RASHID A MUGHAL
As the whole world is grappling with COVID-19 which is shaking the very foundations of global economy, the deadly effects of the virus have started showing monstrous, deep and lasting impact on the global economy. The over all impact of this global economic turmoil on Pakistan’s economy is going to be substantial. Already reeling under massive burden of loans and debt re-payments, the Pakistan economy is going to be under tremendous pressure. With continuous lock downs, wheels of industry jammed, ports activity almost zero, export markets closed, trade almost halted, the coming months are going to be extremely tough for Pakistan. On top of this is the pressure on government for providing social safety nets/payments to millions of people, who are almost at starving point. The daily wage earners are sitting idle due to lockdowns and are having real hard time to feed their families. All these factors are going to push Pakistan in further poverty and deterioration of whatever health facilities, people have at present, due to financial constraints
According to the latest Asian Development Bank Report, the COVID-19 outbreak would pose a downside risk to growth prospects as it has further dampened consumer demand due to closure of private businesses and “lockdowns” in efforts to control the pandemic. The ADB Report said weaker demand under COVID-19 could adversely affect exports. Pakistan’s economic growth is projected to shrink to 2.6 per cent in 2020 from 3.3 per cent in 2019, while inflation will remain around 11.5 per cent for 2020. “Economic growth in Pakistan is expected to slow down to 2.6 per cent this Year due to ongoing stabilisation efforts, slower growth in agriculture and the impact of the COVID-19 outbreak, before recovering to 3.2 per cent in 2021,” said the ADB. The Report said agriculture is expected to see slow growth in fiscal year 2020 as the worst locust infestation in over two decades damaged harvests of cotton, wheat and other major crops. It expects modest growth in some export-oriented industries such as textiles and leather. But large-scale manufacturing, which provides over half of industrial production, is likely to contract, as it did in the first half of 2020.
“Inflation is projected to accelerate to 11.5 per cent in FY2020, reflecting a sharp rise in food prices in the first part of the fiscal year and a 9.8 per cent drop in the value of the local currency against the US dollar in the first 7 months of FY2020,” said a press release issued by ADB. The ADB report said that the inflation would be fuelled by escalating food prices, scheduled hikes to utility rates and domestic currency depreciation. The State Bank of Pakistan, the country’s central bank, raised its policy interest rate by a cumulative 575 basis points to 12.25 per cent at the end of FY2019 to counter inflationary pressures. Following the decline in global oil prices and expected sluggish demand under COVID-19, the State Bank of Pakistan reduced it in two steps to 11 per cent in March 2020. The ADB report expects inflation rate to moderate to single-digit in 2021 to 8.3 per cent. At a growth rate of 2.6%, Pakistan will be the sixth slowest growing economy in South Asia, trailed by Sri Lanka and the Maldives.
ADB noted that although Pakistan’s strong policy measures in recent years have started to yield positive results in reversing macroeconomic imbalance and narrowing current account deficit, the country needs to focus on the new challenges posed by Covid-19, such as uncertain short-term growth prospects and socio-economic repercussions. There was some good news for Pakistan as the International Monetary Fund (IMF) in its first review of Pakistan’s economic performance had acknowledged that the government reforms programme was on track and producing results. Having been satisfied with the economic performance, the IMF recently released $452 million as the second tranche, bringing total disbursements to about $1.45 billion. The IMF Report acknowledged that the business climate had improved and market confidence was returning.
The assessment confirmed the government had recognised that structural reforms, particularly in the public sector, were key to reviving economic activity and growth. The IMF mission chief observed that macroeconomic outlook remains broadly as expected at the time of the first review. Economic activity has stabilized and remains on the path of gradual recovery. IMF said “The current account deficit has declined, helped by the real exchange rate that is now broadly in line with fundamentals, while international reserves continue to rebuild at a pace considerably faster than anticipated. Inflation should start to see a declining trend as the pass-through of exchange rate depreciation has been absorbed and supply-side constraints appear to be temporary. Fiscal performance in the first half of the fiscal year remained strong, with the country registering a primary surplus of 0.7 per cent of GDP on the back of strong domestic tax revenue growth”.
In September, Pakistan’s current account deficit dropped by 80 per cent to a 41-month low of $259 million, with a 111.5 per cent rise in foreign direct investment (FDI) and 194 percent increase in private investment. With foreign direct investment (FDI) of $1.34 billion during the first half of the current fiscal year, a 68.3 per cent increase was registered in January, compared to $796.8 million of the same period of the previous fiscal year. In early February, the reserves of the State Bank of Pakistan (SBP), also hit a 21-month high at $11.586 billion. The financial developments in Pakistan have been duly recognized globally as well, with Moody’s Investor Service upgrading Pakistan’s economic outlook from negative to stable in December 2019. The World Bank has also acknowledged Pakistan as one of top 10 “most improved” countries in the Ease of Doing Business Index. There is, however, a serious challenge Pakistan is facing due to COVID-19 for drain on government resources, to fight epidemic and loss of revenue due to “lockdowns” and collection of taxes. Let’s hope to come out of these crisis, successfully.
— The writer is former DG (Emigration) and consultant ILO, IOM.
RASHID A MUGHAL