How will Pakistan deal with the fallout from war on Iran?

[0:01] The war in the Middle East has worsened the economic crisis in Pakistan. [0:04] Most of its energy supplies are shipped through the Strait of Hormuz, [0:07] which Iran has largely blocked for five weeks. [0:11] As global oil and gas prices soar, how will Pakistan deal with the consequences? [0:15] This is Inside Story. [0:18] And welcome to the programme. I'm Rishad Salamat. [0:37] Soon after the war between the United States, Israel and Iran began, [0:40] its ripple effects were evident. [0:42] Pakistan stands out as one of the countries paying a heavy price. [0:46] It is heavily dependent on energy supplies from the Gulf, [0:49] and with the Strait of Hormuz blocked, [0:51] the government increased the fuel price twice in a month. [0:54] The weak economy was already struggling, [0:55] and authorities say the move was unavoidable. [0:58] But it triggered mass protests, [1:00] with people furious at the decision to pass on the burden of higher costs. [1:03] In response, the Prime Minister announced a series of subsidies and support packages. [1:07] But they are temporary, and economists are warning that if the war drags on, [1:11] the fallout could be unprecedented. [1:13] Why is Pakistan more vulnerable to the current [1:16] climate crisis than other countries? [1:17] What can it do to mitigate the impact? [1:19] We'll discuss those issues and more with our guests in a moment. [1:22] But first, this report from Michael Appel. [1:26] Five weeks into the war in the Middle East, [1:28] and the global economic consequences are stacking up. [1:33] Iran's eastern neighbour, Pakistan, is among the worst affected. [1:38] The country imports 85% of its crude oil from Saudi Arabia [1:42] and the United Arab Emirates through the Strait of Hormuz, [1:46] and nearly 20% of its liquefied [1:48] natural gas comes from the region. [1:51] Karachi has emerged as a major transit hub for vessels [1:55] diverted away from the Gulf because of the conflict. [1:59] The port has handled a year's worth of container ships in just 24 days. [2:05] In addition, the economy is weak and dependent on bailouts. [2:10] The government recently reached a preliminary agreement [2:13] with the International Monetary Fund for a $1.2 billion loan. [2:18] Pakistan has taken two weeks to get back to normal. [2:20] It has sold two dozen IMF support packages in the past seven decades. [2:26] On the streets, people are frustrated with the rising cost of living. [2:33] The government has imposed two major fuel price increases since the war began. [2:38] In early March, petrol and diesel went up roughly 20%. [2:43] Then on Friday, authorities announced petrol would be nearly 43% more expensive, [2:48] leading to long queues at fuel stations. [2:51] But less than a day later, [2:53] Prime Minister Shahbaz Sharif partly reversed the hike, [2:56] cutting the petrol price by 17.5% [3:00] and declaring public transport would be free for a month in some areas, [3:04] including the capital. [3:06] The public cannot afford these increases. [3:10] The government needs to give relief. [3:13] Fuel ships are coming to Pakistan. [3:15] No Pakistani ships are being stopped in the Strait of Hormuz. [3:17] So why are prices increasing? [3:21] While Pakistani-flagged vessels are passing through the strait, [3:24] the oil on board costs more on the global market. [3:28] And that increase is immediately felt at the pump. [3:31] The energy crisis comes as Pakistan prepares for higher demand during the hotter summer months. [3:38] There may be a war going on, but shouldn't we also think about our people? [3:43] What is a poor man supposed to do, someone earning $90 a month who relies on his bike for work? [3:50] All his money goes to petrol while there's hunger at home. [3:53] To ease the pressure, [3:56] Islamabad has rolled out emergency relief measures. [4:00] Among them, a four-day week for some government offices, [4:04] extended school holidays and online classes. [4:07] But these are temporary solutions. [4:11] And the fact remains, Pakistan is facing another cash crunch, [4:15] compounded by a geopolitical crisis with no apparent end in sight. [4:19] Mike Leppel, Al Jazeera, for Inside Story. [4:28] Well, let's bring in our guest. [4:29] Joining us from Karachi [4:30] is Karachi. [4:31] He's the former head of the policy reform unit for the chief minister of Balochistan. [4:37] Michael Kugelman is in Annapolis, Maryland. [4:40] He's a senior fellow at the Atlantic Council and specializes in South Asia geopolitics. [4:44] And in Islamabad is Ali Salman, the founder and CEO of Prime, [4:48] the policy research institute of market economy. [4:52] It's a think tank in