Pakistan-The possible economic impacts of coronavirus crisis

First negative GDP growth in 68 years

Pakistan may fall into a recession – for the first time in 68 years – due to the severe impact of the deadly pandemic, economy expected to be shrinking up to 2.2% and a painful decline in per capita income, reveals a new report of the World Bank.

The country was in such a bad economic condition almost 68 years ago but even after the third India-Pakistan war that led to separation of East Pakistan, the country posted some growth.

“Pakistan suffered a decline in its GDP only once in her entire history (1951-52). Even at the height of the Bangladesh crisis in 1971, GDP growth was positive at 1.23%.

It is for the first time that the finance ministry endorsed the economic recession forecast from the World Bank and the International Monetary Fund (IMF). The statement suggested that Pakistan would fall into recession for the first time in 68 years. Last time, the economy had contracted in fiscal year 1951-52.

For the first time in nearly seven decades, Pakistan’s economy is expected to post a negative growth rate of about 1.6% this fiscal year, the finance ministry said on Tuesday, confirming the recession forecasts by leading global financial institutions because of the coronavirus pandemic.

“In the worst-case scenario, the growth rate could remain negative, at -1.57 per cent of GDP,” the ministry said in a statement, issued after a high-level meeting chaired by Adviser to Prime Minister on Finance and Revenue Dr Hafeez Sheikh.

In a nutshell, the marked economic slowdown is now leading to negative GDP growth, as projected by the International Monetary Fund (IMF), the World Bank and the SBP.

From mild to deep recession

Pakistan’s pre-corona economy was facing a mild recession, which was the result of stabilisation measures adopted by the government and the State Bank of Pakistan (SBP). Then the Covid-19 pandemic forced the government to impose lockdowns across Pakistan. These lockdowns have triggered deep recession in the economy. Pakistani economy will likely to come out of lockdown facing a deep recession.

Decline in imports and exports

According to ministry of planning estimates, Imports are estimated to decrease by 50-60%, exports by 10-20%. The economic meltdown is taking place across the globe and exporters have already felt the pinch since the frequency and number of new orders has slowed down. They are meeting the old orders that were at advanced stage and close to completion.

In certain cases, old orders have been put on hold since their processing has not yet started. This implies that Pakistan should expect lower foreign exchange earnings in the near future.

Corona Virus has primarily disrupted the Global Value Chain also called GVC. It means that the movement of imports and exports has been disturbed. Exporters from Pakistan are unable to process their orders and the payments from previous orders have also been halted in most cases as businesses abroad, mostly in Europe and the U.S have been shut down.

 Movement of goods and cargo is also blocked making it extremely difficult to maintain the flow of business. Conversely, imports cannot be completed as lockdowns have shut down every major city in the world.

 People are not coming to offices and Governments have ordered to work from home. This model can work for IT and service based companies but trade involves tangible goods, which cannot be handled without human presence. There are a huge number of private companies in Pakistan that heavily rely on imports for running successfully.

 Commercial importers will suffer from delays or complete stoppage of value chain while industrial importers will have to stop production because of non-availability of raw material. After the initial grace period, the shortfalls in revenue will result in salary cuts and then finally, job losses.

Pakistan Institute of Development Economics (PIDE) presented three different scenarios as the first, there will be negative impact of GDP growth of -0.30 percent in case of reduction in imports by 2 percent; the second, there will be negative growth impact of -2.3 percent in the case of 10 percent reduction in imports and exports; and the third, there will be negative growth impact of -4.64 percent with reduction of 20 percent in imports and exports.

Although, Pakistan may not be ranked higher on the GVC, the country has enough integration with the global market to feel the impact of international lockdown. The five major trading partners of Pakistan with more than 50 percent share are including China, USA, UK, Japan, and Germany. Four of these are the worst-hit countries by the COVID-19.

The USA and China are the major importing partners and we heavily rely on them for the import of capital and intermediate goods. These raw materials are then utilised in the production of final goods for exports and domestic consumption. Similarly, being our major export partners, any economic downturn to these economies may face, would directly affect our exports as well as our GDP.

Growing fears of business bankruptcies

The closure of schools, offices, factories and markets will hit the small and medium businesses. There is a possibility of mass bankruptcies. As the middle and lower income groups struggle to earn enough income to feed them and pay for basic necessities, which can result in hyper-inflation, joblessness and complete collapse of the economy. Small traders, businesses with couple of employees and self- employed people have been hit hard and find it difficult to run the small businesses without cheap credit from banks. The small investors and businessmen in transport- travel-hotel- aviation-tourism-entertainment-sports and other sectors badly needs the help to avoid bankruptcies. The government needs to announce rescue plan for these sectors ignored so far.

