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Covid-19 came to Pakistan and found a country with serious underlying conditions – a corrupt political class, a sclerotic bureaucracy, poor governance structure, a divided and distracted public and an economy on the ventilator. These symptoms had gone untreated for many decades, and eventually became an uncomfortable reality accepted by all. It took the scale and havoc of an epidemic to bear their severity – to jolt us with the realization that we are in fact facing a “crisis within a crisis.”

According to data released by the National Command and Operation Centre (NCOC), the number of confirmed coronavirus cases in Pakistan has reached 191,022 of which 3808 are deaths and 77,754 have recovered. Pakistan is, according to the Prime Minister, walking a tightrope to strike a balance between an unpopular lockdown necessary to slow down the spread of coronavirus, and ensuring its economy does not collapse. Now, the decision has been made - the economy has been chosen in favor of. Places of business can be allowed to stay open for up to nine hours a day, four days a week. This decision has not necessarily been taken lightly. The news is inundated with projections of a global recession, with many experts believing we already are in one. This inevitable recession is bound to be something the world has not witnessed before. In Pakistan’s history, now is the first time the country is projecting negative growth - contraction of the economy. Unemployment benefits’ claims in the US have also skyrocketed, tripling compared to the last recession. In the latest update to its World Economic Outlook, the IMF projected the global economy to contract by 3 percent, much worse than that of the 2008-09 financial crisis that was projected to be 1.1 percent. We have already witnessed that Covid-19 is no “great leveler”: in fact, it is an amplifier of existing inequalities. With incomes declining and vanishing, a formidable and rapidly evolving foe in the shape of the Covid-19, inequality within and across countries will surely exacerbate.

The fundamental question, therefore, is that can our economy survive this scourge of coronavirus or will it collapse? It follows that we should ask which industries/sectors would take the brunt? How will the government cater to sharp declines in domestic demand, supply disruptions, decreased exports-imports, production linkages, lower tourism and most importantly a nerve-wracking burden on public health?

Impact on the Macroeconomic Variables

In July 2019, Pakistan entered into a 39-month Extended Fund Facility (EFF) arrangement with the International Monetary Fund. Stabilization measures under the EFF were expected to moderate aggregate demand pressures in the economy. The GDP growth rate for FY20 was expected to be significantly lower compared to FY19, a downfall from 3.3% to 2.4% – however, the IMF has projected that owing to slow global and domestic activity in the last four months, real GDP growth may contract by 1.5%. A partial recovery is expected for FY21 (Refer to Figure 1).

***Figure 1: GDP Growth (annual) - Pakistan***

Average inflation increased to 11.8 percent during Jul-Mar FY20 (from 6.8 percent in Jul-Mar FY19) reflecting upward adjustments in administered prices and exchange rate depreciation. The State Bank of Pakistan (SBP) maintained a tight monetary stance during this period, keeping the policy rate at 13.25 percent to dampen inflationary expectations. However, as the COVID-19 pandemic spread, it reduced the policy rate to first 12.50% on March 17, then 11% on March 24, 9% on April 16, and most recently to 8% on May 15, 2020 "to facilitate businesses and exporters who seek loans frequently from commercial banks to run their businesses". Figure 2 illustrates the interestingly complex relationship between interest rate, inflation rate and economic growth for Pakistan.

***Figure 2: Interest rate, Inflation and Economic Growth - Pakistan***

Pakistan’s Current account deficit is projected to narrow to 1.7 percent of Gross Domestic Product in FY20, as imports contract more than exports, according to the IMF. The five major trading partners of Pakistan, in terms of exports, are USA (16.9%), China (7.1%), UK (7%), Afghanistan (4.32%), and Germany (5.6%). Four of these are the worst hit countries by COVID-19, according to Pharmaceutical Technology . There have been significant disruptions in international trade flows of these countries. The restrictions imposed on imports, the cancellation/postponement of export orders for Pakistani goods, shortages in supplies of domestic goods due to transport and other bottlenecks, decline in the physical inflow of imports into Pakistan and potential decline in foreign direct investment (FDI) and remittances are a few contributors that will disrupt trade. According to the data from the World Integrated Trade System, 32% of our imports in the product category are in the form of consumer goods, while the rest of the 68% constitutes raw material, intermediate goods, and capital goods. A decline in the latter category will have an effect on the final goods produced and consumed domestically or exported to other countries – resulting in an eventual loss in the GDP (refer to Figure 3).

