Before the COVID-19 outbreak, Pakistan’s economy was already struggling to stay afloat but was in no danger of collapse. However, the pandemic has severely impacted the nation’s economy and may virtually push it to the brink of bankruptcy. While almost all nations have been substantially affected by the global health emergency, however, Pakistan’s economy does not have the capacity to absorb the massive disruption caused by the pandemic.
Months before the pandemic, in July 2019, Pakistan was forced to seek an Extended Fund Facility (EFF) program with the International Monetary Fund (IMF) due to its twin deficit problem, i.e. fiscal and current account. With aggressive curbs on imports and massive devaluation, the country managed to reduce the current account deficit (CAD) by over 70 percent in the first seven months of Financial Year (FY) 2019-20. However, this came at the expense of economic growth, which fell from 5.6 percent in 2018 to 3.3 percent in 2019. In 2020, it was being projected to fall further to 2.4 percent, without accounting for the pandemic. Meanwhile, the fiscal deficit problem continued unchecked—partly because the revenue collections fell drastically short of the targets and because the government reduced developmental expenditure to demonstrate a positive primary balance, which was one of the conditionalities of the IMF program. Amidst the ongoing COVID-19 pandemic, both these twin-deficits are likely to re-emerge, with a drastic decline in exports and foreign remittances. Pressure will also mount on the expenditure front.
Economy before COVID-19
On January 2, 2020, PM Imran Khan claimed that the government had stabilized the economy, declaring this to be the year of growth, development and wealth creation A week later, the finance ministry issued a press release asserting that the economy was moving “progressively along the adjustment path and stabilization process and economic recovery is expected towards the end of FY2020”, (The News International 2020, M. Saleh Zaafir). The statement noted several achievements in the first five months of FY2020: the CAD dropped by nearly 73 percent; the fiscal deficit was at 1.6 percent of GDP; the “primary balance” was positive, at 0.3 percent of the GDP; the credit rating had improved from negative to stable; and the country’s rank on the Ease of Doing Business Index had improved from 136 to 108.
Foreign banks and ratings agencies, too, have endorsed Pakistan’s management of the economy. In December 2019, Moody’s also upgraded Pakistan’s credit outlook from negative to stable (The News International, December 3, 2019). As late as the last week of February 2020, Credit Suisse released a report titled “Pakistan: On the Path to Recovery,” noting that the “fundamentals” of the economy had improved significantly as a result of the IMF package, fiscal consolidation and the necessary reforms being undertaken by the government. (“Pakistan’s Economy on the Path of Recovery”, The News International, February 2020)
However, a closer look at Pakistan’s pre-COVID-19 economic landscape reveals a very different picture. The 70 percent reduction in the CAD was a result of import compression and steep depreciation of the Pakistani Rupee, which came at the cost of economic growth (“Palpable Despondency”, Waqar Masood, The News International, December, 2019). From around 5.5 percent in FY18, Pakistan’s GDP growth came down to 3.3 percent in FY19, and was further projected by the IMF to fall to 2.4 percent in FY20. Renowned Pakistani economist, Dr. Hafiz Pasha, estimated that the 3.3 percent growth claimed by the government and multilateral institutions in FY19 was actually 1.9 percent, set to fall further to 1.2 percent in FY20 (The News International, Feb 2020). Moreover, Dr. Pasha predicted a fall in per capita income in light of the population growth rate of 2.4 percent (PBS). Thus, Pakistan’s economy was faltering on virtually every economic parameter.
The increase in foreign exchange reserves (after the IMF approved the EFF program in 2019) was largely based on borrowed money, such as bailout loans from China, Saudi Arabia and the UAE. Despite a nearly 30 percent depreciation in the value of the Pakistani Rupee, exports increased only slightly. In the first nine months of the current fiscal year, exports rose by only 2.2 percent in dollar terms (PBS, 2020). Meanwhile, by January 2020, the percentage had spiked to 14.6 percent, with food inflation at 19.5 percent in urban areas and 24 percent in rural areas. In March 2020, the inflation number did fall to 10.2 percent, with food inflation at 13 percent and 15.5 percent in urban and rural respectively (“Inflation snapshot”, SBP 2020) but this was largely due to the disruption and dislocation caused by the pandemic.
