Will Economic Fallout of Middle East Turmoil Impact India and Pakistan?

Much is being written about the potential for the spread of political upheaval that started in Tunisia and recently led to the end of the 30 years rule of the Egyptian dictator Hosni Mubarak. Most of the commentary and punditry has so far been focused on potential political instability forced by possibly massive street protests.

Political fall-out from the events in Tunisia and Egypt has already engulfed the Middle Eastern nations of Bahrain, Libya and Yemen. However, little attention has so far been paid to the more immediate impact of spreading trouble in the oil-rich Middle East on developing nations in South Asia and elsewhere.

Crude oil prices have been rising for some time but the fears of the spread of the political unrest have accelerated the rate of increase. The price of crude has already crossed the crucial $100 a barrel mark with the Libyan crisis in full bloom. South Asian economies are keeping a close eye on the situation in Africa and Middle East but still remain unaffected in receiving their oil supplies through this region. Any further spread of the unrest into GCC countries, particularly Saudi Arabia, could have a huge impact on the health of South Asian economies.

According to the World Bank's Immigration and Remittances Factbook 2011, the top remittance sending countries in 2009 were the United States, Saudi Arabia, Switzerland, Russia and Germany. Worldwide, the top recipient countries in 2010 were India, China, Mexico, Philippines and France, according to Dawn News. In South Asia, the top five remittance receiving nations in 2010 were: India ($55.0 billion), Bangladesh ($11.1 billion), Pakistan ($9.4 billion), Sri Lanka ($3.6 billion), and Nepal ($3.5 billion).

Pakistan's exports to the Middle East add up to several billion dollars a year. The United Arab Emirates alone imported $1.7 billion worth of Pakistani products last year, according to Arabian Business.

Relatively stable energy prices and rising exports and surging remittances have helped South Asian nations in 2009-2010. But this could all unravel with rising oil import bill combined with the fall of inflows from worker remittances and decline in exports to the Middle East region. India and Pakistan are already running significant current account deficits, and experiencing high rates of inflation exacerbated by rising food and energy prices since late 2010. The economic hardship, particularly high food prices and unemployment, could become a catalyst for serious political turmoil in South Asia in 2011 and beyond.

Related Links:

Haq's Musings

Pakistan's Economy 2008-2010

Pakistan's Rising Exports and Remittances

Indian Economy: Hard or Soft Landing in 2011?

China's Trade and Investment in South Asia

India's Twin Deficits

Inflation Hits India

Goldman Sachs India Warning on Twin Deficits

India's Nov 2010 Imports, Exports

Comments

Riaz Haq said…
KSE-100 is so far flat this year but BSE is in sharp decline as foreign buyers are fleeing.

Whatever happened to the Indian equity market? asks the BBC:

Back in November, the Sensex squeezed past 21,000 for a day before starting a three month, 16% fall.

In the same time, the world's main indices, the FTSE Dow and Nikkei have all gained up to 7%, two of the remaining BRIC countries have fallen no more than 7%, and Russia's RTS Index has gained 26%.

Unsurprisingly foreign funds have been fleeing Indian equities in the last three months.

India is in a pickle and two reasons spring to mind - the stock market was heavily overvalued and the Central Bank has been raising interest rates.

At the end of the year the price of the average share on the Sensex was 23 times its earning power (ie its p/e ratio was 23 x). The Shanghai Index was 18 x, Brazil's Bovespa 14 x and Russia's just 9 x (the Dow's p/e was 13 x). That kind of valuation may be fine if future growth seems assured, but there are signs it may be falling off.
'Leg down'

GDP in real terms expanded at an annual rate of 8.2% in the last quarter - slowing from the 8.9% rate recorded in April to June. Now, this isn't a serious problem and no one is suggesting that the Indian growth story is in serious trouble, but it may be more than just a blip.

Maya Bhandari, senior economist at Lombard Street Research, says that, on a seasonally adjusted basis, growth was pretty much flat. She adds: "I would expect another leg down in the market in the coming few months."

Food inflation has been entrenched for some time, which means the Reserve Bank started putting up interest rates a year ago and has since hiked them seven times.

"In the last 25 months or so, we have had negative real interest rates and the central bank is going to have its work cut out to bring down inflation. And while it may be raising rates, the bank is holding more auctions and lowering the statutory liquidity levels for banks - all of which has inflationary consequences," says Ms Bhandari.

