Managing the economics of a needed lockdown

ARTICLE: The pandemic has badly hurt the country's economy with real GDP growth rate, according to World Bank's Global Economic Prospects report, is expected to be around negative 2.6 percent for fiscal year (FY) 2019/20. It is indeed a lot more worse than being projected by many multilateral agencies at around negative 1.5 percent in April 2020. For FY2020/21, the report has expected the growth to recover to negative 0.2 percent.

So for two straight years economy will contract, which in itself shows the gravity of the challenge at hand. The recovery in Pakistan is quite a 'U-shape' relative to a 'V-shape' one expected by WB, whereby the report highlights a swing in average economic growth rate of the 'emerging market and developing economies' group from negative 2.5 percent in FY 2019/20 - almost the same as being expected for Pakistan - to positive 4.6 percent in FY 2020/21.

Having said that, easing of lockdowns has caused a sharp rise in Covid-19 infection rates and in the number of death cases. Clearly, there is an urgent need for the government to revisit this policy of easing lockdowns. The government should, therefore, implement lockdowns and provide greater financial support to the masses through both 'Ehsaas' programme and the district magistracy till the time this infection is on the falling path.

Finances can be made available through printing of currency notes, which will not be inflationary because the aggregate demand and supply have both collapsed, and through shifting money from lesser important development projects to the lockdown 'projects'. Moreover, to help channelize funds towards required ends in this crisis, and to further dampen any inflationary trends, supply chain should be managed by restricting it to cover needs that allow proper functioning of the health sector, meet essential needs of daily life and ensure smooth running of the needed sections of government and state. This would require better planning and implementation through improved governance. Moreover, the situation underscores the neef for a significant cut in policy rate because of lower inflation and a massive reduction in domestic debt repayments to create much-needed greater fiscal space.

The government should share with the parliament rough estimates of financing for the short- and medium-terms, which means from 1 month (short-term) to 3 months (medium-term). This will be an important timeframe since government expects the pandemic to peek sometime during July/August 2020. Money can also be raised through a wealth tax. 'Lives over livelihood' argument should be balanced in this way. For this the government has to show political will.

The rich countries should also understand the very deep nature of challenge facing developing countries, and should help them save lives, by effectively putting in place needed large welfare programmes, and meeting overall financing needs of the lockdowns. Moreover, a greater understanding and support of creditors will allow poor developing debtor countries to sustainably manage the pressures on their currency in the wake of falling exports and remittances due to the current crisis. In this regard, in a recent article 'What the G20 should do now', which was co-signed by a number of important global voices, and was written by a former British PM, Gordon Brown, among others, urged the G20 countries and multilateral institutions to provide a strong support to countries in these difficult times, in the following words:

"Debt relief for the 76 International Development Association countries needs to be scaled up radically to include relief by bilateral, multilateral, and private creditors until the end of 2021. ... A dozen or more emerging-market countries may well run into debt-servicing problems in the coming year. The IMF should be mandated to convene relevant players and, through its debt-sustainability and policy analysis, to set broad parameters for resolution. ... The G20 should agree that the $2.5 trillion in support will now be provided. This requires the IMF, the World Bank, and regional development banks to raise their lending and grant ceilings. The multilateral development banks (MDBs) will likely increase their outstanding loan portfolio from the current $500 billion to $650-700 billion over the next 18 months. ... Without action from the G20, the recession caused by the pandemic will only deepen, hurting all economies - and the world's most marginalized and poorest peoples and nations the most. Representing 85% of the world's nominal GDP, the G20 has the capacity to lead the mobilization of resources on the scale required. We urge leaders to do so immediately."

If the government re-imposes lockdowns, it will not be something out of line with other poor countries since, according to OxCGRT (Oxford Covid-19 Government Response Tracker) 'Stringency Index', which 'uses information on 13 indicators of government responses, including school closures, travel bans, and fiscal and monetary measures and samples 17 low income countries, the 'median' stringency in terms of containment measures in many low income countries (LICs) sharply rose in mid-March 2020 from around 10 percent to around 65 percent by end-March, and since then has hovered around that mark. This means that if many LICs can continue to manage costly lockdowns, why a policy is not being evolved in Pakistan to do the same. The government should do a lot more and find ways to finance lockdowns - like the ones suggested above - until the number of infections starts to decline.

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)

He tweets@omerjaved7