Job losses  

According to ministry of planning estimates, employment loss is estimated at 20%. On the social front, livelihood opportunities have been squeezed all of a sudden. Daily-wage earners, small and medium businesses and traders took a big hit due to this unavoidable action.

According to PIDE (Pakistan Institute of Development Economics), there will losses of jobs in the millions, particularly for semi-skilled and daily wage earners. The unemployment can go up to near 9%. According to some estimates 18 to 22 million workers can lose jobs as the result of this crisis. Daily wages and contract employees will be hardest hit.

When the lockdown just started, the labour related to industries and other businesses waited for some time in cities in the hope that the situation would improve in a couple of weeks.

However, the situation deteriorates and many labourers have gone back to their native villages and towns since they are not in a position to eke out their existence. The compelling reason is that they will be better off in their native areas due to the availability of food items and shelter.

Shrinking job markets in Gulf countries

Another serious problem adding to the country’s woes are the shrinking job opportunities in the oil-producing Arab and Gulf countries that are the biggest source of employment for Pakistani expatriate workers. These countries are facing severe economic crisis as the result of oil price crash. The businesses will shed jobs as economic activity will slow.   This will not only add to the rising unemployment problem but will also affect remittances. The development will have serious social and economic implications.

One hundred thousand (1, 00,000) Pakistani workers have lost jobs in UAE as the country announced to postpone the World Trade Exhibition to next year. Thousands more will return from Saudi Arabia- Qatar and other countries.

Increased poverty

The job and livelihood loss will lower the incomes of most working class and poor families. The rising unemployment means more people will fell under the poverty line. The decline in incomes simply means more poverty and deprivation. The people living in poverty could increase to 70 million as the result of deep recession.

Although philanthropist/charity organisations actively jumped in to provide essential food items to a large chunk of people, the scale is quite large and it is not easy to reach out to all the deserving people.

Slowdown in economic activity

Agriculture is expected to see slow growth as the worst locust infestation in over 2 decades damages harvests of cotton, wheat, and other major crops. The major supply chain disruption has caused major problems to farmers. The changing weather patterns also affecting the crops. The agriculture sector will experience a slow growth.  

Modest growth is expected in some export-oriented industries such as textiles and leather. However, large-scale manufacturing, which provide over half of industrial production, will likely to contract, as it did in the first half of financial year 2020 when currency depreciation ran up production costs.

On the economic front, the sudden closure of large industries, small and medium businesses, ports, airports and transport have almost jammed the wheel of the economy.

Even the lockdown has scaled down the consumption of petroleum products a great deal, which has resulted in partial closure of refineries and the government has to cut down on petroleum imports.

Pakistan’s economy is projected to face a loss of up to 4.64 percent in gross domestic product (GDP) because of disruptions in trade, both in imports and exports after the outbreak of COVID-19.

It may be mentioned that the impact entirely relates to trade disruptions, while the impact of internal lockdown was not considered, the potential decline in foreign direct investment (FDI) and remittances, and disruptions in other sectors such as aviation, tourism and hospitality, etc., would also be expected.

Several sectors of the economy were affected by the ongoing lockdown in Pakistan. The analysis focused on the quantification of the potential loss in economic activity for the last quarter of FY 2019-20 resulting from trade disruptions.

World Bank report has pointed out; sharp economic recession along with skyrocketing fiscal deficit will have serious implications. Pakistan`s total debt and liabilities stand at about Rs41 trillion, which is almost 94pc of the country’s GDP. The external debt situation is particularly problematic.

The government will face shortfall in the revenues. The deep recession will make it difficult for tax authorities to achieve the revenue collection of Rs 5250 billion.  

Government incentives to reduce the impact

Important incentive policy announced for the construction sector: reduction of import duties on construction and building material, reduction of taxes on sales / purchase of property. Financial incentives announced by State Bank of Pakistan. Around US$ 290 million cash subsidies given to export sectors to compensate for lost revenue. More than 237 exports units allowed resuming of production under preventive SOPs imposed by the government.

 Three months waiver on electricity bills for SMEs when they open up is, granted by the government. Under a financial support programme for skilled labour losing their jobs due to the lockdown, the government would pay cash assistance. Prices of various types of imported fuels reduced.

But these incentives are not enough to reboot the economy. The small businesses will need more incentives to kick start their businesses. These incentives needs to be extended to other sectors like transport-aviation-travel-tourism-agriculture-sports etc. 

                                                                                           Khalid Bhatti