Ultimately, high taxation, high interest rates, and the devaluation of the Pakistani Rupee (which raised the prices of imported inputs) lead to a massive fall in industrial production. According to Dr. Hafiz Pasha, “Many of the industries have registered double-digit declines in the first four months of 2019-20. The production is down by 43 percent of cars; 19 percent of motorcycles; petroleum products by 14 percent; cigarettes by 36 percent; steel products by 30 percent; chemicals by 20 percent and so on. In fact, out of the 112 product lines covered by the QIM, there has been a decline in output in 65 lines” (“Fall in industrial output”, Dr. Hafiz Pasha, Business Recorder, 2019).
After COVID-19: dire predictions
The economy has been unraveling at such a puzzling speed that even seasoned institutions and individuals cannot accurately estimate the extent to which the pandemic will impact growth. In the first week of March, the Asian Development Bank (ADB) came up with a number that seemed agreeable with the dire predictions being made around the world. According to the ADB, Pakistan’s economy would lose around US$ 16 million in the best-case scenario and around US$ 61 million in the worst-case scenario. In the event of a significant outbreak of COVID-19, the loss would amount to approximately US$ 5 billion, the GDP would contract by 1.57 percent, and nearly a million people would lose their jobs (“Coronavirus may cause $61m loss to Pakistan: ADB, Shahbaz Rana,” Express Tribune, 07 March 2020). By the third week of March, the ADB had drastically revised its estimates to a US$ 415 million loss in the best-case scenario, and a $6.6–17 billion loss in case of significant outbreak, with the loss of employment ranging from 1.2 million to 3.2 million jobs and the GDP growth contracting by two to five percent (“COVID-19 Economic Impact Assessment Template,” Asian Development Bank, 28 March 2020).
However, the Pakistan Planning Commission declared that the virus would lead to a 0.8–1.3 percent loss in the GDP, which would bring the growth down from 3.3 percent to around 2.5 percent (“COVID-19 effects: Pakistan estimates 0.8 to 1.3pc loss to GDP growth,” Mehtab Haider, The News International). However, multilateral institutions such as the World Bank and IMF, and independent economists in Pakistan did not share this optimistic assessment.
The magnitude of the crisis confronting Pakistan was evident in the negative growth being projected, this being the first time in history that its economy will contract by 0.38%. Independent Pakistani economists Dr. Hafiz Pasha and Dr. Shahid Kardar initially presented two scenarios of different severity. In the best case, the economy would contract by 4.6 percent in the fourth quarter of FY20, and in the worst case, by 9.5 percent. Their projection for long-term job loss is approximately 6.5 million, an unemployment rate of 16 percent. Nearly 15–20 million people could slip into poverty, and the total number of poor is likely to cross the 100 million mark, i.e. almost 50 percent of the population.
Foreign trade and balance of payments
A PIDE study into the trade disruptions caused by COVID-19 and its impact on Pakistan’s GDP had worked out a worst-case scenario in which there would be a 20 percent decline in exports and imports. Almost 70 percent of Pakistan’s imports constitute raw materials, intermediate goods, and capital goods; around 60 percent of exports are textiles, which depend heavily on imported raw materials. Therefore, a decline in imports will, in turn, affect both exports and growth. By the PIDE’s calculations, a trade disruption of 20 percent would lead to a GDP contraction of 4.6 percent in the last quarter of FY20.66
The prospect of reduced remittances by overseas Pakistanis further adds to the crisis. Remittances account for approximately eight percent of the country’s GDP, being equal to (and sometimes more than) exports. COVID-19 is expected to have a severe impact on the remittances, especially from the Middle East. The IMF has estimated a drop of over US$ 5 billion in FY20 and FY21. Together with the fall in exports, this will significantly impact Pakistan’s external finances.