Pakistan. [4:54] A warm welcome to each one of you. [4:56] Now, my first question is going to be to you, Michael. [4:58] Why is Pakistan more exposed [5:00] and vulnerable to this war in West Asia compared to other countries? [5:08] I think there are three reasons. [5:10] One is, as your report noted, a very heavy reliance on hydrocarbon imports from the Middle East. [5:16] You have very high growing demand for these energy sources at home, [5:21] and domestic production simply can't keep up. [5:23] And Pakistan, to this point, hasn't been able to sufficiently diversify its sources of energy imports, [5:28] its hydrocarbon imports, beyond the Middle East. [5:31] A second factor I would highlight relates to remittances. [5:36] There are a significant number of Pakistani expatriates who are living and working in the broader Middle East, [5:42] particularly in the GCC countries, [5:44] and they send home significant amounts of remittances, which are critical to the economy. [5:49] So if that's interrupted by conflict, then you're going to have problems for the economy. [5:54] And the third factor is what I would describe as structural factors linked to Pakistan's broader economy. [6:00] It simply is particularly vulnerable. [6:01] And the third factor is what I would describe as structural factors linked to Pakistan's broader economy. [6:03] It simply is particularly vulnerable to global economic shocks because of what the Pakistan economy is. [6:07] It's inherently weak, you don't have a diversified export strategy, you have high levels of debt, [6:13] so you have cycles of crisis all the time, and it's always going to be made worse [6:18] when you have a crisis like the one that you had now. [6:20] And, you know, in recent months, we had seen some successes for Pakistan's macro economy, [6:24] but I would argue that that was largely tied to an increase in external funding, particularly from the IMF. [6:31] Pakistan nearly defaulted on its loans just a few years ago, so it's just inherently vulnerable. [6:36] And I think that helps explain why it's in this situation it is today. [6:40] Well, there's subjects we're going to be covering during the course of the program. [6:43] Gajza, what's your take? [6:48] Thank you. [6:49] I'll take a somewhat long-term view, supporting what Michael has said. [6:55] For the past 25, 30 years, we have created an economy that is very import-dependent, not just on oil, [7:04] but on other products as well, including food now, including cotton for our textile industry. [7:11] And we are paying the price today of excessive dependence on imports for basic commodities, [7:22] oil, energy and food included. [7:30] So we are paying the price of that misgovernance of the last 25, 30 years. [7:37] Ali, I mean, the same question here as well. [7:40] You know, it all does, you know, point to something very deep and actually, as Michael was suggesting, structural. [7:52] Well, in my view, I think Pakistan has made significant improvements in at least some parts of its economy in terms of structure. [8:04] If you look at, for instance, the exchange rate, some privatization programs started, you know, trade and tariff reforms have been implemented. [8:14] So I think Pakistan was actually on, you know, has been on the right track for the last one and a half year, [8:22] as well as reforms and structural reforms are concerned. [8:26] So this particular moment of crisis is particularly very sensitive for Pakistan because we were just barely, you know, going to enter, you know, growth phase, [8:38] when suddenly pressure from the current account from the import side due to the Middle East, [8:45] crisis has has has arrived. [8:49] So it will be difficult, of course, for Pakistan to to manage. [8:52] And that's why we are seeing, you know, government first offering subsidy and then withdrawing it. [9:00] So I think this is a test case also. [9:03] But at the same time, in my view, this crisis also provides an opportunity to address some of the very long term structural issues in the energy market [9:14] and electricity market, particularly for Pakistan, you know, and especially on cutting down on public spending. [9:22] So that's where we are looking forward, because otherwise, if you look at our import and export structure, [9:28] I believe that most of our imports are inelastic in nature. [9:34] They are non-luxury. [9:35] And so therefore, we have to keep growing the economy, keep it open, but at the same time use this crisis to cut down [9:44] on government expenditure where we can. [9:47] Ali, I just wanted to add something to what you were saying there. [9:50] Just get your view on the economy was in poor shape, but there were signs of stabilization, as you hinted