Pakistan Institute of Development Economics


Brexit not to impact Pakistan hard

Publication Year : 2016
Author: M Ali Kemal
Explore More : PIDE in Press

islamabad – The people of Great Britain voted out the pro-EU sentiments in a referendum by 52 percent to 48 percent on June 23, 2016. The voting was done to decide on Britain’s exit from EU, therefore it is in general known as Brexit.The European Union is a political economic union of 28, now 27, countries. It is a single market system which was developed through standardised rules of free goods, labour and capital mobility through Schengen visa.The 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. The 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, all main stock markets witnessed decline.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 the 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 days, though not to the extent of EU, every country will be hit by Brexit, Pakistan may not be exception to it. However, due to 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 the UK. Brexit may affect in two ways: due to depreciation in British currency people may need to send more in pound sterling, therefore there are good chances that remittances may increase while contrarily, recipient households may need to cut down their expenditures which will negatively affect our GDP growth and secondly, in case of job loss, even in the short run, the flow of remittances will be reduced to Pakistan. Therefore we may face slightly higher current account deficit 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 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, yet 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. A few other questions 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?India’s daily COVID-19 cases rise to record 379,257The 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.