Economic Survey: Red Sea disruptions continue to affect supply chain

ISLAMABAD: The Government said on Tuesday that prolonged disruptions in Red Sea will continue to disrupt supply chains including massive increase shipping charges which will potentially stall the efforts to contain inflation.

According to Economic Survey 2023-24, despite these challenges, global merchandise trade showed notable resilience in Q4 of 2023, with a significant surge of 6.3 percent compared to pre-pandemic levels in Q3 of 2019. However, the overall performance of global merchandise trade in 2023 remained subdued, with a 5 percent decline to $ 24.01 trillion.

In 2023, there was a significant decline in exports from Russia (28 percent), China (5 percent), Japan (4 percent), and Korea (8 percent).

The US also saw a slight decline in exports (2 percent). On the other hand, there was an increase in exports from Germany (1 percent), Mexico (3 percent), and the EU (2 percent). The drop in merchandise exports was due to lower commodity prices, reduced trade volumes, and exchange rate fluctuations.

However, the rise in commercial services trade was attributed to the recovery of international trade and the increase in digital services delivery. Climate change has caused a 36 percent reduction in trade transit through the Panama Canal due to low freshwater levels, making the shipping industry more vulnerable.

The economic survey has revealed that over 90 percent of Pakistan’s trade volume passes through maritime routes, with land routes primarily serving China, Afghanistan, India, and Iran by truck. Air routes are mainly utilised for high-value and perishable goods.

The recent disruption in the Red Sea, a critical trade route, poses severe consequences for Pakistan’s trade and overall economy. The Red Sea has historically been the shortest and most efficient trade pathway between Asia and Europe.

Rerouting trade around the Cape of Good Hope extends the journey by over 3500 nautical miles and adds 10 12 days of sailing time, significantly inflating freight costs. Pakistan’s heavy reliance on the Red Sea route is evidenced by its trade statistics.

Approximately 60 percent of Pakistan’s exports, valued at US $ 16.3 billion, and 30 percent of its imports, $ 23.2 billion, during FY 2023 are from the US, EU, and UK.

The repercussions of disruptions in this vital trade route are multifaceted. Delayed arrivals of essential goods, including raw materials and finished products, disrupt domestic supply chains. This delay, particularly in the supply of imported raw materials, has led to production slowdowns, exacerbating the deceleration of the LSM sector. The escalation in freight charges poses a significant threat to Pakistan’s major export commodities, such as textiles, rice, and fruits.

Notably, the textile sector, which accounts for around 60 percent of Pakistan’s total exports, is under immense pressure. The timely availability of raw materials and machinery imports is crucial for textile and apparel producers. Any disruptions in shipping schedules result in production delays and increased costs.

For instance, in mid-January, shipping companies hiked freight charges by 140 percent, rising from $ 750 to approximately $ 1800. This not only impacts exporters but also affects the competitiveness of Pakistani products in international markets. Moreover, the escalating tensions in the Red Sea have led to a decline in demand for Pakistani rice from traditional buyers in the Middle East, the United States, and Europe.

The complexity of the Red Sea disruption underscores the severity of its consequences for Pakistan’s economy. Prolonged disruptions will continue to disrupt supply chains, potentially stalling efforts to contain inflation.

As such, addressing the challenges posed by these disruptions is imperative to safeguard Pakistan’s economic stability and global competitiveness.

Copyright Business Recorder, 2024