The coronavirus (COVID-19) pandemic will have a huge and lasting negative effect on the global economy; 2020 and 2021 will be lost years in terms of growth, and it is expected that the global economy will recover to pre-coronavirus levels only in 2022. However, this global forecast masks big disparities between countries. Some members of the G7 and BRICS groupings will recover quickly, whereas others will take up to four years to return to pre-coronavirus GDP levels depending on the level of economic shock experienced in the second quarter of a year. China will be an exception, as the country is not expected to enter a recession this year. In fact, the output of G7 and BRICS countries in the third quarter of this year will remain low, and in some cases at levels last recorded more than two decades ago.
The official assessments estimate an initial loss of PKR 3 trillion (around $15 billion) to the Pakistani economy. The disease could result into unemployment ranging from 12.5 to 15.5 million people in the case of moderate slow down and 18.7 million people to 19.1 million in case of severe restrictions. A condensed income for a vast part of the population will result in shrinking the tax base. Tax collection which was growing at the rate above 17% during July-February, FY2020 has witnessed a significant decline. After the outbreak of COVID-19 pandemic, an average negative growth rate of 13.4% was recorded during March 2020 and April 2020 as compared to last year. It is expected that there will be an increase in expenses due to the relief packages and therefore budget deficit is expected to exceed the target of 7.5% of GDP and may go up to 9.4% of GDP. The Ministry of Commerce has estimated that the exports losses may be as significant as $4 billion. Imports are expected to decline which will disrupt the supply chain of multiple industries as 68% of imports constitute raw materials, which are used to produce final goods. Healthcare facilities are insufficient to meet the populations need, creating social vulnerabilities. On average there is only 1 bed available for over 1680 people.
|IMF forecasted macroeconomic indicators for Pakistan|
|GDP Growth (%)||(1.5)||2.0|
|CAD (% of GDP)||1.7||2.4|
|Fiscal Deficit (% of GDP)||9.2||6.5|
|Unemployment Ratio (%)||4.5||5.1|
|Inflation Rate (%)||11.1||8.0|
Policy response by the government
Fiscal policy: A relief package worth PKR 1.24 trillion has been announced by the federal government. Following are the key features:
- Elimination of import duties on emergency health equipment.
- Relief to daily wage workers (PKR 200 billion).
- Cash transfers to low-income families (PKR 150 billion).
- Accelerated tax refunds to the export industry (PKR 100 billion).
- Financial support to SMEs (PKR 100 billion).
- Accelerated procurement of wheat (PKR 280 billion).
- Financial support to utility stores (PKR 50 billion).
- Relief in fuel prices (PKR 70 billion).
- Support for health and food supplies (PKR 15 billion).
- Electricity bill payments relief (PKR 110 billion).
- An emergency contingency fund (PKR 100 billion).
- A transfer to the National Disaster Management Authority (NDMA) for the purchase of necessary equipment to deal with the pandemic (PKR 25 billion).
Monetary & macro-financial policy
State Bank of Pakistan (SBP) has responded to the crisis by cutting the policy rate three times by a cumulative 625 basis points to 7.0% in the span of three months. SBP has also introduced three refinancing facilities for supporting hospitals and medical centers to purchase equipment to detect, contain, and treat COVID-19, stimulating investment in new manufacturing plants and machinery and incentivizing businesses to avoid lay off their workers during the pandemic. It has also introduced temporary regulatory measures to maintain banking system soundness and sustain economic activity. These include:
- Reducing the capital conservation buffer by 100 basis points to 1.5%.
- Incentivizing businesses to avoid lay off their workers during the pandemic.
- Increase the regulatory limit on extension of credit to SMEs by 44% to PKR 180 million.
- Relaxation of the debt burden ratio for consumer loans from 50% to 60%.
- Allowing banks to defer clients’ payment of principal on loan obligations by one year.
[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]