PAKISTAN will largely escape the effects of the escalating eurozone debt crisis that is dragging down the world economy. Still, the crisis is likely to leave its marks on Pakistan’s fragile economy.

“Frankly, I don’t see the eurozone crisis creating a major problem for Pakistan’s economy, at least not in the immediate future. Our exchange rate is under pressure due to growing fiscal and current account deficits rather than because of a weakening euro,” says Mohammad Imran, financial and capital market analyst at a bank.

“But the economy may slow down further, and foreign official (bilateral and multilateral aid, grants and loans) and private capital flows and the workers’ remittances could take a beating going forward. Our exports would also suffer if the demand in the eurozone dips and euro loses further ground against dollar,” he argues.

While multilateral and bilateral official flows to Pakistan have fallen sharply, foreign direct investment has dropped to $666 million in first 10 months of this year to April from $1.2 billion last year. Remittances have nevertheless grown to $10.87 billion from $9.05 billion a year ago, propping up foreign exchange reserves. The government also fears the eurozone crisis to impact country’s trade growth. The eurozone accounts for about 22 per cent of the external trade and, according to the Economic Survey of Pakistan 2011/12, the problems in this area can impact both volume and terms of trade. Consequently, the country’s current account, projected to widen by 1.7 per cent of the size of the economy at the close of the current year on the back of rising trade deficit, is likely to come under more pressure.

Trade imbalance for the July-April period was recorded to have expanded to $12.68 billion from $8.49 billion last fiscal, mainly because of soaring oil and food import bills.

“Despite global slowdown, Pakistan has managed to maintain its exports during July-April to last year’s level, which saw a phenomenal growth. Remittances remained buoyant and estimated to reach close to $13 billion, up by 16 per cent from a year ago, at the end of the fiscal on June 30.

Recessionary trend globally have, however, impacted capital flows to Pakistan. Current account balance was affected due to sharp increase in oil prices and import of 1.2 million metric tons of fertilisers,” says the survey.

It argues that Pakistan’s economy is very closely linked to the rest of the world due to its high external sector exposure. “Several countries of the eurozone are important trading partners of Pakistan. As such, any untoward development in these countries could have a substantial negative impact on the economy of Pakistan. A contraction or stagnation in economic activity in the global economy can potentially affect the level of our exports, FDI and home remittances adversely.”

Ijaz Khokhar, chief coordinator of the Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA), is not worried about the impact of eurozone crisis on our textile exports to the 27-nation EU bloc. “We do not work for brands in Europe. Nor do we have our brands selling there. Our exports are low end textiles and I don’t think the crisis is going make much of a difference for us,” he argues.

He says he is worried more about energy shortages at home because “our buyers are reluctant to place orders for fear of delay in shipment due to energy crisis here.” Another factor that can hurt Pakistan’s value-added textile exports to Europe and elsewhere is the unavailability of raw materials, he claims.

“The big groups of spinners and weavers are holding back their stocks to raise their prices as cotton plunges to new lows. This has created an artificial shortage of raw material for us and we are finding it difficult to meet our orders,” he alleges, saying the government should create a buffer stock of cotton to intervene in the market when such a situation arises.

A banker, who requested anonymity, says the eurozone crisis has started to hurt Asian economies like China and India as well, slowing growth there and bringing their exchange rates under pressure. If this trend spreads to major Asian economies and if China, which last week cut its interest rates to spur growth, is hurt by the crisis, Pakistan will not be able to escape its negative impact.

“If any one in the eurozone countries or the US or elsewhere was considering to invest in Pakistan, he must have either abandoned or delayed his plans. Proposed cuts in government spending in the member countries of the bloc will depress demand there and possibly affect our exports. Similarly, growing job losses could affect the workers’ remittances. Therefore, we should not take the crisis lightly. It is time we started addressing our macroeconomic problems seriously and fixing structural imbalances like electricity shortages to push fresh investment for fostering economic growth,” he suggests by way of avoiding the possible negative effects of the eurozone financial crisis.