The world has come to a screeching halt.
The coronavirus pandemic has affected lives in so many different ways that no one could have imagined only a few months ago. Large metropolitan cities like New York and London seem like ghost towns right out of a Hollywood movie. Restaurants, cinemas and airlines have stopped operating and malls are deserted. People, no matter where they are, are just afraid to get out of their houses and carry on with normal life. It is no more a health crisis, and is instead, taking the shape of an unprecedented economic catastrophe.
No one knows the exact scale of this catastrophe, but everyone knows that a major recession is in the offing.
Pakistan is no exception and the International Monetary Fund (IMF) has projected a 1.5 per cent contraction in the country’s GDP this year, the first in over seven decades, whereas the World Bank (WB) estimates that it can be as much as 2.2 per cent. Next year would be no different and the economy is expected to post negligible growth, that too if we are lucky. However, even this guesstimate can very easily turn into further contraction, if the crisis continues to deepen.
HOW TO UNDERSTAND COVID-19’s IMPACT ON PAKISTAN’S ECONOMY?
In layman’s terms, there are two major ways in which the pandemic can affect the economy. The first is what’s happening outside the country, while the second is what’s happening inside. In other words, the effects on the economy can be driven by both global factors and domestic developments.
If you remember the 2008 global financial crisis, which turned the world’s financial markets upside down, you would also remember that it did not have a major impact on Pakistan’s economy. That can be explained by our poor integration with the world’s financial markets, which has been a blessing in disguise. Therefore, one thing is certain that the impact of a global economic meltdown is going to have a much more diluted effect on Pakistan than other countries that are fully integrated into the global economy.
There is no doubt that the country would sail through this storm, but not without a well-thought-out action plan to stimulate the economy and bring it back to life, once the crisis is over.
Let’s look at the global travel and tourism industry, for instance, that is taking a major hit. But Pakistan hardly had any share in this market and therefore is not likely to get impacted much. Nevertheless, disruptions in economies of Pakistan’s export destinations like the United States (US) and Europe are having a major bearing on Pakistan’s exports. Export orders are being cancelled, leading to a serious dip in the country’s already flailing exports. Fall in workers’ remittances is another area that is going to adversely impact the country, as Pakistani workers in the Middle East and elsewhere suffer job losses.
Now we come to the in-country crisis, the impact of which is going to be driven by the severity and duration of the disease outbreak and the state’s response to it i.e. the nature and duration of the lockdown and the restrictions imposed. The already imposed lockdown, though enforced unevenly, has affected the economy in a big way. Millions of jobs are at stake and daily wage workers, who in most cases already belong to a vulnerable segment, are likely to be the major sufferers of the crisis.
The lockdown has also suppressed demand in a number of industries such as automotive, consumer goods and construction among others. But more significantly, services sectors like domestic travel and transport, retail and wholesale trade, and hospitality are the worst casualties with their business activities coming to a standstill.
Suppressed economic activity is resulting in a significant revenue loss for the government, whereas massive emergency response and relief activities are driving the expenditures high. The fiscal deficit is likely to touch 10 per cent of the GDP, leaving hardly any money for development, while the debt-to-GDP ratio is expected to hit the roof on the back of substantially increased debt burden. And if the country has to impose a blanket lockdown again at some stage, owing to the worsening health situation, all these indicators could quickly go from bad to worse.
It is time for us to start thinking about some difficult fiscal and economic reform sore points that we have been avoiding for years.
However, there is also a silver lining. Looking at Pakistan’s GDP composition, there are quite a few sectors like agriculture, electricity generation and distribution, gas distribution, communication, government services etc that are going to be much more resilient to this crisis. Moreover, there could also be some windfall earnings from the global economic downturn. The unprecedented fall in global oil prices is likely to bring in some relief for the country through the reduction in import bill. Additionally, as the world gears up for providing relief to developing countries to fight the economic shock, Pakistan is likely to be one of the beneficiaries of debt relief measures and aid inflows. In fact, the country has already received $1.4 billion in rapid financing from the IMF.
Nevertheless, we must realise that Pakistan was already facing a tough economic situation and COVID-19 hit the country just when macroeconomic indicators were beginning to stabilise. There is no doubt that the country would sail through this storm, but not without a well-thought-out action plan to stimulate the economy and bring it back to life, once the crisis is over. And this would need much more than what’s being offered in the recently introduced fiscal stimulus package. Moreover, we would need years of fiscal discipline and economic prudence before we are fully able to recover from this shock.
Now is the time to start thinking about some of the difficult fiscal and economic reform sore points like bleeding state-owned enterprises, ballooning wage and pension bill, swelling circular debt and inefficient government machinery, that we have been avoiding for years.