***Figure 3: Imports and Current Account Deficit (2014-2018)***

Economic Earthquake: Unemployment to a Pullback in Consumer Spending

According to the Pakistan Labour Force Survey, the share of vulnerable workers is highest in Agriculture (87.8%) but also significant in wholesale and retail trade (70%) real estate (63%), hotels and restaurants (49%), transport and telecommunication (49%). 55.6 % of Pakistani labour is employed in vulnerable jobs. The detailed report on macroeconomic losses before the National Coordination Committee assessed that there will be a loss of three million jobs in post COVID-19 scenario based on how strict or moderate the government-mandated lockdown would be. The informal, undocumented labor force is the one to take the biggest hit from this pandemic.

The key to consumer spending is employment. The abrupt halt of commercial activity and unemployment has deteriorated consumer confidence and have made them very skeptical on how and where they choose to spend their hard-earned cash. Consumer spending amounts to roughly two-thirds of economic activity worldwide. The supply of things to spend money on has been stanched as national supply chains were disrupted during the lockdown. Simultaneously, a dented consumer’s appetite has caused upheaval across every industry imaginable. The pandemic has reconfigured the very concept of consumer-led economic growth and has challenged all conventional orthodox theories to bounce back. We do expect things to ameliorate as the lockdown eases. This aided by low prices of fuel is bound to improve matters. A snapshot of the data on final consumption expenditure in Pakistan illustrates frequent boom and bust cycles (Refer to Figure 4).

***Figure 4: Business cycle of Consumption Expenditure in Pakistan (1970-2018)***

Is there a Silver Lining for Pakistan’s Economy?

Pakistan being an oil importer with a major share of its import bill generated from crude purchase can benefit from the historic drop in oil prices. Pakistan imports $15-$16 billion worth of oil annually and in the current scenario the country can save up to $8-$9 billion. This is a potential windfall gain and gives Pakistan some vital fiscal space. This will be matched with a small spike in manufacturing (textiles) as All Pakistan Textile Mills Association (APTMA) has received contracts for textile products which are mainly used in hospitals like white bed-sheets, white gowns and white t-shirts while China was shut down. However, once the contracts are completed, the increase in export revenue will decline.

Secondly, Pakistan has received major debt relief from G20 countries as the international forum agreed to postpone loan payments for developing nations. After getting the relaxation, the government can now solely focus on the compilation of relief plans for the most vulnerable and deprived. Also, it can reinvigorate domestic demand and take a more proactive stance on fiscal and monetary policy and strengthen productivity rather than relying excessively on debt. Consequently, this can help restore the confidence of consumers and investors and should help cushion demand, and limit adverse supply effects.

***Figure 5 Debt from IMF (in Billion Rupees)***

***Figure 6: Pakistan’s Debt and Liabilities (% of GDP)***

Thirdly, Pakistan needs to take a balanced approach toward meeting internal demand and meeting export orders. This pandemic brought to light the need to review local value chains and the productive structure of ‘essential’ industries. So we are at a crossroad. While it might be convenient to fall back to our erstwhile habits, we would urge against this. It would be helpful to think through the country’s productive structure and assess the needs of the country as a whole. During this lockdown, we started consuming only those things that were needed and those that were available. We were also confronted with the reality that some of our wants are essentially luxuries. The premise is not to cut back on them - the government’s responsibility is to understand how people make preferences, not dictate them. But amongst a host of things, we saw that the country does not have automatic stabilizers in place. So we should use the momentum of the bailouts and social protection plans rolled out by the government and think about instituting unemployment insurance, protecting labor’s rights and universal health coverage.

Last but not the least, Covid-19 has taught us how interconnected our lives are. We are only strong as our weakest link. Like other countries, Pakistan has quickly adapted to the need of evidence-based policy. We need to rethink policy design in Pakistan in light of evolving and high frequency data. Pakistan should try and build capacity to collect and publicly share fiscal data along with data on tracking the Covid-19.

Dr. Izza Aftab

Dr. Aftab is the Chairperson of the Economics Department at Information Technology University, Lahore. She is also the Director of the SDG Tech Lab and the Program Director of Safer Society for Children. She has a PhD in Economics from The New School University (NY, USA) and is a Fulbrighter.

Ms. Sadaf Akbar

Ms. Akbar is a post-graduate in Applied Economics from FC College, Lahore. She is currently working as a Research Associate at the SDG Tech Lab established in collaboration with Information Technology University, Lahore, UNDP and UNFPA.