Thursday, March 23, 2023

Afghanistan’s dependency on Pakistan to cost dearly

By Hamid Pakteen

As an impoverished and land locked nation, Afghanistan is grappling with economic difficulties which have not only been exacerbated by its disadvantageous geographic location, but also by its badly managed neighbour’s economy and polity. Historically, Afghanistan’s trade volumes as well as economic empowerment have been dependent on Pakistan. Due to this dependence, Kabul, which is already facing herculean task of managing its economy after its regime change  in August 2021, is now facing new difficulties on account of fast deteriorating economic situation in Pakistan.

Pakistan’s political crisis has begun to hit its already worsening economic situation turning the conditions very painful and pitiable. Ordinary citizen’s anger and frustrations are at its peak. Inflation is sky rocketing while peoples’ purchasing power is fast declining. Islamabad’s friends and benefactors are showing little inclination to rescue the country from the situation. US Assistant Secretary of State for South Asia, Donald Lu, before a Congressional Committee stated that Pakistan is heading for a dangerous economic crisis.

Petrol prices have gone up to Pakistan Rupee (PKR) 248.74 and diesel prices to PKR 276.54 and are likely to rise further. According to independent economists, inflation could touch 25% in the fiscal year 2023, notwithstanding the fact that Pak budget has estimated it around 11%. There is less likelihood that the State Bank of Pakistan could manage it below 20%.

Islamabad’s external difficulties mainly stem from the falling foreign exchange reserves to below USD 9 billion. External debt servicing had jumped to USD 4.87 billion in the 3rd quarter of FY 2021 22 from USD 3.51 billon in the first quarter of FY 2020-21. The increasing size of the external debt servicing in each quarter indicates the government has been borrowing dollars at higher commercial rates to meet its foreign debt repayment obligations.

Pakistani currency breached the level of 216 to a dollar in the open market, down over 33% in the last one year. Banks have stopped opening letters of credit for importers to save foreign exchange and foreign banks are demanding 100% cash margins for oil imports. This is happening at a time when Pakistan is suffering severe power outages of 10 to 12 hours affecting business, industry and exports. New base power tariffs are also expected to rise by 100%.

Pakistan’s economy was badly managed over the last several decades and this is now being increasingly noticed internationally. Pakistan’s financial transparency was questioned in the US State Department’s 2020 Fiscal

Transparency Report, which noted that the country had not released details of its debt obligations, including debt to state-owned enterprises for the China Pakistan Economic Corridor. Further, firms blacklisted by the World Bank had been provided contracts under CPEC.

Pakistan has no money

To put it simply, Pakistan has run out of money. According to a former Chairman of the Federal Board of Revenue, Pakistan is “no longer a going concern” and is bankrupt. As such Afghanistan cannot seek any solace from Pakistan.

At the time when Afghanistan is faced with both shortages of goods and foreign exchange, Pakistan’s policy objective is to compel Afghan traders to opt for Pakistani exports. Islamabad is trying to exploit Afghanistan’s economic difficulties to boost Pakistani exports and benefit its producers.

Pakistan’s clamping down on Afghanistan’s trade flows as well as repeated border closures is adversely affecting Kabul’s trade. Kabul is looking up for other alternatives to enhance its trade and overcome economic challenges. This has led Afghanistan to prioritize the Chabahar Port for its trade.

Port connectivity is the major issue in increasing Afghan’s trade. However, Karachi port which provides connectivity to Afghan trade faces perpetual congestion. Though Pakistan offers its prestigious Gwadar Port route for Afghan trade, the port is currently under developed and managed by the Chinese. The Gwadar Port suffers from a number of difficulties like inhospitable conditions of Baluchistan as well as harsh climate, besides shortages of water, power and other infrastructure. On top of it, the entire project is perceived as being beneficial only to China and to the Pakistani elite.

New trade alternatives for Afghanistan 

Due to the unpredictability of Pakistani policy and difficulties in bilateral trade, Afghanistan is searching for alternative markets and routes to keep its foreign trade alive. A new outlet, Chabahar Port in Iran, has now afforded Afghanistan access to other markets and trading partners. The Chabahar Port is well connected to Zabul province in Afghanistan, which is accessible via the Delaram–Zaranj route, allowing Afghanistan an alternative access point to the Arabian Sea and Persian Gulf, and freeing Afghans from dependence on unstable Pakistani routes.

The operationalization of the Chabahar Port has already resulted in reduction of logistical costs to Afghanistan. Further, a railway system between Chabahar and the Iran-Afghanistan border is under construction, thus improving Afghan connectivity to the rest of the world in selling traditional Afghani goods.

The Iranian administration has taken steps to ease Afghani good’s transition to Chabahar as its primary trading outlet. Afghan traders enjoy an 80% discount on export tariffs, in addition to offer of 50 acres of land and free cold storage facilities. Afghan companies currently make up 33% of the companies registered with the Chabahar Free Zone Authority.

It is time for Kabul to come out of Islamabad’s grip as the latter only intends to exploit Afghan resources to boost its own trade and economy. A failing neighbour would indeed be a stumbling block for Kabul’s development and a country which is aspiring to meet at least the basic needs of its population in the immediate future.

Note: The contents of the article are of sole responsibility of the author. Afghan Diaspora Network will not be responsible for any inaccurate or incorrect statement in the articles.

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