The swift and startling takeover of Afghanistan by the Taliban in the wake of the US-backed Ashraf Ghani regime in Kabul is causing concern not only about the war-ravaged country’s future but also about its potential implications for Pakistan’s economy in the short- to medium-term. Even though the return of the Taliban will likely affect all regional economies, Pakistan was the immediate focus of international investors as indicated by rising yields of its dollar-denominated Eurobonds in the wake of the quick collapse of the Ghani administration.

Though it is too early to predict the economic spillover of the Taliban’s return to power after 20 years in regional countries like Pakistan, serious concerns remain. While a stable and secure Afghanistan is projected to work in Islamabad’s favour, the comeback of the Taliban is not going to be trouble-free for Pakistan with chaos in the neighbourhood triggering risks of an influx of refugees and insecurity spillovers.

“The Taliban takeover in Afghanistan has several unanswered questions… about the shape of the future government and its acceptability to the international community, and whether the Taliban will keep their promises (made to the world),” Intermarket Securities analyst Raza Jafri wrote in a note on the change in Kabul for the investors.

Of the immediate concern for Pakistan, according to him, is the impact of the disruption in bilateral trade and the possible influx of Afghan refugees. Of medium-term importance is the possibility of a spillover of insecurity from Afghanistan, which will have (serious) implications for Pakistan’s security conditions, with the hard-fought gains over the last five years vulnerable to threats from the banned Tehreek-e-Taliban Pakistan (TTP).

The surge in the bond yields immediately after Kabul’s capture indicates that global investors are feeling jittery; it’ll increase the cost of future debt Islamabad plans to raise from international markets

Another analyst, who sought anonymity because of restrictions from his employer, says the potential implications of insecurity in Afghanistan and the Taliban’s failure to address the valid concerns of the world on political and human rights of Afghans, especially women and girls, could be huge for Pakistan. “There are already 15 million internally displaced people in Afghanistan and the deterioration of the security conditions owing to the disagreement of the Taliban on a broad-based, inclusive government could push millions into Pakistan. That will place a punishing burden on the economy and the external sector,” he argued.

Further, he is of the view that the security spillovers will have a long-term impact on investment sentiments. “The surge in the bond yields immediately after the Taliban retook Kabul indicates that the global investors are feeling jittery about the situation; it’ll raise the cost of future debt Islamabad plans to raise from the international markets to boost its reserves.”

In addition to the refugee and insecurity spillovers, he believes Pakistan is facing a difficult situation with the US and other western powers. “If we’re suspected of somehow endorsing the Taliban and their actions against their opponents or violations of human and women rights, it would make it difficult for Islamabad to access multilateral dollars and lift debt from the international bond markets. This will also bring the fiscal and external sectors under immense stress,” he contended.

Almas Hyder, a businessman and chairman of the Engineering Development Board, is quite optimistic about the situation, however. “The collapse of a pro-India regime in Kabul and the ascendancy of the Taliban has reduced security risks for Pakistan. Once the present transition period is over and stability returns to Afghanistan, we will be able to significantly increase exports (to Afghanistan) besides accessing the Central Asian markets. Once the reconstruction work starts there, Pakistan will also have a big role to play with China leading the way to fill the void created by the American pullout from that country.” He believes that the Taliban’s comeback has made Pakistan strategically more important to the US, implying Pakistan would continue to receive multilateral dollars.

Another businessman, who sought anonymity, warns that the fears of insecurity spillovers into Pakistan, the resurgence of the terrorist groups linked to Tehreek-i-Taliban Pakistan and the arrival of refugees are well-founded. “We can escape these consequences of the regime change in Afghanistan only by helping the international community convince the Taliban to agree to the formation of an inclusive, secular government representing different groups and ideologies.”

Fahad Rauf, head of research at Ismail Iqbal Securities, does not see much trade or reconstruction opportunity in Afghanistan any time soon. “There will be no aggressive development in Afghanistan or a massive jump in trade between the two countries unless the Afghan economy also picks up,” he argued. Nevertheless, he agrees that the establishment of a pro-Pakistan government in Kabul will make Pakistan, especially Balochistan, securer, which will help complete China-Pakistan Economic Corridor projects in that province besides attracting investment in oil & gas exploration along the Pak-afghan border. “The greater involvement of China, Russia and Pakistan in Afghanistan will be a positive for that country’s stability and development. And if China invests there it will be good for Pakistan as well.”

He does not agree with the suggestion that the West will isolate Pakistan because of Afghanistan. “Pakistan has already announced to go along with the international consensus when it comes to recognising the new rulers in Kabul. Pakistan also wants peace there… just like the US and the rest of the world. So I don’t think we will be marked out by the US.”

Published in Dawn, The Business and Finance Weekly, August 23rd, 2021