at there. [9:58] I mean, I suppose it's all going to be really how long this war drags on for. [10:02] And that would really mean that if it goes on for a long time, we could really see that recovery, that stabilization upended. [10:12] I agree with you. [10:13] I mean, look at the inflation rate. [10:15] We came down from 38%. [10:17] Of inflation about two years ago to less than 5% late last quarter of the previous year. [10:26] And now it's going up again. [10:27] It's already touching 8%. [10:29] And of course, recently we have seen the transport costs have gone up 25% and other prices are rising. [10:37] So you're absolutely right that this crisis is particularly creating more difficulties for Pakistan and some of the gains which [10:46] we made. [10:47] So, I mean, I don't think it's going to be a problem for us. [10:49] I mean, you know, I think that the economic growth and currency stabilization through Forex operations of state bank or other macroeconomic measure, you know, may be up to a major challenge now. [10:57] Yeah, Michael, it would just come also as Islamabad is trying to secure a bailout from the IMF. [11:05] And those talks are teetering a little bit at the moment. [11:07] Now Islamabad seems never to fix the roof, as it were, when the sun is shining. [11:13] I mean, as I said before, external financing is critical for Pakistan's macro economy. [11:21] And so I think when we look at the issue of the state of the economy in Pakistan, even in the best of times, we have to distinguish between the macro economy and the micro economy. [11:30] And as Ali noted, and as I think I noted before, you know, there have been some indications of improvement. [11:35] It was inflation down, farm reserves coming to a better level and so on. [11:39] And indeed, as Ali noted, there's been some success on the reforms front. [11:43] There have been some major developments in privatizing state owned industries, which have been a major burden on the economy because of their high debt. [11:50] So there's all that. [11:51] But, you know, in terms of the micro economy, you know, poverty levels continue to be very concerning. [11:57] Household income figures continue to be very concerning. [12:00] And obviously, that's where the vulnerability lies. [12:02] And that's where you have to look when you see what impact this crisis, this conflict in the Middle East will have on, you know, common people in Pakistan, including those that you interviewed in your report, those that are not able to get gas at a good price and so on. [12:18] That is the current concern. [12:19] And I would also argue that, indeed, [12:21] Pakistan is following this pattern that it's followed for so long of going for external financing to try to, you know, strengthen the macro economy. [12:29] And many, many governments in Pakistan, pretty much all governments in Pakistan over the last few decades have said that they want to end their reliance on the likes of the IMF. [12:39] But it simply has not yet happened yet because the structural factors that I noted continue to be very significant constraints on truly building out a sustained economy, sustainable economy that doesn't need to resort. [12:51] I think we are now in the middle of a very important crisis in the world right now. [12:53] I think we are now in a major crisis, but we are able to say one thing in advance. [12:56] And that is the price of oil prices are really very high. [12:58] And we are also experiencing a very great хлguest before the end of the world war. [13:00] And so it's a very interesting risk situation. [13:01] And, you know, you've you've mentioned, you know, at least today that the year is a long and a very long one. [13:03] And I think that these are really the main challenges that we face as a country in terms of our economy. [13:06] I think we have to continue to work towards the future. [13:07] I think that we have to continue to work towards the future. [13:09] I think that we have to continue to go further and further ahead. [13:11] And I do think that these are really the main problems that we face as a country in terms of our economy. [13:14] You know, the subject of structural change and the point of view that Pakistan was on the verge [13:27] of stabilizing and taking off on the growth path in my 40 years career, I've heard this [13:36] at least 20 times. Every time an IMF program is into the second year, this statement is made [13:44] that those numbers of inflation and others are improving and we are just about to take off into [13:51] growth. But that never happens. And it will not happen again, even if the war had not come by. [13:58] You see, the point is that for every hundred rupees of revenue, our expenditure is 130 