There are fundamental changes that happen from time to time; specially during times of war. But this time the enemy is a virus and not a foreign power. The COVID-19 pandemic has created a wartime atmosphere where sudden and unexpected changes seem possible. After many months of lockdowns, loss of life and the closing of global economy, the clouds of uncertainty are overcasting everything. Would the business houses reopen and the jobs come back? Would we be able to travel again? Would the supply of money from central banks and governments be enough to prevent a deep and lasting recession? The industries are seeing a big drop in profitability as production stops, but the rebound effects when the situation relaxes will allow for partial catch-up.
One thing is clear. GDP is currently taking a severe beating. However, the size of the impact in different parts of the world will depend fundamentally on how long the present economic disruption lasts. We foresee a drop in GDP growth in 2020 compared to the pre-crisis base case ranging from 1.9 to 7.1 percentage points. Whether the economic disruption lasts eight weeks or twelve, the impact on industry will be two-fold, affecting both annual profitability and short-term liquidity. Tourism and travel, the airline industry and retail (excluding FMCG) will be hit strongly on both fronts, putting them in the upper right-hand quadrant of our coronavirus impact matrix below.
Pakistan’s economy was already in shambles even before COVID-19 pandemic and most of the industries were barely surviving. This was already evident due to closures of a large number of small industries and sharp decline in large scale manufacturing. The federal government has estimated that the impact of losses due to pandemic COVID-19 virus on some sectors of the national economy is around Rs 2.5 trillion. Pakistan Institute of Development Economics (PIDE), an affiliate of Planning Commission, has assessed that the monthly average losses of losing jobs is around Rs180 billion to Rs260 billion and it might go up to Rs780 billion in the next three months.
The Planning Commission has estimatedthat the size of the country’s GDP stood at Rs44 trillion and one/fourth stood at Rs11 trillion, so the disruption caused by coronavirus was expected to cause at least 10 percent losses in the last quarter (April-June) that would stand at Rs1.1 trillion.
Fear in construction sector
Construction is a major economic driver, not only in terms of employment, but also the wages. COVID-19 is impacting the global construction industry with projects facing supply chain issues, a halt to planning and inspection timetables, and new measures to ensure the health and safety of the workforce. New social distancing measures have come into focus as international governments enact their approaches to minimize the spread of the coronavirus. Everything boils down to time and money in construction industry. To help prevent the spread of the infection, numerous schools, universities and organizations have closed down. Construction firms are still in the dilemma and fear of how they will cover up with the delays of the project completing after their site has been shut due to quarantine. These shutdowns and bans imply that organizations should work from home and involve teleworking with different technologies to keep the business going.
Researchers are prediction that the US economy will soon enter recession wherein the non residential construction ordinarily slacks the general economy by one to year and a half time. This implies numerous temporary workers can expect “increasingly troublesome conditions” one year from now. Largely the American construction companies depends heavily on foreign suppliers and producers for building raw materials; especially China. Since most of the companies have closed due to quarantine, the production lines have stopped creating shortages.
In Pakistan, the worst affected are daily wagers and laborers, who are the 47 percent of the workforce. They are struggling hard to survive amid coronavirus lockdown in the country.
The COVID-19 outbreak across the country is not only affecting the business class but also badly hitting the daily wagers; especially construction laborers. The construction business is the second largest sector in Pakistan. It is highly labor-intensive as almost all the construction companies are using contract labors. These contractual laborers or daily wage workers does not have any perks and benefits like other employees. Therefore they are not supposed to be compensated for any type of leave. They can’t go into self-quarantine if they have traveled to high risk areas or are tested positive with virus symptoms. Due to COVID-19 outbreak, the reduction in the supply of labor force is delaying the construction projects. Given the shock the coronavirus has had on the economy, early on it appears the construction industry is absorbing the blow and adapting.
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On April 03, Prime Minister Imran Khan elevated the status of the construction sector to that of an industry while announcing incentives for investors and businessmen as the government tries to mitigate the economic impact of the coronavirus outbreak. He said that the government aimed to “find a balance” between continuing a lockdown and avoiding unemployment.
The main incentives announced by the premier include:
- People investing in the construction sector would not be asked about their source of income.
- The constructors will be charged a fix rate tax of per square foot or square yard.
- However, constructors of Naya Pakistan Housing Scheme for the poor will only have to pay 10 per cent of the fixed tax.
- Withholding tax will be waived off for all construction sectors except the formal sectors of steel and cement.
- Sales tax will be reduced in coordination with provinces.
- Any family selling their house will not have to pay any capital gains tax.
- A subsidy of Rs. 30 billion to be given for the Naya Pakistan Housing Scheme.
- Construction sector to be given the status of an industry.
- Construction Industry Development Board to be set up to support the sector.
This relief package has twofold aim, providing employment to daily wage workers and encouraging economic activities. The key feature of this package is to support housing for the poor under the Naya Pakistan Housing Program. This also includes additional incentives for builders and developers to build low-cost housing. However, like every newly announced scheme by the governments, there are certain doubts. Are these proposed measures the best possible available way to do so? What impact it would have on bourgeon urban growth? Riposting to such probing would not be easy.
Under this scheme investors will no longer be required to declare the source of income for their investments until June 2022. This will an immediate surge in the demand for land hence there would be increase in property prices. As untaxed or illegally money would flow-in; resultantly, there is a risk of reducing the affordability by masses.
Moreover, the exemption from provisions of Section 111 of the Income Tax Ordinance, the tax breaks and justification of capital gains tax, the said scheme would be able to sell properties for investment purposes. Likewise, fixed tax regime would allow the constructors to make hefty profit. Hence it would to benefit the investor and not the general public. It is expected that measures could be taken to restrain such malpractices otherwise it might back-fire and the new housing schemes remains vacant or may benefit the higher income groups take the advantage. This would kill the objective of benefitting the poor.
It is expected that the government would design a pre-qualification criteria for the constructors/ builders. The government should also control the tendency of developing the housing schemes in remote areas where the prices of the land are comparatively low. Such steps would enhance the long-term affordability of this scheme for general public.
[box type=”note” align=”” class=”” width=””]The author, Mr. Nazir Ahmed Shaikh, is a freelance columnist. He is an academician by profession and writes articles on diversified topics. He could be reached at nazir_shaikh86@hotmail.com[/box]