Coronoavirus Impact: Negative Global Growth Makes Pak Economy More Vulnerable

SoDATA — The Moody’s rating agency has forecast that instead of an over 3 percent growth in 2020, world economy will now see negative growth due to Coronavirus pandemic.

The EIU has projected that the growth rate in 2020 will fall, for example, in China from 6 to -1.5 percent, in India from 6 to 1 percent and in Turkey from 4 to -5 percent.

The magnitude of the negative impact globally is so large that some writers have suggested that it will be even worse than the Great Depression.

Conditions are unlikely to improve till 2021, including Pakistan’s, some experts say who add “it’s a national security issue”. Fall in oil price will reduce import bill, but is unlikely to effect the bottom line in the final analysis”, they say.

A recently published position paper says Pakistan’s economy is inherently unable to face the major shock of negative global growth caused by the pandemic and therefore needs more than an oomph with the recently announced relief by the government.

For example, it says the lockdown has resulted in temporary unemployment — as much as 10.5 million workers, including daily wage and contract/casual workers in businesses.

In the longer perspective, it adds, there is likelihood of increase in number of unemployed workers in the country — anywhere between 3.1 million and almost 5 million due to slowdown of the economy and is of a more lasting nature. As such, the social protection and anti-poverty initiatives will have to be significantly larger and longer lasting in nature. More effective targeting mechanisms will need to be developed to reach new families falling below the poverty line and the large number of displaced daily income and casual workers.

The shocks to the domestic economy due to the Coronavirus and measures taken thereof, in particular the lockdown, to avoid its spread have both supply and demand related manifestations both domestically and in trade, a pressure which is likely to end sooner.

The conditions in developed country markets are already exerting a negative impact on other countries exports and commercial enterprises in a wide range of sectors.

The restrictions imposed on imports by the countries like EU, USA, UK and China or cancellation/postponement of export orders for Pakistani goods are expected to lead to a decline in the volume of exports in relation to the desired level.

Similarly, there is likelihood of a decline in the physical inflow of imports into Pakistan in relation to the desired level.

There is also the risk of a further massive decline in industry which makes the more dominant contribution to GDP growth.

The stock market continues to be under pressure, partly because of the withdrawal of portfolio funds by foreign investors and mutual funds managers seeking higher returns in short term or risks abatement.

Meanwhile, the Government is expected to maintain a real growth in current expenditure of 8 to 12 percent (which includes markup payment on debt) and in development spending of 10 to 15 percent, contributing to a higher fiscal deficit given the erosion of the tax base (direct + indirect).

On fiscal side, the current account deficit could decline by $1824 million in one scenario. However, in another scenario, it may worsen by $531 million.

The tax revenue loss could range from Rs 150 billion to Rs 290 billion. However, this will be partially compensated for by a decline in the cost of debt servicing of Rs 90 billion over the next three months. Also, as the decline in the oil price gets reflected in imports the Petroleum Levy could yield additional revenues of Rs 100 billion by end-June 2020.

Therefore, fiscal account could be partially mitigated by an increase in the inflow of borrowing from the IMF, World Bank and the ADB.

The GDP could fall by 4.6 percent in Scenario- I and by as much as 9.5 percent in Scenario- II in the fourth quarter of 2019-20. The estimated GDP loss in the fourth quarter of 2019-20 is potentially large. It has been calculated at Rs 891 billion in Scenario-I and Rs 1602 billion in Scenario-II at current prices.

The Macroeconomic Model of the Beaconhouse Center for Policy Research (BCPR) was used to look at the combined impact of different shocks. The first is the likely fall in the volume of global trade in the next few months. The consequential impact on the unit dollar value of exports has been taken into consideration. Further, the assumption made is that with the precipitate more than halving of the oil prices there will be a somewhat bigger fall in the unit value of imports by Pakistan.