- Not as bad as it could have been
By: Usman Rasheed
Before the covid-19 epidemic, Pakistan’s economy was fraught to stay afloat but was not in impending danger of collapse. However, the epidemic has severely impacted the nation’s economy and almost pushed many businesses to the brink of bankruptcy and economic failure, while Pakistan’s economy does not have the capacity to absorb the gigantic disruption caused by the pandemic. Out of the 14 global slumps since 1870, the present covid-19 oriented global recession will be the fourth-deepest and steepest, and the most severe since World War II.
Consequently, Pakistan’s national output is likely to worsen with the effects of covid-19 and the medium to long term prospects of the country could be endangered. Before the covid-19 tragedy there were some positive indicators for the economy. In the first six months of FY2020 (July 2019–December 2019) the current account deficit dropped by nearly 73 percent, the fiscal deficit was at 1.6 percent of the GDP, the primary balance was positive at 0.3 percent of the GDP, the credit rating had upgraded from negative to stable and the Pakistan’s rank on the Ease of Doing Business Index had upgraded from 136 to 108. Foreign banks and ratings agencies, too, have recognized Pakistan’s management of the economy. In December 2019, Moody’s elevated Pakistan’s credit outlook from negative to stable. In its second-quarter report on the state of the country’s economy, the State Bank of Pakistan (SBP) claimed that the “collective effect of stabilization and regulatory measures taken during the past one year had led to prominent enhancements in the economy. Moreover, there was an upsurge in foreign investment, exports and in tax and non-tax revenues. Further, currency had stabilized, inflation had started to ease and large-scale manufacturing exhibited some encouraging signs. While the SBP annealed its optimism with several cautions, on the whole, it seemed to suggest that the economy was on the right track.
Pakistan has to decode the disastrous COVID-19 crisis into an opportunity for undertaking improvements in its economy, polity, foreign and security policy. Failing this, the country will face the prospect of further corrosion in its economy
However, an in-depth look at Pakistan’s pre-COVID-19 economic scene discloses a very different picture. The 70 percent decline in the CAD was due to import compression and sharp devaluation of the Pakistani rupee which came at the price of economic growth. The upsurge in foreign exchange reserves (after the IMF approved the EFF programme in 2019) was mainly based on borrowed money, such as bailout loans from China, Saudi Arabia and the UAE. Regardless of a nearly 30 percent depression in the value of the Pakistani Rupee, exports amplified only marginally. In the first nine months of the current fiscal year, exports rose by only 2.2 percent in dollar terms.
The tax target of PKR 5.5 trillion set for the Federal Board of Revenue (FBR) became impossible to achieve after the sharp fall in growth. The Government of Pakistan and the IMF applauded the 17 percent rise in revenue but failed to factor in the inflation of 12–14 percent, which meant that the actual augment in revenue was only three to four percent. In December 2019, at the time of the second review of the EFF programme, Pakistan requested the IMF for a lower tax target of Rs 5.23 trillion. By February 2020, however, Pakistan was forced to demand a further reduction to Rs 4.8 trillion, but the FBR managed to collect Rs 4.123 trillion during FY 2019-20.
As a result of substantial contractionary measures espoused by the Federal Government and the ongoing epidemic, Pakistan’s GDP growth has dropped from 5.53 percent in 2017-18 to -0.38 percent in 2019-20. Furthermore, the GDP growth of the country for 2018-19 has also been revised down to 1.91 percent, as compared to provisional figures of 3.3 percent.
The last time Pakistan observed a negative GDP growth in the country was in 1951-52. Under the imperative regime, the GDP size in US dollar terms has dropped to $264 billion in 2019-20. The size of the GDP was recorded at $315 billion and $279 billion in 2017-18 and 2018-19, respectively. Presently, Pakistan’s net liability ranges around $90 to 100 billion.
The economy has been twisting at such a baffling speed that even seasoned institutions and individuals cannot precisely estimate the extent to which the epidemic will affect growth. In the first week of March, the Asian Development Bank (ADB) came up with a number that seemed incongruous with the terrible predictions being made around the world. According to the ADB, Pakistan’s economy would lose around $16 million in the best-case scenario and around $61 million in the worst-case scenario. In the event of a significant outbreak of covid-19, the loss would amount to around $5 billion, the GDP would contract by 1.57 percent, and nearly a million people would lose their jobs. By the third week of March, the ADB had radically revised its estimates to a $415 million loss in the best-case scenario, and a $6.6–17 billion loss in case of significant eruption, with the loss of employment ranging from 1.2 million to 3.2 million jobs and the GDP contracting by two to five percent. Moody’s, is also continually reviewing its growth projections for Pakistan. The Pakistan Planning Commission stated that the virus would lead to a 0.8–1.3 percent loss in the GDP, which would bring the growth down from 3.3 percent to around 2.5 percent but the provisional GDP calculated at the end of the Fiscal year 2019-20 witnessed negative growth of 0.38 percent.
Pakistan has to decode the disastrous COVID-19 crisis into an opportunity for undertaking improvements in its economy, polity, foreign and security policy. Failing this, the country will face the prospect of further corrosion in its economy.