GCC trade deal to help ‘level playing field’ for Pakistan

Reuters

• Aims to boost trade by 50%
• Pakistan’s trade deficit with GCC $1.3bn
• Real GDP in Pakistan down 0.6%

The GCC has signed a preliminary free trade agreement with Pakistan as the South Asian nation looks to boost exports to ease its financial woes.

The agreement was signed in Riyadh earlier this month.

It aims to increase trade and investment with GCC countries by up to 50 percent by eliminating tariffs on goods and expanding access to services.

Jasem Mohamed Albudaiwi, secretary-general of the GCC, described the deal as “historic”. He added that it would contribute to “growth and prosperity” for both sides.

• Pakistan looks to UAE for trade deals, not loan debts
• PIF to open Indian office as part of $100bn investment drive
• Pakistan seeks talks with AD Ports on terminal operations

The Pakistan Business Forum (PBF) called it a “remarkable step” for export growth.

According to a 2022 PBF report, Pakistan’s total export potential to the GCC was $4 billion. Actual exports were $700 million in 2020, dominated by rice, meat and spices.

The GCC’s total export potential to Pakistan was almost $9 billion compared with actual exports of just over $5 billion in 2020. Pakistan’s trade deficit with the GCC region stood at $1.3 billion.

The UAE accounts for more than 40 percent of Pakistan’s trade with Arab countries and hosts 1.7 million Pakistani nationals, the biggest diaspora after Indians.

A vital deal

Arun Leslie John, chief market analyst at Century Financial, said the FTA could bolster Pakistan’s economy and financial situation “significantly”. 

He said the deal is “vital” for attracting foreign investment amid Pakistan’s payment crisis and international debts. It will help to “level the playing field” against South Asian neighbours, he added. 

The PBF noted that Pakistan finds it tough to compete in exports of agricultural products with India, which has the upper hand as a result of cost and logistics advantages. 

Saudi Arabia’s trade with India, at about $30 billion, is 10 times larger than its trade with Pakistan.

John said Pakistan’s exports to the GCC have risen by more than $480 million over the past two years. They now account for 27 percent of exports. 

“This positive trajectory is expected to continue with the removal of trade barriers under the FTA, which also overcomes past Saudi market barriers and strengthens GCC trade ties,” John said. 

GDP woes

It is a time of severe economic stress for Pakistan. The country’s real GDP is estimated to have contracted by 0.6 percent in 2023.

The World Bank said the decline in economic activity reflects the cumulation of domestic and external shocks.

These include the floods of 2022, government restrictions on imports and capital flows, domestic political uncertainty, surging world commodity prices and tighter global financing.

Record high energy and food prices, lower incomes and the loss of crops and livestock because of the floods have also significantly increased poverty. 

The amount of people living in poverty is estimated to have exceeded 39 percent, with 12.5 million more Pakistanis falling below the threshold of $3.65 per day.

“Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth,” said Najy Benhassine, World Bank country director for Pakistan. 

“It is imperative that critical reforms are undertaken to build the fiscal space and public means to invest into inclusive, sustainable and climate-resilient development.”

Pakistan averted a sovereign debt default in July with a $3 billion loan programme approved by the International Monetary Fund.

Dezan Shira & Associates, a pan-Asia foreign investment practice, said in a research note that security problems, the reduction of foreign exchange reserves, concerns about non-payment of debts and the lack of reforms are all challenges in expanding trade relations with the GCC.

But John added that the upcoming general election in Pakistan, scheduled for the end of January 2024, is expected to lower the level of uncertainty for foreign investors.

“The reduction in policy uncertainty will create a more conducive environment for investment, trade and development in Pakistan and enhance its regional and international cooperation,” he said.

Aramco investment

Saudi oil company Aramco could play a pivotal role. It signed a memorandum of understanding with four Pakistani state-owned energy companies in July related to plans for a $10 billion refinery project in the port city of Gwadar.

Aramco is expected to inject the initial 30 percent equity into the project. It aims to process 300,000 barrels per day.

In Pakistan, growth is forecast at only 1.7 percent in the next 12 months. That is compared with nearly 6 percent across the wider South Asia region, according to the World Bank.

“While South Asia is making steady progress, most countries in the region are not growing fast enough to reach high-income thresholds within a generation,” said Martin Raiser, World Bank vice president for South Asia. 

“Countries need to urgently manage fiscal risks and focus on measures to accelerate growth, including by boosting private sector investment and seizing opportunities created by the global energy transition.”