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It’s Not Over Yet

Published in Nov-Dec 2020

Nasir Jamal cautions that the economic fallout of the pandemic may not be over yet.

It has been roughly eight months since Covid-19 sent shockwaves through Pakistan’s economy. In an economy already facing strong headwinds and reeling under the pressures of harsh stabilisation policies, the global pandemic brought about a crisis like no other.

The economy came to a screeching halt as the rapidly increasing number of Covid-19 infections forced the government to put Pakistan under lockdown, close borders, shut down factories and businesses and ban large public gatherings to stop the spread of the virus. Only essential industries and services were permitted to stay open as citizens were ordered to remain at home to avoid catching the disease.

Consequently, Pakistan’s economy shrank by 0.4% for the first time in 68 years, exports plummeted, tax revenues shrunk, thousands of micro, small and medium sized enterprises (MSMEs) – mostly in the informal sector – suddenly went out of business as demand for goods and services collapsed. In fact, MSMEs were among the major victims of the outbreak as they lacked the financial backup necessary to support them as well as the managerial capacity to tackle and sustain supply chain disruptions and declining demand for their goods and services. Millions of workers found themselves out of jobs and below the poverty line.

The health crisis plunged Pakistan into a deep recession, affecting virtually everyone – some more than others – and struck the economy at a time when it was struggling to recover from a major external sector crisis that had seen the country go back to the International Monetary Fund (IMF) for its 13th bailout since the late eighties. The economic crisis also brought the cash-based informal sector to a complete halt. The hardest hit businesses were clearly the ones that depended on large groups of people coming together at one place such as cinemas, hotels, restaurants, airplanes and so on. The automobile sector and the multiple industries related to construction were among the major losers as were textile exporters. All suffered massive losses during the last quarter of the previous fiscal year as domestic and foreign demand for these products bottomed. Mercifully, however, the recession proved to be short as the virus largely spared Pakistan, unlike the rest of the world, and the government was able to lift the lockdown restrictions earlier than expected. A lot of credit goes to the government which announced a hefty Rs 1.2 trillion relief package to support different sectors of the economy and hand out cash to poor families to support them in their difficult times.

To support government efforts, the State Bank of Pakistan (SBP) implemented significant monetary measures to reduce the impact of the pandemic on businesses. These included a reduction in the policy interest rate from 13.25% to seven percent, low-cost loans for firms to pay salaries to their employees, and subsidised long-term investment loans. SBP also allowed loans to be restructured to avert defaults and keep the balance sheets of the banks healthy. In fact, a sizable number of industries and other businesses might not have survived the pandemic without the measures taken by the SBP even if the majority of MSMEs from the informal sector were unable to take advantage of these initiatives.

More importantly, the increase in the inflow of multilateral dollars to help the country fight the pandemic created space for the government and the SBP to implement fiscal and monetary measures to shield the economy and businesses from the negative effects of the outbreak.

Now, with the worst possibly behind us, it will be premature to expect the economy to recover from the impact of Covid-19 quickly. Many in the government would like us to believe that the economy and businesses are out of the crisis as is indicated by the short-term economic trends for the first quarter (July-September) of FY 2020-2021. Yes, the construction package announced by the Prime Minister has buoyed sales of cement, glass, steel and other construction-related industries. Textile exports, barring garments, are rising. The automobile industry has bounced back with the swift increase in the sales of cars and motorbikes. The stock exchange has gone back to pre-Covid-19 levels. Other sectors of the economy are also catching up. However, the economy is yet not out of woods and a complete recovery is forecast to take a longer than expected time.

Like other multilateral lenders, the World Bank also sees an anaemic, fragile economic outlook for Pakistan for at least two years, predicting the growth rate to recover by just 0.5% in the ongoing financial year. This compares with the targeted GDP (gross domestic product) growth rate of 2.1 per cent that the government had set for the present year.

Even this forecast of economic recovery is predicated mainly on the absence of infection flare-ups or subsequent waves that would require further lockdowns. The World Bank has also predicted a substantial increase in poverty in the wake of lacklustre growth recovery.

Another major threat to quicker recovery stems from the resumption of the stabilisation policies as the government and IMF negotiate the revival of the six billion dollar bailout Extended Fund Facility (EFF) programme that was suspended when the pandemic struck in March. The resumption of the programme will force the government into tighter fiscal measures and the SBP to raise its policy interest rate which is in the negative territory at present, with monthly headline inflation hovering around nine percent compared with the discounted rate being held down at seven percent for the moment.

For now, we may think we are done with Covid-19, but we are not. The number of infections has started to rise in the major cities, spawning fears of another lockdown and economic shutdown if the situation gets out of control during the winter. The new wave of Covid-19 may appear to be not as bad as the first one. But are we prepared for, or can we afford, even a milder wave? Don’t think so.

Nasir Jamal is Chief Reporter, DAWN Lahore.