- Responding to the economic fallout of COVID-19
Globally, Coronavirus could trigger the worst economic crisis since WWII. It has been suggested that unemployment in the US could jump to 20%, which is close to the level reached during the Great Depression in the 1930s. Similar consequences may happen in other countries, as the economies of the affected countries shut down one by one, posing great risk to the capitalist system, as we know it today. In response to this growing crisis, many countries have put in place massive stimulus packages on a scale unheard of before in history. Likewise, many central banks have lowered interest rates drastically and pumped substantial liquidity into the system to keep their economies afloat. To help countries that get into payment crises, the IMF has set up a US$ 25 billion Emergency Financing Facility. World Bank and other multilateral development institutions have taken similar action.
As far as we know, China is the only country that has not only tackled the spread of Coronavirus with speed, but has also managed to counter some of its damaging effects of the economic consequences.
What about Pakistan?
Coronavirus is already in Pakistan and is expected to peak soon enough, putting our health service and the economy in serious jeopardy. WHO has issued instructions asking South Asian countries, including Pakistan, to step up their response.
We could also see some holding back of remittances, as well as increased capital flight out of the country because of the fall in risk appetite on the part of investors. Both these factors could seriously derail our balance of payments situation.
The Prime Minister, in his recent speech, was right in underlining the challenges ahead. The government needs to act, and the best way to proceed would be for authority to be delegated to a high-powered working group with a mandate to come up with proposals for protecting the economy and monitoring its implementation.
Here we must note that the economy is already in recession, with a growth rate of only 2.1% per annum; there is a risk that if things get worse, it could fall into depression, from which recovery would be long and painful.
The first thing to recognize is that for all practical purposes, the ongoing adjustment program negotiated with the Fund recently would be difficult to hold together. It needs to be reviewed quickly, and revised or put on hold temporarily. This could be for a period of up to six months initially, estimated to correspond with the Coronavirus cycle. For this, we would need to seek a waiver from the IMF in certain specific areas such as revenue, expenditure and subsidies.
We could start immediately with some monetary stimulus by asking the State Bank of Pakistan (SBP), which cut interest rate by 0.75% on Tuesday, to cut the rate further to bring it to 11%. This would have three positive effects: on the budget deficit by lowering interest on government debt; companies, especially SMEs would benefit immediately from increased cash-flow due to lower rates; lowering of interest would also help to stimulate demand when economic activity is declining. The argument that lowering rates could fuel inflationary expectation would not be strong when the economy is contracting due to exogenous shock; growth forecasts have already been downgraded.
SBP has another policy instrument at its disposal. If needed, it should not hold back from injecting additional liquidity into the economy on a step-by-step basis as and when required. Central banks in other countries have used such instruments in times of economic meltdown with great effectiveness.
We should also expect substantial negative effects on our trade and balance of payments. IMF has projected that world trade will suffer significantly from the effects of Coronavirus on global output. This will very directly hit demand for our exports in US and European markets, which account for much of our exports of textiles and manufactured goods.
We could also see some holding back of remittances, as well as increased capital flight out of the country because of the fall in risk appetite on the part of investors. Both these factors could seriously derail our balance of payments situation.
These are anti-cyclical measures, which should help to prevent economic activity, including businesses, from collapsing under financial strain.
It is not clear whether the government has taken sufficient account of this possibility. In such an eventuality, Pakistan has the option of approaching the IMF for support through its Emergency Financing Facility, which is set up specifically for this purpose. It is better to be prepared than rush around in a hurry when the situation has become unsustainable.
There are a host of other initiatives, which the government should be undertaking. In the first place, it should mobilize sufficient funds for essential expenditures related to tackling Coronavirus. World Bank and Asian Development Bank has acted quickly to provide Rs 93 billion for COVID-19 emergency response in Pakistan from their local currency reserves. This would in some part help to cover the cost of necessary medical supplies, including equipment. But this would be insufficient to deal with the scale of the problem we are facing.
The government needs to take the initiative to set up a special fund, which could be called the ‘Solidarity Fund’, in line with WHO concept. This should be funded from unutilized government resources such as contingency fund, undisbursed amounts from PSDP, Dam Fund, contributions from private sector sources and voluntary contributions. These funds should be utilized to purchase vital equipment such as ventilators, which are in short supply in Pakistan, and for rapid build-up of sensitive food products like wheat and sugar etc., which are depleting due to panic buying and which could result in unanticipated price hikes. This would affect the poor and even the middle classes directly, at a time when unemployment is expected to creep up.
The government should also take steps to reduce tax rates on essential food items and utilities, which are consumed by those in low-income groups. Credit lines should be set up to provide working capital to SMEs and Women’s enterprises that are likely to be most affected by this economic downturn. Benazir Income Support Fund can play a vital role in making cash available directly to the poor. It already has a fairly extensive database to work from.
All these actions would mean that the government’s budget deficit target agreed with the IMF would not be met and a waver has to be sought due to exceptional reasons. But this should not be taken as an excuse to go back on the work being done to broaden the tax base by registering non-filers, and to take positive steps towards imposing property tax and land holding tax on large land holdings.
The Prime Minister’s proposal for debt relief is an expression of hope, but is unlikely to materialize easily as those who have been involved in debt negotiations would know. At this time what is urgently required is a credible response to the economic emergency and a coordinated approach. The Sindh Chief Minister, Mr. Murad Ali Shah has set a good example for our leadership.
