FeaturedNationalVOLUME 15 ISSUE # 20

Expanding Covid-19, contracting economy

Pakistan’s economy continues to reels under the adverse impacts of the novel coronavirus. Its economy has already contracted by 0.38pc in the outgoing fiscal year and the situation is not expected to improve much even though lockdown restrictions have been relaxed.

Pakistan’s economy, which had slowed down after the introduction of stabilisation policies that hit the industrial sector much before the onset of the pandemic, has contracted by 0.38pc in the outgoing fiscal year. Moody’s Investors Service has put Pakistan under watch for possible downgrade of its long-term local and foreign credit ratings, suspecting that Pakistan may default on debt repayments to “private sector creditors” due to economic mess under the coronavirus pandemic. However, Moody’s said Pakistan had improved its economic indicators well before the outbreak of Covid-19 late in March and was still capable of continuing to pay off the debt on time. The possible deterioration in the country’s current account deficit, likely depletion in its foreign currency reserves and low tax and non-tax revenue collections due to limited economic activities and anticipated contraction in the domestic economy may weaken the government’s ability to continue paying off the debt on time, going forward.

Analysts fear Moody’s move may turn the rupee-dollar exchange rate volatile and increase the cost of new foreign borrowing for the country in international markets. The rating agency has placed the government of Pakistan’s local and foreign currency long-term issuer and senior unsecured B3 rating under review for downgrade. However, the move is not Pakistan-specific only. “Consistent with Moody’s approach globally, the review period will allow the rating agency to assess whether Pakistan  would likely entail default on private sector debt,” it said. It, however, did not mention the duration of the review period, as to how long it would monitor Pakistan’s debt repayment activities and when it would announce its final decision. Moody’s said the decision to place the ratings under review for downgrade reflected its expectation that the government would request for bilateral official sector debt service relief under the recently announced G20 initiative.

On the other hand, the National Accounts Committee has projected the GDP to grow negatively at 0.38pc during the fiscal year 2019-20 ending on June 30. The estimates are based on six to nine months provisional data projected for the whole year and adjusted for the impact of Covid-19 followed by the lockdown. The economic contraction and currency devaluation cut the size of the economy to around $265.6 billion from $280 billion a year ago. At the end of the Pakistan Muslim League-Nawaz (PML-N) government’s term, the size of the GDP was $313 billion.

Almost every sector of the economy witnessed negative growth. After witnessing a 0.6pc growth rate in the last fiscal year, the agricultural sector grew by 2.7pc this year. The government had set a target of 3.5pc growth in the sector for the fiscal year. The industrial sector is the worst hit by the pandemic, although there was a partial lockdown in the country and some industries kept running. The government missed key sectoral targets. Against a target of 2.3pc, the output in the industrial sector stood at -2.64pc. The output of large-scale manufacturing contracted by 7.8pc while small-scale manufacturing grew by 1.5pc after the government adjusted the adverse impact of Covid-19. The construction sector also posted a growth of 8pc this year as against a negative growth of 16.7pc in the previous fiscal year. The services sector, which accounts for 60.4pc of the size of the economy, contracted by 0.6pc against the target of 4.6pc. The wholesale and retail trade sector posted -3.4pc growth against the target of 3.9pc.

The World Bank has also noted adverse effects of the pandemic on Pakistan’s economy. It has approved $500 million loan to help the country out of a major economic crisis. “As the world battles coronavirus, a lot of countries have been having a hard time saving their economy. Pakistan, a country that has already been struggling economically, has seen a steep decline in the economy. Political risks are high because Covid-19 response adds uncertainty to the relations among the federating units,” it said.

The State Bank of Pakistan (SBP) has slashed the policy interest rate by 100 basis points to 8pc to provide easy liquidity to help businesses under stress owing to the pandemic. This was the fourth reduction within two months and cumulatively interest rates were slashed by 5.25pc. “The inflation outlook has improved further after a recent cut in domestic fuel prices. Inflation could fall closer to the lower end of the previously announced ranges of 11-12pc this fiscal year and 7-9pc next fiscal year,” it observed. However, the central bank expects some upside risks from potential food price shocks associated with adverse agricultural conditions.

In the light of preliminary evidence from China and other countries that eased lockdowns earlier than others, activity in service sectors and consumption, which formed a large part of the domestic economy, could remain subdued for a longer time. Large-scale manufacturing witnessed a steep decline of 23pc year-on-year in March due to withdrawal from economic and social activities aimed at slowing the spread of coronavirus. “High-frequency indicators of demand such as credit card spending, cement dispatches, credit off-take and petroleum products sales also suggest a marked contraction in domestic economic activity in both March and April. After showing signs of recovery earlier this year, both consumer and business sentiments have fallen sharply,” the SBP observed.

The recent measures have failed to prevent a sharp fall in economic activity due to the lockdown. Despite a cut in fuel prices, prices of essentials, like chicken, flour and sugar, have increased sharply. As the pandemic continues to rage, people cannot expect immediate economic relief.