InternationalVOLUME 15 ISSUE # 17

Cushioning the economy from coronavirus impact

According to the Ministry of Planning, an estimated 15 million people in the country will lose their jobs and the economy would sustain Rs 2 trillion to Rs2.5 trillion losses in just three months due to the shocks from the coronavirus outbreak.

In making the assessment, experts have taken into account limited, moderate and complete levels of lockdown. At present, the country is at the moderate level in terms of restrictions on movement and may move towards complete restrictions. In this context, the ministry has assessed losses at Rs1.2 trillion in the case of a limited lockdown, Rs1.96 trillion in moderate and Rs2.5 trillion in case of a complete lockdown.

The assessment is based on losses sustained in the areas of business, tax revenue, international trade and the cost of unemployment for three months. Initial estimates show that in case of limited restrictions, about 1.4 million jobs will be lost, which are equal to 2.2% of the employed workforce. In monetary terms, the three-month wage losses will translate into Rs66 billion. However, if private offices and most shops are closed, but essential shops are open, the government thinks that about 12 million people will become jobless, accounting for around 20% of the employed labour force. In monetary terms, the loss of wages will translate into Rs561 billion for three months alone.

In case of a complete shutdown, the government has assessed that 18.53 million people or 30% of the labour force will be unemployed. The people will sustain a loss of Rs783 billion. In the scenario, two-thirds of the workforce is daily wagers, 30% is working on the piece rate and the rest are street vendors. The government has also assessed Rs9.3 billion losses for the aviation sector, Rs250 billion initial loss in the stock market, Rs30 million losses being sustained by the Ministry of Maritime Affairs, Rs136 billion by the Ministry of Energy, Rs55 billion by the agriculture sector and Rs8 billion by the Ministry of Railways.

However, experts question the figure of losses being shown by the Ministry of Energy on account of circular debt, delay in tariff adjustments and deferred electricity payments. The argument is that all the amounts will eventually be recovered. Similarly, the loss figures of agriculture appear exaggerated, as COVID-19 has not impacted the sector. On the government’s revenue side, it is expected that the Federal Board of Revenue could see a decrease in revenue and cash outflow of around Rs600 billion in the fourth quarter of the fiscal year.

Among various sectors, trade has suffered more. It is said that the government expects a sharp slowdown in trade activities. There is an expected sharp slowdown in imports from 35% up to 60%, depending upon the severity of the crisis. According to one calculation, exports could potentially go down by up to 10% in dollar terms in the fourth quarter. It is said that the impact of trade contraction only on the GDP could be up to 4.6% if combined imports and exports go down by 20%. The preliminary estimates show that in case of a 2% decline in imports and no decrease in exports, the fourth quarter GDP would be shaved off by 0.3% that will translate into Rs45 billion. If both exports and imports decline by 10% each, the fourth quarter GDP would take a hit of 2.3% or Rs345 billion. Similarly, a 20% decline in imports and exports in the fourth quarter would cause losses of 4.7% of the GDP or Rs700 billion.

As we know, the national economy is inherently incapable of facing the shock of negative global growth caused by the coronavirus. In recent months there has already been a slowing down of the growth momentum. The growth rate for 2019-20 was expected generally to be significantly lower than that of 2018-19 and to come down to perhaps even below the target of 2.4 percent. In fact, the large-scale manufacturing sector has been exhibiting negative growth. Some of the major crops, especially cotton, are likely to see significant output declines and various service activities, like domestic trade and transport, are in a state of recession.

There is the risk of a further massive decline in domestic economic activity, especially in the industry which makes a major contribution to the GDP growth. The conditions in the markets of developed countries are exerting a negative impact on our exports. The stock market continues to be under pressure, partly because of the withdrawal of portfolio funds by foreign investors. There are reports of closures of a host of large and small industries and commercial enterprises in a wide range of sectors and the resulting heightening of risk perceptions. The large-scale outflow of “hot money”, invested in government short-term treasury bills, has already contributed significantly to a perceptible decline in foreign exchange reserves and an almost 7 percent depreciation in the value of the rupee. It is clear that in the circumstances, a comprehensive strategy will have to be adopted to sustain the economy and see it through before the situation starts improving.