FeaturedNationalVOLUME 15 ISSUE # 18

Uncertainties deepen

The corona virus has changed the world in three months. The global growth is projected to fall to -3 percent in 2020, a downgrade of 6.3 percentage points from January 2020. The spread of Covid-19 has also brought an exceptional set of challenges for Pakistan. It is walking a tightrope to save its economy and lives from the pandemic.

The country was in the process of deep structural reforms to put the economy on a firm path towards sustainable growth, when the pandemic struck. Pakistan already faced huge challenges and the coronavirus has compounded them. Moody’s Investors Service – one of the top three global credit rating agencies – has anticipated that a drop in domestic consumption, halt in tourism – whose share in GDP stands at 2pc – and sluggish exports would fuel a “moderate recession” in the economy. Pakistan will see economic contraction for the first time in the past 68 years – after 1951-52. Pakistan’s growing need for funds to finance the fight against the health crisis, address hunger and relief packages announced to support industries, construction sector and daily-wage earners during the lockdown would increase its fiscal deficit to 9.5-10pc of GDP. “We expect that Pakistan’s financing needs will rise because of coronavirus-related economic effects and the government’s Rs1.2-trillion ($7 billion, 2.7pc of GDP) stimulus package, approved on March 30,” it noted. The country recorded 8.9pc fiscal deficit in the previous fiscal year ended June 30, 2019.

The global rating agency said the deficit would surge despite strong growth in revenue collection, which narrowed the deficit in first half (Jul-Dec 2019) of the current fiscal year. The nationwide lockdown from late March to month-end (with a possible extension) to contain the spread of the coronavirus would significantly curtail domestic consumption and pose downside risks to economic growth, which threatens a wider fiscal deficit and a higher government debt burden than current projections. General government debt is expected rise to around 87pc of GDP by June 2020, from around 83pc in June 2019, and gradually decline in subsequent years. In fiscal 2021, it expects the deficit to narrow given the government’s commitment to fiscal consolidation under its IMF programme, but remain wide at 8-8.5pc of GDP.

On April 16, the IMF approved the disbursement of $1.4 billion (0.5pc of GDP) to Pakistan under its Rapid Financing Instrument (RFI). The financing supplements the assistance of $588 million (0.2% of GDP) committed by the Asian Development Bank (ADB) and the International Development Association (IDA) to support Pakistan’s response to the coronavirus outbreak. Additionally, G20 creditors offered Pakistan a bilateral debt relief estimated at around $12 billion. The multilateral development banks’ latest financial assistance augments their current funding to Pakistan in programmes including the IMF’s Extended Fund Facility and the World Bank’s Revitalising, Innovating, Strengthening Education project. “We expect the extra funding to cover the government’s additional external financing needs in fiscal 2020,” Moody’s said.

Pakistan faces the worst recession of its history over the severe impact of the deadly pandemic, as its economy is expected to shrink up to 2.2pc and per capita income will decline sharply. The World Bank has projected that Pakistan may fall into a recession – for the first time in 68 years. Pakistan is among Maldives, Sri Lanka and Afghanistan whose GDP growth forecast for the fiscal year is in negative territory. The latest report is in contrast to its estimates of 1pc growth in the current fiscal year 2019-20. It projected a decline in Pakistan’s national output in the range of 2.2pc to 1.3pc, which will also hit personal incomes badly. Pakistan, which has already experienced low growth rates in recent years, could well fall into a recession. With 1.8pc population growth, that would imply a painful decline in per capita income.

The International Monetary Fund (IMF) has projected that Pakistan would miss all economic targets during the ongoing fiscal year as the country is facing unprecedented health and economic shocks from the outbreak. Pakistan’s economy could contract by 1.5pc in FY2020 (the first full-year contraction since 1952), a downward revision of about 4 percentage points due to a decline in consumption, investment, international trade, remittances, and private capital flows. In its latest report on Pakistan’s economy, it noted that the budget deficit would swell to Rs4 trillion in the current fiscal year (FY20) against an early projection of Rs3.2 trillion. The primary deficit is now expected to deteriorate to 2.9pc of GDP in FY 2020 (from 0.8pc expected earlier) due to a 1.8 percentage point decline in tax revenue relative to the pre-virus baseline, and the needed higher spending to support the health response, social safety nets for the poor and unemployed.

The Asian Development Bank (ADB) has also projected Pakistan’s economic growth to shrink to 2.6pc in 2020 from 3.3pc in 2019, while inflation will remain around 11.5pc for 2020. In its latest report, it said the Covid-19 outbreak would pose a downside risk to growth prospects as it further dampened consumer demand and as private businesses were temporarily shut down in efforts to control the pandemic. It said weaker demand under Covid-19 could adversely affect exports.

According to the State Bank of Pakistan (SBP), stabilization efforts and regulatory measures yielded notable improvements during the first half of fiscal year 2020, however, the global and domestic spread of Covid-19 has brought exceptional challenges for the country. According to SBP’s second quarterly report on the state of economy, the current account deficit contracted to a six-year low, foreign exchange reserves increased, the primary budget recorded a surplus, and core inflation eased. The spillovers from the global economy and infection-containment measures in the country are bound to weaken the economic activity and consumer demand and adversely impact supply. The situation is uncertain in Pakistan and it will become graver if the lockdown is extended after a possible spike in Covid-19 cases.