Fall of Kabul and implications for Pakistan economy

Taliban which had been making rapid advances across Afghanistan in the wake of US evacuation, were finally able to take control of the capital, Kabul, in what was a rather swift, seamless and somewhat peaceful transition. The development finally puts an end to the uncertainty over the political future of Afghanistan.

In contrast to what had been feared, Taliban seek to present a moderate face by offering general amnesty to masses, preserving the infrastructure deployed in the past 20 years while remaining mostly in compliance with agreements forged with the international community, opening up possibility of international recognition of the new political setup. Further, China, Pakistan and Iran are on the same page on maintaining stability in the Afghanistan region.

Rise of new power in Afghanistan

Major regional powers, China, Iran and Pakistan have all showed a willingness to work with the new setup in Afghanistan and help maintain peace in the region. The geographical and political dynamics have changed significantly since the last time Taliban government was in power in Afghanistan with China establishing its strong presence in the region through economic corridors in Pakistan and also in Iran.

The economic corridors in Pakistan and Iran connect landlocked Afghanistan and the central Asian Republics to the sea ports, thus giving them access to global markets. The integrated economic interests of major powers in the region will help bring these players closer and work together and potentially bring peace and economic prosperity in the region.

Implications for Pakistan

From Pakistan’s vantage the peaceful transition has so far has ended concerns for a civil war that could have resulted in unrest on Pakistan’s western border, increasing law and order risks and potentially putting projects under CPEC into jeopardy. Moreover, the threat of an influx of refugees that could further put pressure on already strained fiscal side has been allayed, somewhat.

Further, with Pakistan likely being the preferred partner for the west amongst the Russia-China-Pakistan-Iran quartet to keep its influence, strengthening of relationship could unlock some concessions in med-to-long run while improving prospects of Pakistan’s status with global agencies (IMF, FATF etc.).

Pakistan’s net trade for FY21 with Afghanistan is reported around US$804 million mostly consisting of food related items while cements, pharma, and aluminum cans (PABC) occupy a minimal share. Analysts do not expect any material impact on cements given the strong robust domestic demand and coal alternatively imported through sea while PABC could witness neutral to negative impact given Afghanistan occupying a significant share in sales mix. The company has ventured into other markets to neutralize the impact. Lastly, with the tight border controls in the near term, Pakistan could witness inflow of smuggled products subsiding, opening up prospects for local players (such as in auto parts tyres, and consumer items).

Investment perspective

The fall of Kabul in the hands of Taliban may not turn out to be as negative as feared earlier, especially if the major powers in the region show willingness to work together. Though, still early at this point, a stable and peaceful Afghanistan will have positive spillover effects for Pakistan and the region at large. The potential positive idiosyncrasies related to lasting peace in the region may help expand market multiples in the medium and long term.