Corona bonds and replacing supply chains
Rarely in recent history has our planet witnessed a phenomenon that has so swiftly affected the lives of almost every single individual. Corona has wrecked economies, destroyed livelihoods, thrust social isolation upon the world and draped pervasive insecurities regardless of color, age, religion or monetary statuses
Yet every calamity brings along unique sets of opportunities and it is imperative for policymakers to identify them at the earliest and respond with measures even faster. In the short-term, Pakistan is in a semi-lockdown phase, offices are somewhat closed, congregations somewhat banned and non-essential retailers requested to remain somewhat closed. The result of this ‘somewhatism’ is yet to be seen but its measures on a medium to long-term phase would determine the future of our economy and courtesy of the covid-19-causing bat, Pakistan is in a position to kickstart its manufacturing sector provided it pivots fast for the post-corona world. Let me explain how.
Oil has plummeted to a low with future contracts trading at a level unseen in history, suggesting that traders expect the demand suppression due to the coronavirus to persist in the near future. Further exacerating the oil crisis is the Saudi-Russian ego war that may have seen some respite due to the impending oil storage crises, but since both countries are ruled by by strong-men who bother less about the short-term national interests than the public perceptions of their tenacious muscularity, the oil skirmishes between the countries seems far from over. All this means that even Barclays and Goldman Sachs are forecasting a $30-per-barrel world for more than just a few months, which luckily for Pakistan translates into a significant saving in import bills for at least the next year. The decline in import bills means a shrunken trade deficit as over 70 percent of its petro-requirements are met through imports. However, as of now, despite the fact that crude oil prices have shrunk from over $60 in December 2019 to below $30 dollars per barrel, the government has passed on a mere 13 percent cut in prices. Pakistan already stands to improve its balance of payments by about $3 dollars even after compensating for the expected downturn in remittances. Passing on the entirety of the price fall would help the domestic industries bring down their cost of production and become more competitive on the world stage. Lower prices also leads to increase in consumption and researchers at PIDE, Islamabad had calculated that for every 1 percent additional consumption of oil, our GDP stands to gain an uptick of almost 4percent%. Therefore, passing the fruits of the situation on to the consumers remains vital to fire up business activity.
The UN database on FDI reflects that in since 2001, cross border manufacturing investments in industries referred to as medium-skill-intensive such as industrial machinery, electronics, chemicals and so on, have been about 10 times more than the capital flow in low-skill industries such as garments, footwear and toys. Pakistan with its seventh largest pool of engineers and tech graduates in the world, available at bargain prices, is at an ideal point to harness the prevailing business sentiment
The second immediate step for the government should be to issue investments bonds, aesthetically titled Corona Bonds. Economic measures require capital and our historical approach in times of needs have been charity-driven relief funds, which have ultimately never accounted for anything more than some good puns and jests. Be it Nawaz’s qarz-utaro-mulk-sanwaro scheme for loan repayment or the former CJ’s Dam-Fund, the result has only been a PR disaster for the state institutions. A much better policy is to specifically target and engage the diaspora by issuance of Corona bonds, conceptually similar to the war bonds that were once popular among the Western nations during times of conflict. They were securities issued to finance military operations and expenditures. Corona is no less than a war except that the guns have been replaced with masks and soldiers with paramedics.
In order to finance any measures, funds need to be raised. Ensuring the security of capital and a decent return on investment for a five-to-10-year period is a prudent method to engage the overseas Pakistanis and utilize their love for the homeland. Enlisting the citizens in this war requires a well-messaged clear roadmap for the disbursement of funds. Corona-era is an ideal time to effectively communicate an economic message and instill nationalistic fervour among its citizens, especially ones living abroad who are emotionally at a point where they can be driven to pay their dues for the nation. This would not only help to prepare for the economic battle but would also lead to de-militarization of patriotism and introduction of community crowd-sourcing while ensuring security of capital.
With fiscal breathing space and a replenished financial war chest, the third step for Pakistan is the most important. The coronavirus has exposed the overdependence of supply chains on China. Manufacturers who had once moved their factories to China to take advantage of cheap labour and lower tariffs on exports are beginning to look for other countries that offer similar business advantages. With a significant chunk of the supply chain in retail totally dependent on China, this outbreak will dramatically accelerate the manufacturing exodus from our neighbor since business sentiment across the board has got a reality check about the perils of Chinese hegemony over the supply chains. This need to diversify production locations presents an ideal opportunity for Pakistan to exhibit itself as an alternative. The key here is to target the middle-skilled industries for the supply chain development as opposed to the conventional policy wisdom of facilitating low-skill production. The UN database on FDI reflects that in since 2001, cross border manufacturing investments in industries referred to as medium-skill-intensive such as industrial machinery, electronics, chemicals and so on, have been about 10 times more than the capital flow in low-skill industries such as garments, footwear and toys. Pakistan with its seventh largest pool of engineers and tech graduates in the world, available at bargain prices, is at an ideal point to harness the prevailing business sentiment. There is of course much to be written on the specifics of the plans but for now let’s just thank the coronavirus for bringing it to such a point.
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