rupees [14:06] to sorry, 230 rupees. And for every hundred dollars of exports, our imports are 220 dollars. [14:15] Uh, this is not [14:18] a one off or five year, two year, three year phenomena. This massive deficit has been there [14:25] for about 25 to 30 years. And we have covered this deficit by taking loans. Now we are taking [14:33] loans just to repay past loans. We even if loans are not available, then we ask friendly countries [14:42] to deposit two, three, four billion rupees in our account just so that it looks good. [14:48] But this is not how you run an economy. [14:51] Uh, it's completely import dependent. We have run down our manufacturing sector. We have run down [14:59] our agriculture sector and created a casino economy where money is made by about a dozen sectors and [15:08] families out of the stock market, the property market and import under invoicing. Uh, the rest [15:15] of the discussion on, you know, where the inflation rate is and what the dollar rate is, uh, basically, [15:23] is, is neither here nor there because we are no longer a productive economy, depending on [15:30] Kaiser. [15:31] And didn't you resign from the government because you were recommending the abolishment [15:36] of 17 divisions, nearly 50 government organizations saying that it was really down to fiscal hemorrhaging. [15:43] Yes, I did. There are 17. I was, I was in this prime minister's committee for five months [15:52] and, and they gave me access to all the data from the finance ministry. And, and they gave [15:53] me access to all the data from the finance ministry. And, and they gave me access to [15:54] all the data from the finance ministry. And, and they gave me access to all the data from [15:55] the finance ministry. And, and they gave me access to all the data from the finance ministry. [15:57] I established that 17 ministries need to be abolished. 60 attached departments, uh, need [16:05] to be abolished. I would also say that it is time to look at defense expenditure and [16:11] all that part of defense expenditure, which is not related to fighting a war externally [16:16] or internally, that part has to be run down to zero. And I have examples to show you, [16:23] uh, what those can be. [16:25] Uh, [16:26] the dette way of how large part of the defense expenditure is, nothing to do with national [16:30] security. So I think there's a whole restructuring off both our physical and our foreign trade [16:37] is necessary. And I also don't agree that our imports are inelastic. We, or the last [16:45] again, 30 years plus, we shifted our intercity goods transport from rail to road. A road [16:54] is uses one third more fuel per kilometer than rail. [16:57] 1,000,000. [16:58] so if we can start shifting back to rail and close down the certain parts of the road sector [17:07] we will actually reduce our oil imports by about 15 percent so i think these structural changes [17:13] will need to be made if pakistan is not to face similar situations in the future and for the [17:20] present we just have to survive whichever way we can uh michael i mean i think there's a big [17:25] laundry list there isn't there absolutely and another factor i'd add another challenge is um [17:34] investor perceptions uh you know pakistan for many years suffered from a terrorist attack [17:40] particularly a especially terrible period between around 2007 2014 and the situation stabilized for [17:48] some time but since the taliban returned to power in afghanistan we've seen an upsurge in [17:54] terrorist violence mainly in the border regions near iran and afghanistan but [17:59] you know this is something that's become a concern and i think uh government is always looking to [18:05] draw in more investment to try to strengthen its uh various sectors i think if this uh terrorist [18:10] challenge continues to resurge then that's going to be you know something else that has to be added [18:15] to uh the laundry list of issues to address um ali you know is the military budget actually [18:24] sustainable and we're not just talking about the official budget but you know there's also [18:29] uh the unofficial budget here is [18:30] well tell us a little bit about that well i agree with the earlier statement by dr caster about [18:40] you know rationalizing especially non-combative military budget and i think there is a room to [18:46] reduce that budget however um you know i have looked at the fiscal trends in terms of you know [18:53] military budget in last 20 years and you know contrary to the popular perception which is like [19:02] we are spending a lot on the [19:04] military in terms of per capita the expenditure has been coming down uh for overall defense [19:11] budgeting so yes there are