On top of domestic inflation pressures, the Middle East and North Africa crisis sent oil prices belting up above $100 a barrel, adding to the central bank's imperative to keep the upward pressure on rates.
Rate rises?

India is the world's the fourth largest oil importer and imports over 70% of its oil requirements. Oil prices, which will stay high for as long as the Arab crisis lasts, will damage India's economy more than most of its main rivals. At the moment, most economists are pencilling in another half to one percentage point rise in rates.

Oil is also going to hurt government finances. In his March budget, Finance Minister Pranab Mukherjee estimated that the deficit would fall from an estimated 5.1% of GDP in the year ending March 31, to 4.6% next fiscal year.

But if oil prices keep on going up, the government will have to decide whether to keep on paying out fuel subsidies or deregulate diesel prices.

Keeping the deficit under control would suggest the latter.

Five state elections in the next few months would suggest the former.

London-based India investment consultancy director Deepak Lalwani points out that foreign confidence in India has also not been helped by a slew of scandals, the biggest being allegations that the 2008 sale of second-generation, or 2G, cellular licenses resulted in losses of nearly $36bn in potential revenue for the government.

http://www.bbc.co.uk/news/business-12650610
Riaz Haq said…
Here's a Op Ed by Miranda Husain published in Newsweek Pakistan about Saudis and Bahrainis seeking Pak help in quelling Shia protests:

Less than three weeks after Gulf Cooperation Council (GCC) forces, led by Saudi Arabia, entered Bahrain to aid the anti-democracy crackdown there, dignitaries from both oil-rich kingdoms did their separate rounds in Pakistan. The royal houses of Saudi Arabia and Bahrain are nervous, and they need Pakistan’s mercenaries, and—if necessary—military muscle to shore them up.

This is a remarkable turn of events for Asif Ali Zardari, who had been trying since he was elected president in 2008 to secure Saudi oil on sweetheart terms. He had been unsuccessful in his efforts because the Sunni Saudis view his leadership with some degree of skepticism. It also doesn’t help that Zardari, a Shia, is big on improving relations with Shia Tehran. Riyadh now appears inclined to export oil on terms that better suit cash-strapped Islamabad. Manama, too, wants to play ball. It wants increased defense cooperation and has pledged to prioritize Pakistan’s hopes for a free-trade agreement with the GCC in return. But Zardari and his Army chief, Gen. Ashfaq Kayani, should fight the urge to get mired in the Middle East.

Pakistan already has a presence in Bahrain: a battalion of the Azad Kashmir Regiment was deployed there over a year ago to train local troops, and retired officers from our Navy and Army are part of their security forces. Media estimates put the number of Pakistanis serving in Bahrain’s security establishment at about 10,000. Their removal has been a key demand of protesters in the kingdom. Last month in Islamabad, Prime Minister Yousaf Raza Gilani reportedly assured Bahrain’s foreign minister, Sheikh Khaled bin Ahmed al-Khalifa, that Pakistan would offer more retired manpower to help quell the uprising against Bahrain’s Sunni rulers by its Shia majority. Gilani’s spokesman was unable to confirm the pledge.

Islamabad’s support to the tottering regime in Manama is not ideal. “It’s like our version of Blackwater,” says Talat Masood, a former Pakistan Army general, referring to Bahrain’s recruitment drive in Pakistan. “We’re doing [in Bahrain] exactly what we have been opposing here,” he says. Pakistan, he maintains, has no business in trying to suppress a democratic, people’s movement in another country. Short-term economic gains cannot be the only prism through which Pakistan views its national interests, he says.

Pakistan has a long history of military involvement and training in the Arab world. Its pilots flew warplanes in the 1967 Arab-Israeli conflict, and volunteered for the 1973 Yom Kippur War. Involvement in Bahrain’s current strife would not be the first time that Pakistan has used its military might to thwart an Arab uprising against an Arab regime. In 1970, future military dictator Gen. Zia-ul-Haq, then head of the Pakistani military training mission in Jordan, led his soldiers to intervene on the side of Amman to quash a Palestinian challenge to its rule.
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“The U.S. has counted on Pakistan to help control the Arab world and safeguard Arab rulers from their own populations,” says Chomsky. “Pakistan was one of the ‘cops on the beat’ that the Nixon administration had in mind when outlining their doctrine for controlling the Arab world,” he says. Pakistan has such “severe internal problems” that it may not be able to play this role even if asked to. But the real reason that Pakistan should avoid this role is so that it can stand on the right side of history, alongside those who are fighting for democracy.
Riaz Haq said…
Here's a Japan Times story on Saudi quest for military help from Pakistan:

The Saudi rulers view Pakistan as one of three regional powers, along with Iran and Turkey, capable of having a decisive impact on the Middle East. An alliance with Shiite Iran — the kingdom’s supreme ideological enemy, and one with regional hegemonic ambitions — is out of the question. Turkey, for its part, is regarded as a competitor for the mantle of Sunni Muslim leadership — a position long held by the Ottoman Empire.

