Saddam Hussein
The coronavirus (a.k.a COVID-19) pandemic is hitting hard on the global economy. The economic cost seems unprecedented. Cities are locked down, industries shutting down, inflow and outflow of any kind of traffic in many parts of the world is halted. Almost all the airlines will technically be bankrupted in few weeks’ time, demand and consequent supply side of goods and services is increasingly showing downward trajectory and so on. From an economic standpoint, the key problem is not COVID-19 itself and the number of people it affects, but the level of disruption to economies from containment measures. This has resulted in global economic slowdown; compelling major institutions and banks to cut their forecasts for the world economy.
What caused this sudden and unanticipated economic melt-down? In simple words, with the emergence of this virus in China, there spread a panic. To contain the outbreak, economic activity was halted across the country. This led to low aggregate demand. The biggest chunk in the Chinese demand is oil; Beijing is the biggest importer of oil. So, oil demand also came down sharply; stock kept piling up within the inventories of Saudi Arabia and other oil exporting countries. They tried to cut the supply to retain the prices, but Russia increased the oil supply. Ultimately, all suppliers were compelled to increase supply as well. Oil price then hit its 17-year low point of around USD 20 per barrel. As, oil is the key trading commodity of all major economies, it caused panic across the globe. With double shock – COVID 19 and oil price dip – everybody started to secure their investments – selling their shares. So, this means sellers in the oil shares’ market excelled manifolds than buyers. Resultantly, oil shares’ prices dropped drastically, crashing many stock markets around the world. Afterwards, the ripple effect just started that we all are witnessing now.
Amid all this, cash-strapped Pakistan may face losses up to USD 61 million due to the noxious coronavirus outbreak, the Manila Based Asian Development Bank (ADB) has stated in its assessment report. In moderate case scenario, the projected losses to be faced by Pakistan are USD 34.2 million. In worst case scenario, the projected losses to be faced by Pakistan are USD 60.8 million, the report added.
Pakistan, in support for the COVID-19 emergency response and to address the socio-economic disruption associated with it, would soon get USD 238 million from the World Bank and USD 350 million from Asian Development Bank. Likewise, China and US also pledged to provide USD 04 million and USD 01 million, respectively.
Most parts of the country are in lock-down, though with varying intensities, to flatten the curve of the spread of COVID-19. These lockdowns would have significant economic effects which could surface through numerous channels including, but not limited to, sharp declines in domestic demand, decreased tourism and business travel, export-imports and production linkages, supply disruptions, and health effects. The biggest concern are the poor – the vulnerable segment of the society.
Keeping the above-mentioned factors in view, PM Imran Khan and his team, on March 24, 2020, came forward with a short-term comprehensive plan for the people in general and the vulnerable segment of the society in particular. He announced multi-billion relief package, which would serve as a stability-cushion in times when the nation is fighting against CoronaVirus outbreak. The package includes PKR 200 billion for daily-wagers, PKR 100 billion each for exports and industry and SMEs, PKR 150 billion for low-income families, PKR 50 billion for medical workers and equipment, lowering oil prices, expansion of panah-gahs (shelter homes) etc. Besides these PKR 100 billion has been kept to use in an emergency in countering the after effects of the lockdowns.
The government of Pakistan has also taken some other steps to mitigate the crises. In a prompt move, the Federal Board of Revenue (FBR) has exempted all kinds of diagnostic support and health safety items from all taxes including Income Tax, Sales Tax and Customs Duty for the period of three months.
On the other hand, State Bank of Pakistan (SBP) has decided, after their Monetary Policy Committee (MPC) meeting on March 24, 2020, to cut the policy rate by a further 150 basis points to 11 percent. This brings the cumulative easing over the past one week to 225 basis points. This cumulative easing would cushion the growth slowdown while protecting inflation. Earlier, SBP monetary policy statement on March 17, 202, did not cheer up the market which was expecting a significant cut in this regard. In my opinion, SBP did have a leverage – in the wake of oil prices taking a nose dive – to go for large cut in the interest rate. However, as many are suggesting, if rates were reduced to 200 or 300 basis points, it would only have benefited the borrowers. In contrast it would have been a shock to depositors. Thus, SBP might have thought to stabilize depositors’ confidence and keep the certainty intact, instead of giving them sudden bump of rate fall, it followed incremental approach.
Prior to that, a week earlier, SBP also unveiled PKR 105 billion stimulus package to shield economic activity from coronavirus, by announcing two measures. First, the SBP announced a ‘Temporary Economic Refinance Facility (TERF)’ to stimulate new investment in manufacturing. Under this scheme, the SBP will refinance banks to provide financing at a maximum rate of 7 percent for 10 years for setting up of new industrial units. The total size of the scheme is Rs 100 billion, with a maximum loan size per project of Rs 5 billion. Second, the SBP announced a ‘Refinance Facility for Combating COVID-19 (RFCC)’ to support hospitals and medical centers in combating the spread of COVID-19. Under this scheme, the SBP will refinance banks to provide financing at a maximum rate of 3 percent for 5 years for the purchase of equipment to detect, contain and treat the Coronavirus. The SBP will provide this facility to banks at zero percent. The total size of the scheme is Rs 5 billion, with a maximum financing limit per hospital or medical center of Rs 200 million. The facility is available until end-September 2020.
Many are of the view that there is a silver lining for Pakistan in the backdrop of coronavirus pandemic. They say that Pakistan can become an alternative market for business across the world, but one might ask, with whom will we be making transactions? We are not living in isolation; it is global phenomenon and demand side will be affected equally all over, bringing down the supply side with itself as well. They also opine that Pakistan is in pretty comfortable position due to sharp reduction in oil prices. In contrast, they forget that oil-factor is temporary. Plus, Pakistan is losing millions and in coming weeks can lose billions of dollars in remittances, as economic activity around the world will be shutting down and employees would be laid off – an alarm bell for the Pakistani diaspora abroad.
Furthermore, nothing can be anticipated much at this point of time. This is a challenge of different nature that humanity is facing after very long. It is an ever-evolving situation. This necessitates proper mapping and data-monitoring on the basis of regular intervals, so that appropriate steps could be taken timely with minimum damage done.
Lastly, there is no need to panic. These times require patience. The economic nemesis will just be temporary. Soon, the economic engine will whistle again. There is no structural ruination so far; stumbling of economic activity is only demand induced. Once the demand side of the equation gets in shape, everything else in the whole equation of economy will fall into place. Remember the Australian bushfire? It devasted huge areas of the country’s natural environment. However, signs of life are returning there; greenery is sprouting through burnt tree trunks and the life goes on.