uh you know there is room to you know rationalize and reduce within [19:17] the defense but if you look at uh what percentage of budget we are spending let's say on civil [19:24] government uh on on pensions on uh on the defense uh you know relatively we are spending less on the [19:31] budget today than we were spending 10 years on the defense budget so you know there is room to you know [19:34] we are spending less on the budget today than we were spending 10 years ago now of course uh there are [19:37] other sources of inefficiencies in the budget state-owned enterprises uh power sector subsidies [19:44] uh you know grants which we have not been able to really uh cut down and there are other uh you know [19:49] sources of like you know the departments which are not needed uh but i think um recently also if you [19:56] look at uh you know the situation with india and pakistan obviously in in that respect i would say [20:04] you know people feel that uh you know pakistan military has been able to defend [20:09] its borders effectively uh also situation with afghanistan has been quite uh [20:15] fragile for last few months so you know we need strong strong defense and strong security uh [20:22] arrangement and and particularly what's happening in the region i think we probably need to invest [20:26] more directly into the security apparatus but at the same time also reduce uh the unnecessary [20:34] you know uh the expenditure and also i think we need to take out military from the businesses [20:38] that's another part of the equation which we need to address uh you know military should be [20:44] focused on its core function and and there should not be any sort of differences no no special [20:50] treatment no exemptions available to any uh attached companies uh michael you must have a view [20:56] on that as well i mean okay sure we've got per capita uh perhaps a military budget falling but [21:03] that's only down to the uh military budget falling but that's only down to the uh military budget [21:04] the exploding population yeah absolutely i mean this issue of uh defense spending uh impact on [21:13] the broader economy has been a point of discussion and one of significant controversy for quite some [21:18] time because as you know pakistan's military is uh most powerful entity i would argue in pakistan [21:24] and oftentimes it's difficult to push back against concerns about that that high level of um of [21:30] defense spending um and uh indeed it is true as was noted before that pakistan is facing a very [21:37] challenging security situation i mentioned the resurgence of terrorism we've also heard about [21:42] its hot border with india and it is involved in a forgotten conflict with with the taliban in [21:48] afghanistan as we speak the border with iran is under the best of times uh tense because of a [21:54] number of uh insurgent groups that are based on both sides of the border and that border i definitely [22:00] could become even more volatile with the conflict in iran so i can understand the justification for [22:06] significant amounts of defense spending but i don't think that's going to be the case for the [22:07] defense spending but indeed there is a hidden economy uh within the military and there's been [22:11] a fair amount of scholarship done on this the military exerts significant amounts of influence [22:15] over many many economic sectors it has its own industries and its own empire i would argue so [22:21] it is a very controversial matter but um you know i i would point this out i think it's important [22:27] to look at at silver linings here as well that we talk about pakistan being very vulnerable [22:32] which it is but i would argue that if you look at some of its neighbors you know bangladesh uh is a [22:37] actually very close to running out of uh fuel imports more so than pakistan india has been [22:42] dealing with an lpg crisis which is a key source of cooking oil for several hundred million families [22:48] there so as bad as things are for pakistan you know this is something that's not unique to [22:52] pakistan and a number of its neighbors are facing similar challenges uh so i mean with this middle [22:58] east conflict continuing and you know the economy taking a hit kaiser what are the social implications [23:06] of this solution of this conflict in the middle east i think it's very important to look at the [23:07] social implications of this solution of this conflict in the middle east i think it's very important [23:07] this situation i think we have had very high levels of extreme poverty over uh two two decades [23:19] plus i i work on this subject and we do household surveys and stories that come out are really [23:26] very