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ARTICLE: When Covid-19 pandemic struck Pakistan every one scrambled to simply save their skins. All thoughts of the economy, industry, jobs and exports went out of the window. That was but natural. To its credit the government and the prime minister soon started talking about lost employment and the setback to the economy. Miraculously, we have somehow stumbled through the worst of the pandemic in better shape than most. The emphasis now is back on rehabilitation and resumption of economic progress.

The State Bank of Pakistan (SBP) has thrown two lifelines to industry in these dire times. The first was the soft loans offered through commercial banks aimed at their workers. Most industries were planning to shut down temporarily or cut their workforce drastically. The SBP offered soft loans to tide over the wage payments for April, May and June and then extended it to another three months through to September. The money was disbursed directly to the workers, or through the companies, up to the full amount of the six months wage bill. The rate of interest charged by the banks was a maximum of three percent per annum for borrowers on the active taxpayers list. The repayment starts six months after the last disbursement and the loan has to be repaid over the subsequent two years in quarterly installments. To date, about Rs. 120 billion has already been disbursed under this facility as wages for workers. This despite the fact that many banks refused to lend for the extended period of July to September and participated for the first three months only.

There will be the obvious difficulties, especially at the time of repayments. If the industry in question is back in its full stride by then it will be able to repay the amounts borrowed without a major hiccup. If it is floundering and does not recover then there will be repayment issues. We will see how it goes for our country by that time. Let us assume that some proportion of these amounts loaned will become bad debts for the banking sector. If so at least the money disbursed will have gone to pay workers' salaries during the pandemic. Most governments all over the world have dished out billions to workers to keep them going through the pandemic. The US Government actually gave grants to US companies. Money was transmitted straight into the companies' bank accounts in April. This was unconditional grant and not a loan. Most other central banks have thrown huge amounts to pump up their economies. So if we lose some amounts of these loans it will still have been money well spent.

Look at the benefits that have accrued from this action.

1) The workers were not laid off and were kept tied to the factories or firms employing them. In this way they did not feel the economic pain of the pandemic. These very workers in the big cities of India were told to go home to their villages. The public transport system was shut down, and they walked home with their wives, children and baggage. The consequences are clear today. These poor workers spread the pandemic, firstly to each other, and then on to the villages where they went. Now when we are down to less than five hundred infections a day in a country of 200 million; the Indians are recording almost a hundred thousand infections a day in a population of 1.3 billion.

2) The factories that had their workforce intact were able to restart very quickly as the pandemic receded. So they were ready when export orders restarted in May and the exports of June and July were fully ten to fifteen percent higher than the year before. Once a factory is shut down and its workforce disbanded it is very difficult to restart again.

The other lifeline that the State Bank has thrown to industry is the Temporary Economic Refinance Facility (TERF). This is a programme to support the recovery and meet the long-term investment needs of the industry. As in the payroll financing scheme, the State Bank lends to commercial banks which on-lend to clients while the credit risk is borne by the bank. The State Bank lends to the banks at one percent and the maximum spread that can be charged by the bank is 4 percent. The facility can be used for a new project and / or BMR. The facility is "temporary" and will end on the 30th of March 2021 so any interested business has to open an LC before that deadline. Some business houses have managed to negotiate their needs at as low as two percent. This will enable the healthy firms to further strengthen their operations and modernize their factories. This facility in times of high interest rates is Godsend for those contemplating investment. So any investment being planned will be facilitated and the economy will get a fillip. Apparently over 100 billion rupees has already been lined up by the banks for their clients. This will be a big step up for those railing against high interest rates throttling investment.

Undoubtedly, these measures are aimed at the stronger elements of the industry or the economy. I would translate it into a case of the Government ensuring that at least the healthy part of the economy does not go sour. This has happened in neighboring India and they are seeing a contraction in the economy of 20 percent in the quarter of April/June 2020. We in contrast may get away with 2/3 percent.

The Government and the industry have to think out the remedy for the weaker segments of the economy and how to revive those. There will be failures and shutdowns. Some segments of the economy have suffered much more than others. The transport, hospitality, catering and entertainment sectors are badly hit and the future is uncertain. I know that many of the weaker and smaller industrial units have floundered. What is to be done about those?

That is the real test of policy and governance.

Copyright Business Recorder, 2020