Pakistan among countries exposed to war in Ukraine

A policy brief on “the War in Ukraine: Impacts, Exposure and Policy Issues in Asia and the Pacific” — which was made available online on Sunday — feared that these 12 countries could be hit harder because their economic structure and conditions are more exposed to higher energy and food prices, smaller external financial inflows, rising financial costs and a sudden shift in business sentiments.

The countries are: Armenia, Cambodia, Georgia, Kazakhstan, Kiribati, the Maldives, Pakistan, Samoa, Solomon Islands, Sri Lanka, Tajikistan and Vanuatu.

In terms of energy, the policy paper says Cambodia, Pakistan, Solomon Islands and Vanuatu are considered more exposed to rising energy prices than other Asia-Pacific countries. In case of both Pakistan and Sri Lanka, the external debt stock and debt service ratios exceed the threshold values. Pakistan is more exposed to external debt and banking sector, it says.

UN policy paper fears 12 countries could be hit hard because of their economic structure

ESCAP is already engaged with many Asia-Pacific countries that are considered more exposed to the war in Ukraine. These include, among others, a readiness assessment for cross-border paperless trade in Armenia and Kazakhstan; training for women entrepreneurs in e-commerce and digital marketing in the Maldives, Pakistan and Sri Lanka; assessment of the Covid-19 pandemic’s impacts on supply chain connectivity in Kazakhstan and Tajikistan; policy advice on sustainable freight transport in Sri Lanka; and policy options to enhance the fiscal space in Kazakhstan, Pakistan, Samoa, Sri Lanka and Tajikistan.

Surging global energy and food prices are pushing up consumer inflation, which will disproportionately hurt poor households. At the same time, rising interest rates amid surging inflation are impairing households’ balance sheets, investor confidence and governments’ debt service ability.

To shield the poor from rising food prices, governments should step-up provision of subsidies and ensure that existing government assistance and subsidy schemes benefit those in need. This would require, however, strong fiscal positions, which had already deteriorated in many Asia-Pacific economies in the aftermath of the pandemic.

To boost fiscal space and maintain public debt sustainability, various fiscal and financing policy options are available and should be explored on urgent basis.

Amid rising economic uncertainty, global investors are shifting towards safe-haven markets, causing a rise in risk premiums in developing countries worldwide. Through these transmission channels, the war would result in weaker economic growth, wider fiscal and current account deficits and higher financing costs in the region.

Given that most Asia-Pacific countries are net energy and food importers and that food and energy items account for up to 40 per cent of the consumer price index basket in many economies, the region’s average headline inflation rose to 7.3 per cent in March 2022.

Similarly, inflation rate in Pakistan edged up to 13.4 per cent in April 2022, which is more than double the central bank’s inflation target. In addition to weighing down overall household consumption, rising food and energy prices will disproportionately affect poor households.

Suggesting selected policy options, the policy paper says the countries should introduce at least temporarily, trade liberalisation and facilitation measures for affected products as short-term policies in the area of trade and investment. In the medium term, countries can accelerate digital trade facilitation which can help cut trade costs, shorten delivery times, and reduce losses of perishable agricultural products.

The regional countries should explore viable fiscal and financial policy options to boost fiscal space and promote policy credibility. They can cut temporarily consumption taxes on necessary items, and expand the scale and coverage of national emergency financing mechanisms to cope with economic shocks. At the same time, public debt management practices could be enhanced to better manage growing debt stocks and benefit from lower borrowing costs.

The Asia-Pacific region recorded mixed export performance in recent months, but export growth is expected to moderate in the coming months. More broadly, weaker export earnings and declining investment inflows together with adverse terms-of-trade could lead to significant balance-of-payments pressures in some countries.

Some indicators also point to worsening sentiments related to tourism activity. Travel sentiments in Asia and the Pacific, which are based on travel-related web social conversations, have weakened steadily in March and April 2022.

Higher global interest rates and economic uncertainty due to the war in Ukraine are pushing up financing costs for Asia-Pacific governments. In addition to higher financing costs, the war will also weaken fiscal positions of most economies of the region through higher subsidy costs of energy and food items and lower tax revenues. This is a concern considering that the region’s average fiscal deficit-to-GDP ratio already increased from 1.3 per cent in 2019 to 5.3 per cent during 2020-2021.

Leave a Reply

Your email address will not be published. Required fields are marked *