Trade, industry and business
Pakistan already had very little fiscal space to absorb any major shock. According to calculations made by Pasha and Kardar, in the fourth quarter of FY20, the industrial sector is estimated to contract by 14-22 percent, while the services sector by 11-15 percent. Agriculture is expected to grow by a marginal one percent. The World Bank expects industrial growth to contract by 2.1 percent and services sector by 1.7 percent in this entire FY20. In FY21, the industrial and services sectors are expected to remain anemic, at 0.7 and 0.8 percent, respectively.
Reports from the ground reveal that businesses and industries are in deep distress. Pakistan’s flagship carrier, Pakistan International Airlines (PIA), which was already incurring losses, has been listed as the airline most at risk of bankruptcy in the next two years because of the COVID-19 crisis (Anurag Kotoky, “The Airlines Most in Danger of Going Under During the Crisis,” Bloomberg, 26 March 2020). Pakistan’s Ministry of Aviation has estimated that the sector could lose up to PKR 25 billion in just two weeks of lockdown (“Economic fallout: Pakistan’s aviation sector braces for Rs25b loss amid COVDI-19 travel ban,” Waqas Ahmed, Express Tribune, 23 March 2020). The Pakistan Railways was losing PKR 1 billion per week due to the lockdown. Amongst the worst hit is the automobile sector, with sales down by nearly 50 percent (Aamir Shafaat Khan, “Car sales plunge,” Dawn, 11 April 2020). The pharmaceutical sector, which was already reeling under the impact of PM Khan’s decision to ban all trade with India, has seen a drop in sales by 50 percent and an increase in the cost of raw material (mostly imported from China) by 300 percent (“Pakistan’s pharmaceutical firms report 50% decline in profits due to pandemic,” Usman Hanif, Express Tribune, 19 April 2020). In the telecom sector, too, revenues have fallen by 10-15 percent due to a decline decrease in voice traffic amidst the lockdown. Much of the telecom revenue came from pre-paid cards, which are not being recharged as frequently, given the restrictions on movement (Khurram Hussain, “Telecom revenues dip as voice traffic falls, data rises,” Dawn, 14 April 2020).
The economic fallout of COVID-19 will be severe on Pakistan. This, in turn, will impact its domestic politics as well as foreign, security and strategic relations with other countries. To meet the challenge of the economic downturn, the country must initiate sweeping economic, political and security reforms, which will require significant bailouts from international donors and friendly countries. However, Pakistan is neither inclined to making reforms nor likely to receive any major bailout program, since most donor countries have to provide huge stimulus packages to kick-start their own economies, leaving little fiscal space to assist other countries.
In the absence of traditional donor countries and institutions, Pakistan must turn to ‘friendly countries’ such as China and Saudi Arabia. The Saudis have already given Pakistan US$ 3 billion as deposits to improve its national balance sheet and have extended a deferred oil-payment facility worth an additional US$ 3 billion. Thus, Pakistan’s hopes are currently pinned squarely on the “Iron Brother,” i.e. China. However, Chinese businesses and officials are concerned about the viability and profitability of Chinese investments. Already, Pakistan has requested China to relax the payment obligations due to them for the power plants set up under the aegis of the China–Pakistan Economic Corridor (CPEC) (Khaleeq Kiani, “Pakistan urges China to soften terms for power deals,” Dawn, 15 April 2020).
In the last 20 months, the current government’s lack of administrative and governance skills have become evident. However, destabilization is unlikely, since the government continues to enjoy the support of the military, which paved its way to power. The Opposition parties are not strong enough to not confront the ruling government and would prefer that PM Imran Khan to bear responsibility for all the tough decisions that will need to be taken to keep the economy from derailing.
In my personal view, internally, the pandemic will result in dislocation and economic distress. Poverty and unemployment are bound to increase. There are serious concerns of law-and-order disturbances and rise in crime. However, the governments need to be more vigilant and responsible to tackle the shrinking Pakistan’s economy.