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.