The State Bank of Pakistan (SBP) said on Tuesday that the global and domestic spread of Covid-19 has brought an exceptional set of challenges for the country and as the situation is extremely fluid and highly uncertain, the economic outlook remains subdued compared to the pre-outbreak estimates.
According to Second Quarterly (Oct-Dec) Report "The State of Pakistan's Economy" for FY20 issued by SBP, the spillovers from the global economy and the infection-containment measures in the country are bound to weaken the economic activity and consumer demand and adversely impact supply.
Although Pakistan may get some benefits from lower oil prices on international front, as the same time Pakistan's exports and home remittances may decline temporarily in the coming months, the report noted.
The report said that Pakistan's economy had clearly moved out of the crisis-management mode before the Covid-19 infections started to be detected in the country. The current account numbers were getting better every month and foreign exchange reserves were shoring up steadily.
In addition, headline inflation was expected to revert to the medium-term target of 5-7 percent over the next 24 months.
"With the controlled twin deficits relatively, encouraging progress on FATF, a stable outlook from the credit rating agencies and confidence provided by the IMF programme, Pakistan's economy had begun to improve. However, this optimism is now subject to risks arising from the global and domestic spread of Covid-19," the report stated.
Achieving this year's real GDP growth target of 4.0 percent was unlikely, as the agriculture sector's performance was lower than expectations, whereas the export-driven growth in large Scale Manufacturing (LSM) was not sufficient to compensate for the subdued domestic market activity.
Therefore, the SBP's projections for GDP growth were revised to 3.0 percent in FY20, down from 3.3 percent last year. However, the SBP is expecting that GDP growth projections are now likely to be revised downward further. The Organization for Economic Co-operation and Development, ADB and the IMF have already all downgraded their growth outlooks for the global economy, the report mentioned.
In terms of remittances, quarterly break-up shows that after declining in Q1-FY20, the remittances rebounded in the second quarter. While the decline in Q1 could be largely traced to lower inflows from GCC countries (especially UAE), the recovery in Q2-FY20 was broad-based.
The World Health Organization (WHO) has declared the virus a pandemic and urged countries to implement effective containment strategies. Nonetheless, the financial impacts of Covid-19 have already been sizeable, and the economic effects are still unfolding.
A large number of countries have completely suspended flight operations to contain the spread and at first, the Covid-19-related panic, along with the Saudi-Russia standoff over crude oil, jolted global capital and commodity markets. Global crude oil prices have fallen to 21-year low levels amid fears of a global recession and abundant supplies.
In addition, sudden shutdowns faced by global aviation, automotive, tourism, and energy companies have significantly increased vulnerabilities in these sectors. In other sectors also, subdued retail buying, unsold inventories and disruptions in supply chains are triggering pressures though improved liquidity buffers in the global banking industry have avoided financial distress so far.
As a result, the overall global economic outlook remains highly uncertain and clearly subdued compared to the pre-outbreak estimates, with layoffs expected to spike in response to lockdowns.
In Pakistan's case, to minimize incremental infections of Covid-19, the government has suspended domestic and international flight operations and strictly tightened cross-border movement.
Moreover, provincial governments have also implemented lockdowns in various regions, allowing uninterrupted operations only in critical sectors, such as healthcare. Most avenues of social interactions, such as educational institutions, shopping centers, theaters and restaurants, have been closed down, whereas public transports including ride-hailing services, have been suspended.
Most employees of financial institutions, factories and businesses are working remotely, wherever possible, and only critical staff workers are being allowed at workplaces. All these measures will clearly weaken domestic economic activity and consumer demand, the report mentioned.
Moreover, the spillover from the global economic slowdown may also be significant. On the positive side, as a net oil importer, Pakistan would benefit from the substantial decline in global oil prices and this will further reduce the import bill and the current account deficit.
On the negative side, however, the outbreak of the virus in Europe and North America and the ensuing lockdowns may have an adverse impact on Pakistan's exports.
Domestic exporters have already warned of cancellation of orders as retail sales in destination markets weaken and port and shipping activities are restricted. Under such circumstances, exporters may face a cash crunch for some time, the report said.
Meanwhile, remittances from major destinations may decline temporarily in the coming months, with some transient downward impact on domestic consumption. Financial markets too have come under severe pressure.
The equity market was the hardest hit as domestic investors grew wary of the pandemic's trajectory
According to SBP, the equity market was the hardest hit, as domestic investors grew wary of the pandemic's trajectory. The corporate sector was already struggling with subdued demand and thin margins, which has now been compounded by the Covid-19 related uncertainty.
The debt market too faced selling pressure as foreign investors took out over $ 1.7 billion from T-bill investments in the month of March 2020, contributing to depreciation pressures in the foreign exchange market, the report mentioned.
At this point, SBP said that it is important to note that the situation with respect to Covid-19 is extremely fluid and uncertain and the government is responding fast to unfolding developments.
Preventing the spread and ensuring robust healthcare facilities to test and treat patients, remains the top policy priority of the government. Ensuring food security is another important agenda on which the government is strategizing proactively and carefully, the report noted.
The trend of expenditure containment in Q1-FY20 was reversed in Q2-FY20 with a broad-based growth in current and development spending. The increase in current spending was more pronounced in the second quarter and mainly came from higher interest payments and grants for social spending (Ehsaas program). In addition, the development spending also grew with a higher pace during H1- FY20
Moreover, social safety nets are also being beefed up to help minimize the impact of lockdowns on daily wage earners and laid-off workers. Certainly, all this requires a sizeable amount of fiscal spending. The government has announced Rs 1.2 trillion economic relief package including a steep cut in domestic petrol prices, stipend for daily wage earners and expansion in the scope for cash assistance under the Ehsas program, immediate release of export refunds by the FBR, deferment of utility bill payments, and additional allocation for the Utility Stores Corporation.
SBP has announced multiple measures to facilitate the general public's access to financial services amid the Covid-19, simplified procedures for exporters and importers, and allowed banks leeway in booking losses pertaining to the outbreak on their financial statements.
As for SBP, it has taken important measures to minimize the impact of Covid-19 on the economy. Within a span of 8 days (March 17-24, 2020), the Monetary Policy Committee (MPC) cut the policy rate by a cumulative 225 basis points to 11 percent. Furthermore, the SBP has announced multiple measures to facilitate the general public's access to financial services amid the Covid-19, simplified procedures for exporters and importers, and allowed banks leeway in booking losses pertaining to the outbreak on their financial statements.