The frequent description of Turkish Prime Minister Recep Tayyip Erdogan as harboring “neo-Ottoman” ambitions for his country clearly implicates this rivalry. It was the Ottomans who brought down two historical Saudi/Wahhabi states. The first such state (1745-1818) was destroyed by Egypt’s Mehmet Ali with Ottoman support; the second (1824-1891) was also defeated by the Ottomans.

By contrast, the kingdom has no problematic history with Pakistan. On the contrary, the Saudis have bankrolled the Pakistani state, and proved a generous host to its current prime minister, Mian Nawaz Sharif, during his long exile following the military coup that toppled his government in 1999.

Indeed, Saudi Arabia has invested heavily in Pakistan since the early years of its independence. Given that Pakistan was founded in 1947 on a religious basis, it is not surprising that its leaders sought support from the source of Islam, Mecca, then under Saudi rule. The kingdom, in turn, exported its Wahhabi teachings to the “Land of the Pure,” ultimately fueling the Islamic extremism and sectarian violence of the Taliban and others.
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Part of the Saudi plan today is to use Pakistanis as the backbone for a new Gulf Cooperation Council (GCC) joint military force. Pakistani forces under Saudi command were used in operations to quell Shiite uprisings in Bahrain in 2011, and the Saudis now want a standby force ready to put down Islamist and Shiite provocations whenever and wherever they may appear in the gulf. In the event of an existential threat in the region, in particular a confrontation with Iran, Pakistan would offer the kingdom a form of deadly protection denied it by the West.

So to what extent can Pakistan really enhance Saudi Arabia’s security, particularly in a war against Iran? Pakistan is badly fractured, with domestic terrorism running rampant. Its military lacks the capacity to intervene in Saudi Arabia’s defense while maintaining not only domestic security, but also readiness for war against India (an obsession of Pakistani generals).

Moreover, Pakistan’s substantial Shiite population might join the ranks of the violently disaffected if the military backed the Saudis in a sectarian war. And the Pakistan People’s Party, now in opposition but still a powerful domestic force, shares interests with Iran.

So, although the strategic value of closer military ties with Pakistan seems highly questionable, Saudi Arabia has little choice. The GCC is in fact disintegrating, following Qatar’s ouster for supporting the Muslim Brotherhood and Oman’s voluntary departure from the group. That, together with the kingdom’s deepening distrust of the U.S., is fueling a growing sense of isolation. Pakistan may not be anyone’s idea of an ally when facing an existential threat; for Saudi Arabia, however, it is an idea whose time has come.


http://www.japantimes.co.jp/opinion/2014/03/28/commentary/saudi-arabias-diplomatic-pilgrimage-to-pakistan/
Riaz Haq said…
Wajahat Ali: "While Hazrat Khadija's home has been flattened for fear of idolatry, there are giant posters of King Salman and Prince Mohammad Bin Salman adorning Mecca"

https://www.nytimes.com/2017/09/11/opinion/contradictions-hajj-through-smartphone.html


That tableau is a perfect symbol of the strained marriage between the house of God — the Kaaba, in Mecca — and the House of Saud, which controls everything related to the sacred mosques. In adherence to the reactionary religious ideology it embraces, the government has allowed the prophet’s house to fall into decrepitude. It has flattened the home of his first wife, Khadija, and installed public toilets where it used to stand. But it has no objection to the construction of extravagant hotels not far away.

These government’s conflicting values were on display wherever I looked: While non-Muslims are forbidden from even entering Mecca, everyone is free to eat American Hardee’s hamburgers or KFC fried chicken, or buy a Rolex watch across from the Kaaba. It’s forbidden to excessively venerate the prophet and his companions, but there’s no problem with the giant posters of King Abdulaziz, King Salman and his son, Crown Prince Muhammad bin Salman, that are all around town.

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