The closure of Pakistan’s airspace to India, a move aimed at crippling India’s aviation industry, is having significant economic repercussions, particularly on Pakistan’s already fragile economy. While Pakistan hoped to exert pressure on India through this action, the real impact has fallen on its foreign exchange reserves and overall economic health.
Key Economic Impact:
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Loss of Overflight Fees:The most immediate economic loss for Pakistan is the overflight fees from international airlines, especially Indian carriers, which are among the largest users of Pakistani airspace. With airlines like Lufthansa, Air France, British Airways, and Emirates rerouting flights around Pakistan, the country is missing out on millions of dollars in revenue. According to Rajeev Mantri, the loss of these fees will deal a significant blow to Pakistan's already fragile forex reserves.
Given that India is the third-largest aviation market in the world, the loss of overflight fees from Indian carriers is substantial. The financial losses can be measured in hundreds of millions of dollars annually. This loss is particularly painful for a country with few competitive export industries and a significant reliance on external debt and aid.
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Increased Airline Costs:As international airlines reroute flights, fuel costs and travel times are rising. This is not only costing the airlines more but also increasing costs for passengers. Airlines are having to fly longer routes, bypassing Pakistani airspace, which affects their operational efficiency. For example, Lufthansa has confirmed it will avoid Pakistani airspace for the foreseeable future, resulting in longer flight durations to Asian destinations.
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Economic Strain:This airspace closure compounds existing economic difficulties for Pakistan. The country had only recently started recovering from the brink of default, having received a $2 billion bailout from the IMF in March 2023. However, these geopolitical tensions threaten to undermine any economic progress made. Analysts, such as Kranthi Bathini of WealthMills Securities, point out that Pakistan’s economy is highly debt-dependent and continues to struggle with global financial pressures.
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Historical Precedents:Pakistan’s decision to close airspace is reminiscent of the 2019 airspace closure following the Pulwama terror attack, which caused nearly $100 million in losses due to flight rerouting and the loss of overflight fees. At that time, it was reported that the country faced daily losses of around $232,000 from overflight charges alone. The current situation seems to be repeating these losses, and Moody’s has warned that further escalation could have a devastating effect on Pakistan’s macroeconomic stability.
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International Reactions and Future Risks:Moody’s and other analysts have noted that continued geopolitical instability could undermine Pakistan’s growth prospects and its ability to manage debt. The ongoing tension could lead to difficulties in accessing foreign loans and increase pressure on Pakistan’s foreign currency reserves, making it harder to meet international debt obligations. Furthermore, Pakistan’s fiscal consolidation efforts could be severely hampered, setting back its recovery even further.
Long-Term Consequences:
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The geopolitical standoff could create lasting effects on Pakistan’s economic trajectory, as the country’s ability to attract foreign investment, manage fiscal policy, and sustain its recovery would be increasingly compromised. The closure of airspace has directly hurt a key source of foreign exchange income, exacerbating Pakistan's economic vulnerabilities.
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Investors and analysts will continue to watch how Pakistan responds in the coming weeks, particularly in terms of its foreign relations and whether the country can stabilize its economy or if this escalates into a more prolonged financial crisis.
In short, while Pakistan may have hoped to leverage airspace closure as a tactical move against India, the economic fallout for Pakistan could be far more severe, especially with global airlines avoiding its airspace and the loss of vital forex at a time of economic fragility.
