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Print Print 2020-03-28

Impact of COVID-19 on economy of Pakistan

Until March 27, the number of confirmed cases of COVID-19 climbed to 1198 with 7 reported deaths in Pakistan.
Published 28 Mar, 2020 12:00am

Until March 27, the number of confirmed cases of COVID-19 climbed to 1198 with 7 reported deaths in Pakistan.
We cannot overstate the profound effects that COVID-19 is having on our families, communities and business, the financial market and the global economy. As the panic continues to intensify with no certainty of when it will abate, we should try to make reasonable projection to the current and potential impact of COVID-19 to Pakistan economy and figure out practicable measures to deal with possible sequences.
The impact on Pakistan economy is dependent on the time line of handling COVID-19 and its intensity of spreading in surroundings. Asian Development Bank (ADB) stated in its report that the virus outbreak could cost Pakistan economy in the range of $16.387 million to $4.95 billion, or 0.01% to 1.57% of GDP. The report also highlighted that this loss would plunge Pakistan's GDP by at least 1.57 per cent and trigger 946,000 job losses.
We should first focus on trade, which is one of the priorities for Pakistani government to maintain foreign exchange stock. Many industrial sectors could be affected due to their integration to global market. Pakistan is one of the major exporters of textile products, which is the key foreign currency earner. Pakistan's textile sector relies on other countries for the bulk of its capital goods inputs. Since lots of foreign companies were closed down during the pandemic, those textile factories will be surely affected. However, given the domestic focus of its economy, Pakistan should be less impacted by travel bans and slowing international trade than other more externally-exposed developing economies. Pakistan has also some preferential treatments from some western countries including Europe. After its Brexit, UK signaled to double its trade with Pakistan on back of the improved security situation of the country. Moreover, in order to deal with the challenges caused by the pandemic, many countries including most members of G20 have announced quantitative easing (QE), trillions of USD will flood in the major economies, and thus push the depreciation to a new height. According to economic projections, the Chinese Yuan is expected to depreciate by 3-5 percent. All these will result in some decline in Pakistan's import bills.
Actually, the country's eight months balance of trade i.e. July 2019 to February 2020 has improved by 26% to 15.77 billion as reported by Pakistan Bureau of Statistics. Exports recorded a growth of 3.65% during the same period, increased from $15.1 billion to $15.65 billion whereas imports declined 14.06% from $36.56 billion to $31.42 billion during the same period. It means the country's balance of payment improved 14.61% to $2.26 billion from $1.93 billion in the month of February. This gain could be eroded by the measures for tackling the pandemic.
Financial market is another area that draws much concern. As confirmed cases keep rising in various part of Pakistan, the Pakistan Stock Exchange (PSX) is in continual decline affected by the panic scale. On March 19, the PSX fell to its lowest in more than five years. KSE-100 has suffered several trade halts these days to safeguard investors and market participants during volatility and turbulence.
After a nation-wide lockdown announced by DG ISPR Maj-Gen Babar Iftikhar, the Securities and Exchange Commission of Pakistan has decided to allow PSX to begin trading at 11:00 am on March 24 onwards.
In view of almost all stock exchanges around the globe experiencing huge decline, we should not worry too much about the recent performance of the PSX. Structural shock is unavoidable when serious social events occur, and it will gradually recover after the pandemic.
As for the currency market, PKR became comparatively stable after the drastic depreciation in the first half of last year. That could be partially contributed to the tight monetary policy. What's more, fundamentals of Pakistan economy started to gain momentum and peoples' confidence was restored as the IMF program is in smooth progress and also the CPEC entered into the second phase bringing more projects in the area of education, agriculture and industrial cooperation, etc.
Another concern is about debt. State Bank of Pakistan data shows that the total national debt of Pakistan stands at 38,727 billion Rupees in the second quarter of the fiscal year 2020, which is 88.9% of GDP in the same period. Near half of the debt is external, including loans from Paris club, multilateral organizations, bilateral preferential loans and commercial loans, etc.
The COVID-19 now becomes a global pandemic, and many countries suffered great losses including those providing loans to Pakistan. The IMF is predicting negative growth for the world economy this year, its worst performance in over 60 years. It may become difficult for some sources to provide loans or aid under such situation.
It may be high time for Pakistan to get rid of its reliance on debt to support the fiscal budget and get more liquidity arrangements. China extended currency swap agreement with Pakistan on May 2018 for another three years. A currency swap deal allows two institutions to exchange payments in one currency for equivalent amounts in the other to facilitate bilateral trade settlements and provide liquidity support to financial markets. It will be a good choice to run safe haven flows to RMB since China has shown strong capacity to cope with the pandemic and managed to control the impact within limited extent.
The federal government has announced rescue package to provide assistance to all sectors affected by the pandemic. This will add more burden to the national exchequer under the background of the IMF bailout program. Despite the uncertainties ahead, Pakistan's economy has stabilized in recent years. PM Imran Khan stated that Pakistan is moving on the road to development with stable rupee, growing exports, adequate power supply and accelerated development spending leading the country in the right direction. We have reasons to believe Pakistan's economic future is promising.
The writer is China's consul general based in Karachi. This was the third of a four-part series of articles for this newspaper by him.

Copyright Business Recorder, 2020


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