The complete isolation of conflicted, war-ravaged Afghanistan spells disaster for the country remains reliant on foreign aid for its very survival. Security and political dimensions aside, the economic impact of the change in Kabul seems to have stunted the recovery in Pakistan.

The capital market meltdown, depreciating currency, drop in investment and growing anxiety in the commodity markets are initial signs of the economic distress in Pakistan. If the world fails to sense the gravity of the worsening situation, Afghanistan could descend into chaos threatening peace and recovery in Covid-battered Pakistan and the world at large.

According to a western media network, Afghanistan’s economy was already in shambles. The supply line disruptions, owing to sanctions, have pushed up food prices by 30 per cent and fuel prices by 40pc since the Taliban assumed control on August 15.

Prime Minister Imran Khan highlighted the destabilising Afghan situation in his speech in United Nations General Assembly last week. He made a case for recognising the Taliban government and lifting sanctions. “We must strengthen and stabilise the current government for the sake of the people of Afghanistan,” he said in the speech.

While the Taliban and the world at large try to outwait the other, Pakistan is having a hard time on the economic front

Many businessmen, unnerved by the US Senate bill seeking to punish Pakistan, expressed reservations over the PTI government’s handling of the Afghan crisis.

“Instead of championing the Afghan cause at the UN, Prime Minister Khan should have highlighted the dreadful consequences of a failed Afghanistan on Pakistan. Economic diplomacy should take precedence over politicking. He could have mentioned the possibility of another wave of immigrant influx, escalated terrorist threat and bleeding of dollar and commodities if the void in Afghanistan was not quickly filled,” a former president of the Federation of Pakistan Chamber of Commerce and Industry (FPCCI) noted privately.

“Why should Pakistan pay for the follies of the others? The prime minister has landed us in deeper trouble,” he said fearing a Western backlash after the speech.

In contrast, Faiza Nasir of the Pakistan-Afghanistan Joint Chamber of Commerce and Industry (PAJCCI) sounded calm. “There might be some indirect impact, but for all I know the bilateral trade is growing at a steady pace,” she said when her attention was drawn towards the rattled Pakistani markets. She told Dawn that the PAJCCI has some 450 members in Afghanistan. “We are in touch with our partners, and trade and transit are moving as usual”.

Pakistan’s benchmark KSE-100 index has dipped by 2,296 points over the past about six weeks after posting consecutive gains during the preceding year or so. The capital market closed at 47,169 on August 13, the last session before the Taliban’s victory. It slid to 44,873 by October 1.

On August 13, the rupee-dollar parity was 164 in the open market. The rupee was trading at 174 when the market closed last week; an erosion of value by Rs10 in 45 days.

Imports that have been rising since the economy bounced back last year are said to have risen more steeply, also motivated by the demand pressure from Afghanistan.

A leading economist, who wished not to be identified, reacted to the mention of the capital market readings thus: “with a very narrow base, the capital market in Pakistan is hostage to a few brokerage firms which have now morphed into huge business houses with their little finger in every pie in the country. I do not consider Pakistan Stock Exchange a credible barometer of the economy. No one has ever been able to explain KSE 100 index movement satisfactorily for me.”

He was not convinced that the Afghan situation was eroding the value of the currency either, or asserting pressure on the commodity market. “Afghanistan could be one of the many factors rattling Pakistani markets. Even if the situation eases in Kabul, I don’t see the rupee recovering. With repayment obligations, rising dollar demand from intending travellers and Pakistani students as the world opens up, the limited base of exportable surpluses, and high dependence of the manufacturing sector on imported raw material, I will not be surprised if the trend in the currency market continues,” he said over the phone.

Malik Bostan, President of the Forex Association of Pakistan, did see the Afghan factor playing its part in the currency market. “Yes, there is high demand for dollars in Kabul. Taliban need dollars to pay for essentials, like oil. They will try to leverage whatever options are available in the wake of the sanctions. However, retail sale is a small fraction of our business. We sell mostly to commercial banks.

“Their demand has spiked probably because of the traders who also supply to Afghanistan,” he noted.

“To curb the dollar demand from Afghan businesses, the government has allowed trade in PKR that is a legal tender in Afghanistan,” said a trader. “The situation will ease after the Taliban government is recognised and is able to access its overseas dollar accounts,” he added.

Disturbing stories of Afghan people struggling to survive, keep making their way to mainstream and social media. Dawar Khan, a trader in Chaman who had just returned from a business trip to Afghanistan, told Dawn: “I have seen fear-stricken desperate people selling their household belongings in the bazaars to feed their families. It was painful to watch people at each other’s throats over, say, a 5kg bag of wheat flour at a camp run by a charity distributing free ration.”

No one in the government or business circles was able to share verifiable trade data beyond mentioning a higher scale of bilateral trade with Afghanistan over the last six weeks.

“The loaded trucks crossing over from Chaman and Torkham have almost doubled. For us traders, the Taliban government has proven to be friendly. The previous government was hostile and used to discriminate, charging higher duties and creating procedural bottlenecks,” a businessman in Quetta said, though he was hesitant to quantify the value of daily cross-border trade.

The world is still reluctant to recognise the Taliban government citing a lack of evidence regarding respect for global norms of statehood, including rule of law, basic freedoms and respect for human rights. Caught between global reluctance and Taliban intransigence, Pakistan finds itself between a rock and a hard place.

Published in Dawn, The Business and Finance Weekly, October 4th, 2021