Through automated picking, highly-efficient robotized storage and smarter order processing solutions, it’s hoped that logistics companies in the UAE and Pakistan can become international players.
However, recent economic developments and the contrasting performances of the Pakistani rupee and UAE dirham may lead to very different outlooks for the logistics industries in these countries.
Current Economic Performance in Pakistan and the UAE
We’ve seen troubling economic news for the Pakistani rupee over the past few years. Due to a widening trade deficit and a free-float exchange rate mechanism agreed with the International Monetary Fund (IMF), the Pakistani rupee hit a life-time low against the UAE dirham and the US dollar in June 2019.
This officially made the Pakistani rupee the worst-performing currency in Asia, losing 35 percent of its value in the last year and nine percent of its value in the last month. As the rupee’s reserves are on the decline due to the country’s debt payments, the Central Bank is also unable to support the currency.
However, when we look at the dirham, which is pegged to the dollar, we see a contrasting story. This is because continual strengthening of the currency has provided some stability in the region, and this has been capitalized on by the UAE Central Bank.
Due to the Middle East’s unstable economic climate, the UAE Central Bank has taken several steps to ensure that the UAE’s economy is resilient to global and regional changes. In a series of stress tests performed in 2018, it was found that the bank remained resilient to risks posed by global economic trends such as escalating tensions between the US and China.
With the US dollar currently accounting for 83.2 percent of foreign currency loans in Emirati banks and the number of foreign assets in the banks increasing, a move by the Central Bank to regulate forex brokers in the UAE has helped the bank manage financial risks, ensuring the smooth operation of the country’s financial landscape in an increasingly globalized marketplace.
In addition to this, as well as increasing regulation in the marketplace, the Central Bank has also increased its gold reserve to the highest level in five months, which has also coincided with a gold price hike.
The actions taken by the UAE Central Bank also support generally strong economic data. Recently, the cabinet voted to cancel or reduce over 1,500 government fees by up to 50 percent, and experts predict that real GDP growth will accelerate to 3.3 percent next year. This follows news of the UAE economy growing by 2.2 percent in Q1 of 2019.
What Does This Mean for the Logistics Markets?
Over the past few years, we’ve seen consistently weak economic exporting figures from Pakistan, with the World Bank now suggesting that Pakistan’s share in the global exports market has fallen below one percent. Given the limited size of Pakistan’s domestic market, this causes concern for suppliers. The government’s ambitious targets on export growth and performance targets, however, provide the industry with food for thought.
To meet the government’s targets, the key for Pakistan’s logistics market will be to diversify product export categories and destinations; particularly plugging into existing Asian product supply chains. Currently, less than 10 percent of Pakistan’s exports go to dynamic markets such as India and China. With these two countries accounting for more than half of global growth, opening up export supply chains here should be a priority.
But problems are arising because Pakistan currently ranks 122nd out of 160 countries on the World Bank’s Logistics Performance Index, which reflects logistics-related problems with the road and rail infrastructure. As Pakistan looks to expand product lines and shorten order cycles to fuel growth, investment in infrastructure will be key.
A lack of market access and inadequate infrastructure are the missing links that are currently preventing a $34.2 billion market from more than doubling its potential. However, due to the weak Pakistani economy and an austerity-laden outlook, it looks unlikely that the Pakistani export sector will receive the overhaul that it needs in order to meet these ambitious growth targets. This is because the government simply does not have the money to invest in the market to alleviate problems such as long dwell times, a lack of integrated cold stores and obsolete and overloaded trucks.
However, when we look to the UAE, we see a different picture. In the recent Agility Emerging Markets Logistics Index, the UAE ranked first in the region and third globally (behind China and India) as the world’s most connected emerging economy.
This is partially due to the strong investment in roads, rail and other transport sectors in the UAE, which some experts place at around $30 billion. Domestically, the UAE has invested in over 1,200 kilometers of rail network, while also undertaking expansions of the main air and seaports. For example, Jebel Ali, which connects the UAE to over 140 ports worldwide, is currently undergoing expansions that will see handling capacity increase to a whopping 22.1 million twenty-foot equivalent units.
As a result, the outlook for the logistics industry in the UAE is far different from the one for Pakistan. The UAE economy is expected to grow over 3.66 percent in 2019, and this growth will be fueled by exports as the UAE further opens up trade routes with India, China and other emerging markets.
An Outlook for 2020 and Beyond
From the economic data provided and the government initiatives towards the logistics industry in both countries, it is clear that we’re currently witnessing contrasting fortunes between the two countries.
If the logistics market in the Middle East is set to reach its $66.3 billion valuation by the close of 2020 as some experts predict, it’s clear that there will be a reliance on the UAE. To help achieve this goal, the market will need to diversify, streamline regulation and strategically deploy digital capabilities.
However, in Pakistan, the continued poor performance of the ailing Pakistani rupee and a lack of government infrastructure (Pakistan remains one of only a handful of countries in the world to not have a dedicated Ministry of Transport), means that projections for the industry are far less optimistic. Currently mired in an economic recession and the subject of an IMF bailout, it appears unlikely that we’ll see much improvement in the infrastructure that the logistics sector desperately needs to thrive.