When one talks about globalisation, the first thing that comes to mind is its sheer economic benefits. However, events like earthquake in Japan or rising political tension in the Middle East suggest that the growing interdependence between economies has its own share of challenges and risks.
For a country like Pakistan that depends heavily on oil import to quench its energy needs, the outbreak of these twin crises would hurt the countrys economic growth by fattening the import bill. This in turn would ignite inflation through increases in food and transportation cost in Pakistan or through deficit monetisation, depending upon how the government chooses to handle the price hike.
Driven by the unrest in Middle East, oil supplies are likely to remain in pressure. On the other hand, Japan may witness growth in oil demand, stemming from closure of nuclear plants and reconstruction activities.
However, Pakistans export revenues are likely to remain unscathed during the current year as the affected Middle Eastern countries, such as Libya and Bahrain, and Japan don rank amongst top export destination from Pakistan.
Annual exports to Libya, Bahrain and Japan stood around $8.3 million, $73 million and $127 million, respectively, contributing to around 1 percent of total exports of around $19.7 billion from Pakistan in FY10.
On the other hand, the imports from these two Middle Eastern economies are also negligible, except for the supply of industrial inputs from Japan, with road vehicles and spare parts accounting for a major portion of imports. Pakistan imported a total of around $1.13 billion worth of goods from Japan in FY10.
The auto manufacturers in Japan have not been directly or severely damaged from the disaster, but on account of power shortages and supply disruptions, a large number of manufacturers have suspended their production. Both Honda and Toyota have extended automobile production suspension till the end of the current week.
However, local auto assemblers seem safe as they maintain inventory of around two months. "At present, it is difficult to assess the status of suppliers. If operations in Japan start by the end of the current month, we may not face any supply shortages immediately", an official at a local auto assembling company told BR Research on the condition of anonymity.
Moreover, even if the commencement of operation activities in Japan gets further delayed, the assemblers alternative production capacities located in Far Eastern countries can fill the supply gaps. And since the scale of assembling is very small in Pakistan compared to the size of total global supplies, chances look slim that operators in Pakistan would face input shortages down the line.