Pakistan Institute of Development Economics


Assessing the Covid-19 economic fallout in Pakistan

Publication Year : 2020
Author: Henna Ahsan
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As the global economy comes to a standstill, one question dominating headlines in Pakistan is whether or not the country’s economy can afford a lockdown. While analysts weigh the cost and benefits of such a move, it is imperative to first understand the economic ramifications of the current situation before one attempts to present a solution.GDP growthWhile reviewing the economic situation of Pakistan for 2019-20, it is heartening to note that despite Covid-19’s adverse economic impact, the agriculture sector will still experience MODEST GROWTH. This is crucial since the sector accounts for roughly 20% of Pakistan’s gross domestic product (GDP). Its growth rate is estimated to be at 3.7% and would surpass the target of 3.5% as conceived in the ANNUAL PLAN 2019-20. This is mainly due to the reforms brought about by the Pakistan Tehreek-e-Insaf (PTI) government in the agriculture sector, particularly in the sub-sector of livestock. However, the manufacturing sector, which accounts for about 13.5% of the GDP, could exhibit a decline in its growth by 5.7% as compared to the Annual Plan’s target of 2.5%, and against the negative growth (-0.27%) in 2018-19. This is mainly due to the closure of several factories and mills across the country. In this sector, only food and pharmaceutical manufacturers have continued their operations during the lockdown.The electricity and gas distribution sector is estimated to grow by 0.8% against the Plan’s target of 1.5%. In the construction sector, a slow growth of 0.1% is estimated against the target of 1.5%. In the wholesale and retail trade sector, there will likely be a slow growth of 1.3% as compared to the targeted growth of 3.9%. The transport, storage and communication sector is estimated to show a negative growth rate (-0.7%) against the target of 3.5%. The finance and insurance sector will also experience a slow down in its growth by 2.8% against the target of 6.5%. The general government sector will achieve a growth of 6.0%, which is due to the increased health and relief related activities. The private services sector, however, will probably show a growth of 6.3% against the target of 7.1%. Naturally, the tourism sector will also be adversely impacted. The overall GDP growth for 2019-20 is estimated to be around 1.1% as compared to the Annual Plan’s target of 4.0%, and the 3.3% growth rate achieved in the preceding year i.e. 2018-19.Balance of paymentsAccording to government sources, exports for 2019-20 are estimated to decline by up to $4 BILLION of the Plan’s target of $ 26.2187 billion. Imports, however, will significantly increase above the target of $53.664 billion due to a greater dependence on the import of medical equipment. As a result, the trade deficit is expected to widen. There will likely be a sharp decline in workers’ remittances because of the slowdown of the global economy and increasing unemployment of overseas Pakistanis. However, there is a possibility of aid and relief packages flowing in from the Middle East. The overall current account deficit is expected to be at a higher level, somewhere between 6-6.5% of the GDP, compared to the 3% envisaged in the Annual Plan, and 5% achieved in 2018-19.Fiscal developmentOn the fiscal side, tax revenue for 2019-20 estimated for the Federal Board of Revenue (FBR) will be in the ballpark of RS4 TRILLION as compared to its target of Rs5.555 trillion. On the expenditure side, there is expected to be an exorbitant increase in current expenditure due to the huge burden of subsidies and relief funds. Therefore, the funding of many ongoing public sector projects might be diverted to relief programmes. This could lead to the widening of the fiscal deficit.On account of the sharp decline in economic activity, mass unemployment, economic uncertainty, negative balance of payments, and tight fiscal positions, there will be a short to medium term recession lasting for three to five months. Additionally, given the decrease in the interest rate to 9%, there will be lower investments, lower economic growth, a decrease in per capita income, more poverty and rising inflation; ultimately leaving a lower cushion both for savings and consumption, and causing more unemployment. The economy will be in a precarious position due to the economic stagnation and the worldwide economic recession. It is estimated that about 50-55% will be adversely impacted.The government has estimated that 18.5 MILLION people could potentially lose their jobs, and the economy might have to face a loss of RS2.5 TRILLION. As reported in the Annual Plan 2019-20, during the five year period ranging from 2013-2017, about 3.66 MILLION Pakistani workers went abroad to find jobs. Even if 60% of these people become jobless due to the global economic fallout, this will result in a huge decline in the remittances sent in to Pakistan.Economic remediesTo put the economy back onto the right track, Pakistan might have to take long term loans from China to jump-start employment generation, build infrastructure, cover the cost of healthcare facilities, alongside the timely completion of the infrastructure projects agreed upon under the China Pakistan Economic Corridor (CPEC).Currently, in order to tackle the situation, an economic relief package has been approved by Prime Minister Imran Khan. Out of this, RS200 BILLION ($1.25 billion) is assigned for low income groups, along with RS280 BILLION ($1.76 billion) for wheat procurement. There is also a package of Rs100 billion to support the agriculture sector and small industries. The prime minister has announced that nearly ten million people will be provided with a STIPEND of Rs12,000 per family. While donating relief amounts to the affected poor and marginalised individuals, a monitoring mechanism should be devised to ensure transparency.The International Monetary Fund (IMF) is providing $1.386 BILLION to the government under its Rapid Financing Instrument. It must be noted here that Pakistan has been a longtime recipient of IMF’s assistance and has already been part of a $6 BILLION IMF programme since last year. According to the IMF, Pakistan needs to recommit to its goals under the package once the crisis abates, including restoring its public finances and governance.Devaluation may come down at a reasonable level of Rs145-150 per dollar due to the expected siphoning of sizable assistance from international donors like the IMF, World Bank, Islamic Development Bank and Asian Development Bank (ADB), alongside commodity aid from the US, Japan and other developed countries. Similarly, the position of foreign exchange liquidity could also be sustained, which could serve to benefit the country. The state must also pay special attention towards uplifting small-scale manufacturers (SMM) and small and medium enterprises (SMEs). Undeniably, Covid-19 has resulted in numerous macroeconomic uncertainties. While walking this economic tightrope, the government will have to make some bold decisions during and after the Covid-19 crisis.