painful and they are going to get more and more painful now we there are uh there are [23:33] domestic female domestic workers who don't take public transport anymore they walk an hour to [23:41] get to work there are families uh there was one family where the mother said my children don't [23:48] know what is the taste of exists because we can't we've never had eggs in our house so and this will [23:54] worsen and there is a phenomenon of kind of a middle class poverty emerging [23:59] there's a someone who has a car in the house but no salary no income [24:03] so not even money for a bus fare this kind of situation is becoming very very rampant [24:10] uh yep so ali what what's your take on the social implications of what's happening [24:18] and how it's affecting the country uh like two points here one is that um you know when the [24:30] government is facing uh the fuel crisis uh last month it announced uh that you know the school [24:36] closures uh and we have seen uh the the loss in education during the covert years and uh i i'm a [24:46] friend that any significant crisis should not hit the education sector because online education is [24:53] a luxury which is only available in urban parts of pakistan and not in the rural areas you know [25:00] the government documents that about 25 million children who should be in the schools are out [25:05] of schools so continued crisis and if the government in the future decides to [25:12] to shift the schools to online it will be significant social cost [25:17] and and similarly i think the mobility will be a concern because of rising uh you know the fuel [25:24] costs and lastly i would add that we are just entering the wheat harvest season and during this [25:32] season uh the diesel becomes extremely important factor supply of diesel and the cost of diesel for [25:39] farmers and and that's where we have not seen i think more attention from the government with [25:45] their announcing subsidies for the farmers [25:48] but um any direct impact at this point in time because wheat is the staple food in in pakistan [25:56] uh there is a risk of an increase in the price uh michael final one to you here can you leave [26:03] us with some positives if possible that uh you're looking at pakistan and you do see some perhaps [26:09] some light at the end of the tunnel yeah absolutely um one of the big success stories [26:17] that pakistan has seen over the last few years is the embrace of solar power this [26:21] goes back to the media period after the russian invasion of ukraine when energy prices were uh [26:28] got very high and significant numbers of pakistani households and companies began to get solar panels [26:36] we've seen these used to a significant extent to the point that you know i think that it's it's [26:41] been able to become a bit of a cushion to the blow of these you know these high energy prices [26:47] this is not a government policy this is not a case of the government going green but it's really a [26:51] on the part of many Pakistanis to simply opt for the cheapest source of energy. [26:56] And so as a result, you know, many, many Pakistanis now are embracing solar powers, [27:01] solar panels, and hopefully that could build into something bigger. [27:05] But I think for now, that's a nice silver lining that perhaps we could close with. [27:10] All right. And actually, final one there to you, Kaiser. Any optimism very quickly? [27:18] Yes, I think Michael is correct. [27:20] I think solar power is certainly a silver lining. [27:24] I think the other is that, you know, Pakistanis have lived with crisis for the last half a century, [27:30] all kinds of crises, and we've learned how to cope and how to adjust. [27:36] And I think the people, even the poor, will somehow learn to cope and adjust [27:44] and try and keep their head above water. [27:47] And once this particular crisis is over, and we hope that it is over soon, [27:54] we will... [27:56] the people, the poor, will be able to start building their lives, rebuilding their lives again. [28:04] Thank you very much, gentlemen, for joining us. [28:07] Thanks to our guests, Kaiser Bengali, Ali Salman, and Michael Kugelman. [28:11] And thank you for watching, too. [28:13] You can see the program again anytime by visiting our website, aljazeera.com. [28:16] And for further discussion, go to our Facebook page. [28:19] That's facebook.com forward slash AJ Insight Story. [28:22] You can also join the conversation on X. [28:25] Our handle is AJ Insight Story. [28:28] That is it from me, Rishad Salamat, and from the whole team here in Doha. [28:32] Do stay with us for more coverage of the war between the United States, Israel, and Iran [28:36] coming up in just a moment.