ARTICLE: The first case of Covid-19 was recorded in Pakistan on the 26th of February 2020. More than four months have elapsed since then and the pandemic has wreaked havoc on the economy and the people of Pakistan. This is also the case with the vast majority of countries in the world, both developed and developing.
The latest Pakistan Economic Survey (PES) of 2019-20 has a special chapter on Covid-19 Advent and Impact Assessment which was prepared by a Sub-Committee of the National Coordination Committee (NCC). This is a well written chapter and quantifies the impact of Covid-19 on the real sector of the national economy. This has become possible as more than four months have passed since the advent of Covid-19.
The PES chapter on Covid-19 impact indicates that the fall in the GDP growth rate has been very sizeable. The pre-Covid-19 projection of the GDP growth rate was 3 percent, but the year 2019-20 has closed with a growth rate of negative 0.4 percent. This implies that the GDP fell by over 7 percent in the last four months of 2019-20.
However, the pre-COVID-19 projection by the NCC is perhaps too optimistic. The GDP growth rate in 2018-19 had been finally assessed at 1.9 percent. In the early months of 2019-20 there was no evidence of an upsurge in the growth momentum in the economy. Even prior to Covid-19 the large-scale manufacturing sector which generally leads the growth process in the economy had exhibited a negative growth rate of 2.9 percent. Also, there had been only a modest growth rate of less than 4 percent in exports up to February 20.
Therefore, prior to Covid-19, the first eight months of 2019-20 had probably witnessed a rise in the GDP of close to 2 percent, like the previous year. Also, the fall in the GDP growth rate would correspondingly have been greater by one percentage point and the year 2019-20 is likely to have closed with a GDP growth rate of negative 1.4 percent.
Therefore, 2019-20 probably saw a growth rate of 2 percent in the first eight months and negative 1.4 percent in the full twelve months of the year. Ignoring seasonality in economic activities, the implication is that the GDP growth rate plummeted by as much as 8.2 percent in the first four months after the arrival of the pandemic in Pakistan.
This magnitude of a fall in the GDP has never been seen before in Pakistan even after major floods or other natural disasters. At the individual sectoral level, the impact has been even greater. The worst hit sectors have been manufacturing, wholesale and retail trade and transport and communications due to the lockdown, interruptions in the supply chain and a quantum decline in both international and domestic trade due to a fall in demand.
The large-scale manufacturing sector has been the worst hit. It was already performing poorly prior to Covid-19 as highlighted earlier. Data is available on the Quantum Index of Manufacturing up to April 2020. The growth rate in the first two months after COVID-19 has been a negative 23 percent in March and an unbelievable negative 44 percent in April. Many industries have seen more than a halving of production in these months.
The other key real sector of the economy relates to the volume of international trade. The disruption in trading activity was likely to be large due not only to domestic physical constraints like the partial shutdown of Karachi port but also because of the big decline in demand for Pakistani goods in countries like China, USA, UK and the EU that had experienced an earlier and more severe outbreak of Covid-19.
Exports had registered a positive growth rate of close to 4 percent, as highlighted above, prior to Covid-19. The growth rate has turned negative since then. Exports have fallen by 8 percent in March, by as much as 54 percent in April, by 33 percent in May and by 6 percent in June. It was indeed a big relief to see much less decline in June. Hopefully, this signals the beginning of the process of recovery in Pakistan's exports.
Cumulatively, exports have declined by 27 percent in the four months after COVID-19. Textile exports have fared even more poorly, with a fall from February to May of 36 percent. Agricultural exports, especially of rice, have performed somewhat better with a decline of 23 percent. Exports by SMEs have also fallen sharply by 31 percent.
Fortunately, imports have simultaneously come down with exports. They showed marginal growth of 1 percent in March and then fell by as much as 32 percent in April, 43 percent in May and by 15 percent in June. Cumulatively, the fall over the four-month period is 28 percent. This has actually implied an improvement in the balance of trade position from March to June 2020 of 29 percent.
One of the major factors contributing to the fall in imports has been the precipitous decline in the international price of oil. Along with a reduction in quantity imported, this has contributed to a 55 percent fall in the oil import bill after February up to May. Other imports that have also shown big double-digit declines are the transport, textile and metal groups. The reduction in the oil import bill of $1.9 billion up to May is responsible for over 43 percent of the decline in the overall level of imports of $4.5 billion.
A critical question is what has happened to remittances? The expectation globally was that remittance inflows into developing countries would be reduced by 15 to 20 percent in the aftermath of Covid-19, especially due to the plummeting of the oil prices and the consequent shrinking in the GDP of oil exporting countries in the Middle East.
Remittance inflows have fortunately been much less affected than perhaps anticipated. They have fallen by only 4 percent over the three-month period after Covid-19 up to May 2020, with, more or less, the same decline in the inflows from Saudi Arabia and the UAE. However, there was a decline of 19 percent in May.
The good news is that the balance of payments of Pakistan has held up fairly well after February 2020. Initially, there was the large negative impact of the exit of hot money of over $3 billion. However, this has been partially compensated for by the receipt of $1.4 billion from the Rapid Financing Facility of the IMF. Multilateral agencies have also helped by larger and faster disbursement of assistance. Some debt relief has also become available.
Consequently, foreign exchange reserves of Pakistan have fortunately not shown a big decline. The current account deficit was even less than $1 billion, cumulatively from March to May. This combined with the larger inflows of external assistance has meant that while the reserves were $12.8 billion at the end of February, they now stand at just over $12 billion, with a fall of less than $1 billion.
Turning finally to the employment impact of COVID-19, the NCC has come up with scary numbers of the drop in employment. A high estimate is that over 16 million workers have lost their jobs. This means that the unemployment rate has gone up from about 7 percent in the pre-Covid-19 period to almost 30 percent. This is a highly exaggerated magnitude.
The fall in the GDP in the period, March to June 2020, has been estimated above at 8.7 percent. As such, even if there was a corresponding contraction in the level of employment, the number of newly unemployed workers due to Covid-19 does not exceed 5 million. However, this is still a large number and represents a doubling of the level of unemployment in the country.
Overall, the economy is mired in a deep recession. The manufacturing sector has contracted severely. The loss of agricultural output due to the locust attack will contribute further to the fall in output and real incomes in 2020-21. Like other countries, this was the time for strongly expansionary monetary and fiscal policies to take the economy out of the recession. Unfortunately, the Federal Budget of 2020-21 has failed in helping to achieve this objective although the SBP has made a significant contribution. The likelihood is that the on-going financial year will continue to be a very difficult time for the people of Pakistan.
(The writer is Professor Emeritus at BNU and former Federal Minister)
Copyright Business Recorder, 2020