The Russia-Ukraine crisis may be taking place thousands of miles away from Pakistan, with odds that the crisis will be resolved and a full-blown military conflict averted. But millions of Pakistani families have already begun to feel the economic fallout of Russia’s ongoing military build-up, just like people elsewhere in the world.

The recent spike in the domestic petrol and diesel prices has already unleashed another round of broad-based price spiral, increasing the cost of living for the vast majority of Pakistanis. With the Brent crude futures already closing in on $100 per barrel and predicted to move north of $110-120 over the next few weeks on the Covid-related supply disruptions even if the potential armed conflict is averted, the immediate future does not appear very optimistic for the inflation-stricken low-middle-income households struggling for their survival as their purchasing power continues to shrink along with their real incomes.

The oil prices at above $95 a barrel are already at a seven-year high. JPMorgan warned that if any Russian oil flows are disrupted by the crisis, oil prices could “easily” jump to $120 a barrel. In the unlikely event that Russian oil exports are halved, crude would surge to $150 a barrel, JPMorgan said. In case the global prices go up further, the cash-strapped government will have little choice but to pass on any further increase in the global oil prices on to the consumers, aggravating the pain at the pump and pushing up the prices of transport, food and other essential items at a time when affordability is a major concern for most Pakistanis.

The Brent crude futures are already closing in on $100 per barrel and predicted to move north of $110-120 on Covid-related supply disruptions — if Russian oil flows are halved crude could surge to $150 a barrel

Abdullah Umer, an analyst at Islamail Iqbal Securities, wrote in a report on the crisis last week that the potential conflict between Russia and Ukraine may be brewing far away from Pakistan yet Pakistan too will feel the shockwaves and must brace itself for that. “The crisis is likely to cause another rally in the (global) prices of energy, food commodities and semiconductor chips,” he wrote. Additionally, Pakistan will take a direct hit as the bulk of its wheat imports is from Ukraine. Islamabad received 39 per cent of its total imported wheat from Ukraine during the last fiscal year, he added.

International publications are predicting that any interruption to the flow of grain out of the Black Sea region is likely to have a major impact on the prices and add further fuel to food inflation globally. The headline consumer price index (CPI) inflation was recorded at 13pc — the highest in two years — in January. Mr Umer says the inflation rate, which was earlier expected to ease on a higher base effect, will remain elevated at least during February. Inflation has been the major problem facing middle-class people for the last two and a half years as the real wages have eroded significantly.

The brewing conflict is also bad for the overall macroeconomic situation as, Mr Umer wrote, it may result in the deterioration of Pakistan’s current account balance and even slow down the economic recovery. This, many analysts agree, could have a devastating effect on Pakistan’s growth prospects. Some are of the view that the increase in import bills because of rising energy, food and other commodities will push the current account deficit, which reached 5.7pc of the size of the economy in the first half of the present financial year, wider and brings pressure on the exchange rate.

“If trade deficit continues to deteriorate on import growth, the State Bank (SBP) may be forced to raise the cost of borrowing, which it had left unchanged at 9.75pc last month to curtail domestic demand, cool off inflation and protect its foreign exchange reserves,” a senior analyst at a brokerage house told Dawn on condition of anonymity.

Mr Umer, however, is of the opinion that the Russia-Ukraine crisis will not hurt Pakistan’s growth prospects unless the SBP decides to increase the interest rates. He said Pakistan’s external financing requirements could increase if the global prices of energy, food and other commodities stay up for a longer-term.

Although Pakistan had emerged rather unscathed from the Covid-19 pandemic it is still struggling to grow its economy at a pace where the economy starts generating new employment opportunities and absorbing around three million new job-seekers entering the market every year.

Last year the Imran Khan government ditched the International Monetary Fund funding programme and gave a liberal budget in June to rapidly grow the economy ahead of the 2023 elections. However, the economy hit the current account deficit in the earlier part of the fiscal year, forcing the government to return to the lender of last resort for resumption of the programme to tackle the emerging external account vulnerabilities.

Islamabad had to agree to harsh conditions of the fund like withdrawal of tax exemptions, increase in petroleum development levy on fuel and electricity prices and revocation of fiscal and monetary stimulus for the industry before the suspended funding programme was revived earlier this month. The programme, which ends in September this year, still requires the government to implement more actions like raising personal income tax rates and increasing electricity prices further to secure the remaining loan amount of $3 billion over the next seven months.

Published in Dawn, The Business and Finance Weekly, January 21st, 2022