain is also involved in giving aid and grants to Pakistan, which could be lessened due to overall Britain’s fragile economic situation at least for a year. However, 18 billion pounds Britain is saving from Brexit, a chunk of it could be spent on aid and grants.

Moreover, students who go for higher studies to UK may not get temporary jobs due to lower economic activity as well as UK/EU scholarship may be reduced for the students due to economic turmoil. Few other question which need answers are; how will it affect Pakistani businessmen living in UK who were involved in trading with EU? What will happen to the Pakistan immigrants to Britain who were on Schengen Visa? Are we expecting more exits from EU? Will there be any split in Great Britain?

The aforementioned are some of the issues which Pakistani government needs to address by either negotiating with British high commission and/or British Government to avoid possible hitches.

Setting high targets again

Appears here http://nation.com.pk/E-Paper/Lahore/2016-06-04/page-4/detail-0

Islamabad - Finance Minister Ishaq Dar revealed Rs4394 billion federal budget of 2016-17 yesterday. Besides, Rs. 800 billion federal PSDP the major chunk similar to that of last year goes to interest payments and defense payments.

It is a mere estimation of taxation and expenditures. Every year government takes few measures to address the prevailing major issues in the economy. Three major problems the government has been facing since it took over are terrorism, energy crisis and stagnant economic growth.

Economic growth is linked with the first two issues, therefore, in the past two years, the government tried its best to allocate a big chunk of funds to eradicate terrorism and mitigate the energy shortages. It is worth to mention here that the war on terror has separate budget than the budget allocated on the defense expenditures. Due to better energy management the government has controlled loadshedding especially in bigger cities. Nonetheless, it won’t be wrong to say that due to energy crisis economy is performing less than the potential.

In this budget, Rs. 432 billion are allocated in PSDP for electricity generation and distribution. It includes PAEC allocation for Chashma Nuclear Power Projects but it did not include the CPEC PSDP fund. It is expected that due to the projects which were set up in previous few years almost 5000 MW electricity will be added to the national grid. This will lessen loadshedding to very short duration. Moreover, it will mark a big impact on the manufacturing sector which is currently deprived of due to energy shortages.

Last year was among the worst year for the farmers due to negative growth of agriculture sector. Therefore, in this budget special initiatives are taken for the agriculture sector. Among them reduction in the price of Urea and DAP, abolishment of sales tax on pesticides and reduction in the electricity price in peak hours are the main policies that will probably reduce the cost of production. The only concern is the effectiveness of implementation that farmers will get the benefits of reduction in prices of these products.

In addition to that, duty rates on cold storage have been abolished. This implies that supply chain process of food from farm to market will be improved. In addition to that, this also implies that if cold storages are properly utilized then problem of food security will be reduced by minimizing the food wastage.

Exports recorded a decline in the last year which was surprising on one end because of having GSP plus status, however, it was not contracting the expectations due to energy constraint and exchange rate forced overvaluation. Therefore, the government has tried to give incentives to those industrial sectors which are active in exporting their products. Especially textile sector will get maximum benefits from the announced policies in this budget. Nonetheless, it is also believed that not all the products in the textile sector will be benefited from the policies announced in the budget.

PSDP has included several infrastructure projects which will directly affect the employment in the country. Moreover, allocation for Diamir, Bhasha and Bunji Dams is a positive sign that people will get employment in those projects which will be completed by 2019 and beyond.

Withholding tax, which was started in 1990s became favourite of the Finance Minister. It seems he knows that this tax can be used in various ways to include people in the tax net as well as to get maximum revenues. Nevertheless, the former objective has not been achieved for the last three years but the later objective, which is a short term gain, is successfully achieved. The budget reveals several higher tax rates for non-filers and lower tax rates for filers. This will eventually hurt a common man and above middle class person who wants to earn little more money but is afraid of filing tax returns due to the behaviour of FBR personnel. Therefore, if the objective is to get more revenue each year then the policy is achieving that goal otherwise it is a bad policy to adopt.

Reduction in corporate income tax by one percent is a shaggy policy. Corporate sector does not feel privileged by paying 1 percent lesser tax than in the previous year. They will feel good if the government reduces the rate by 5 to 10 percent. Nonetheless, there is always a fear to get lesser revenue if the rates are slashed by a bigger margin.

Apart from economy and taxation, one of the important aspects of budget is the relief for common person. The present government is known to be “industrialist friendly government”, however, they came up with few policies which will ease the burden of common person. One of the policies which have already discussed was agriculture policy which will reduce the prices of agriculture products due to decline in the cost of production.

In addition to that 10 percent raise in the salaries of government employees, merging the 2013 and 2014 ad hoc relief allowance with basic pay, 10 percent raise in pensions and 25 percent increase in pension of those who are more than 85 years of age are few initiatives which help government employees.

Beside government employees, the budget of BISP is raised to Rs.115 billion and number of beneficiaries will be increased. Although total anticipated number of people who should get benefit from BISP program is higher but every year more and more people are included in the pool. Minimum wage is increased to Rs.14000 for the informal sector, however, how much actually they will get is always one of the major concerns.

Overall we can call it “agriculture budget” even though there is no policy device for the cotton crop apart from reduction in the duty of pesticides. However, it is hoped that in the next fiscal year economic activity will be kicked off due to a better energy situation. In addition to that similar to that of last year, Mr Dar is trying his best to collect revenues from the non-filers’ pockets. Above all, even though there is some relief to government employees but there isn’t much for a common man in this budget.