Businesses worldwide, already under strain, dread the escalation of the Middle East conflict, but Pakistan stands to be amongst the hardest hit despite its lack of direct involvement, especially if the conflict spreads to encompass Western Asia.

Heightened tensions could disrupt vital trade routes, hinder cross-border commerce, jeopardise energy imports and intensify security concerns, further deterring much-needed investment. Additionally, Pakistan’s close proximity and shared borders with Iran increase its vulnerability to unforeseen fallouts from the conflict.

An observer commented on the recent events, stating: “Israel has warned of consequences following Iran’s strikes. The pressing question within business circles is whether this was a one-off retaliation or an indication of the conflict expanding beyond the Middle East.”

Meanwhile, oil benchmarks surged by nearly five per cent last week, according to reports, amid growing fears that an expanding regional conflict could disrupt global crude flows. For Pakistan’s fragile economy, which has shown early signs of recovery with slowing inflation, rising reserves and slight improvement in economic activity, this is already a significant setback.

‘The situation in the Middle East is beyond our control, but it would be negligent to ignore the potential challenges it poses’

Pakistan’s heavy reliance on oil imports for energy makes it vulnerable to global market volatility, which could further destabilise its trade balance. Rising logistics costs, driven by potential route changes and higher insurance premiums for cargo, could hamper the country’s recovery. Additionally, the evolving geopolitical situation may deter vital international capital flows and discourage investor visits, slowing down the economic momentum.

According to data from the Pakistan Bureau of Statistics (PBS), petroleum imports in July 2024, in dollar terms, surged by 60 per cent, reaching $1.27 billion compared to $0.79bn in July 2023. The latest PBS figures show 16pc year-on-year and 1.8pc month-on-month increase in September 2024.

Logistic and insurance costs, which have been rising since the Ukraine war in February 2022, are expected to spike further if the Middle East conflict escalates, potentially making trade unfeasible, particularly for developing nations like Pakistan.

This year’s relatively modest agriculture output, following last year’s strong performance, suggests Pakistan may need to import more grains and significantly more cotton.

Current data points to a sharp contraction in cotton production, while local demand is expected to rise due to the expanding textile sector driven by higher export orders as Western buyers shift from Bangladesh to Pakistan.

This will likely necessitate a substantial increase in cotton imports. However, rising logistic and insurance costs could pose challenges for textile exporters, straining their competitiveness.

According to numbers released last week by the Pakistan Cotton Ginners Association, cotton arrivals at ginning factories totalled 2.04 million bales as of Sept 30, marking a steep 60pc decline from 5.03m bales recorded on the same date last year.

Babar Badat, former president and current board member of the International Federation of Freight Forwarders Association, and a recognised expert in logistics, shared his views on Pakistan’s positioning amid the evolving geopolitical landscape. “Pakistan should have prioritised building a robust regional infrastructure, creating seamless connectivity from its Southern ports to the markets of Central Asia in the north.

“This would have allowed commerce and transport to thrive, fostering deeper integration among the communities along this ‘great vertical corridor’.”

A former trade secretary expressed disappointment with the government’s approach, lamenting that instead of focusing on strategies to mitigate the potential adverse effects of the evolving geopolitical situation and safeguarding the hard-earned, modest economic gains, the government and its team appear preoccupied with avoidable internal political conflicts. He emphasised that the country cannot afford such distractions at this critical juncture.

“The situation in the Middle East is beyond our control, but it would be negligent, even reckless, to ignore or downplay the potential challenges it poses for our economic diplomacy. Now is the time to gather available expertise and proactively prepare for the range of possibilities we might face,” he stressed.

Dr Manzoor Ahmed, Pakistan’s former ambassador and permanent representative to the World Trade Organisation, articulated his concerns clearly: “The escalation of conflict in the Middle East is likely to adversely impact Pakistan’s trade and economy. Rising oil prices could worsen the country’s balance of trade, while supply line disruptions may arise. Furthermore, inflation could begin to rise again.

“If Iran seeks assistance from Pakistan, we could find ourselves in a serious predicament. Our recent economic recovery is very fragile, and such a situation could have significant repercussions for our trade and economic relations with the US and several EU countries,” he warned.

Published in Dawn, The Business and Finance Weekly, October 7th, 2024