Balanced on the edge of a knife

March 16, 2020

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The threat posed by the deadly coronavirus to Pakistan’s economy is now real and upon us. Fortunately, there are no signs of a local outbreak yet.

Without calling it a national health emergency, the government has announced extraordinary precautionary measures at least for three weeks following a meeting of the National Security Committee to prevent the spread of the infectious disease.

Many areas in the country’s economic supply chain that were not originally anticipated to suffer by the initial estimates of local and international experts are now coming under pressure. The movement of goods and passengers has been restricted at the major border entry points, educational institutions are closed and public gatherings have been banned.

The Pakistan Cricket Board appears to be the first to face financial losses estimated to be close to Rs100 million following the decision to hold remaining matches of the Pakistan Super League without spectators. The unexpected losses are also now evident to the entire chain linked to the wedding and entertainment industry including food, catering, clothing, jewellery and transport to name a few.

The ADB estimates that in the worst-case scenario, the country could suffer an economic loss of about $5bn. Otherwise, losses will remain limited to a few million dollars

The oil industry is already feeling the brunt of inventory losses as global demand suffers and prices plunge. It has asked the government to change goalposts to its favour. Trade was already under pressure and the closure of western borders for three weeks will add to its woes. At the same time, however, the drop in global oil prices should have also a positive contribution to Pakistan’s economy in the shape of a lower import bill, reduced cost of production and lower inflation.

The negative impact on revenue collection because of the lower price will partly be covered by higher tax rates.

The economic managers will formally review the situation early next week and based on their assessment firm up a strategy of whether a request should be made to the international lending partners for relaxation in conditionalities of the ongoing loan programmes or additional financial support be solicited given the emergency-like situation and its devastating impact on economic indicators.

The International Monetary Fund (IMF) has already earmarked about $50 billion in emergency financial support for its member countries. Already under a 39-month extended fund facility, Pakistan can qualify for an additional quick disbursing assistance package should authorities so decide.

As things stand now, borders with Iran and Afghanistan have been sealed for all purposes and international flights have been restricted to three major airports (Karachi, Lahore and Islamabad) while all cinemas, theatres and marriage halls have been shut down and all wedding and entertainment functions stand cancelled.

Even the judiciary has been advised to postpone the hearing of criminal cases or shift proceedings to digital/online modes where possible.

All educational institutions including schools, colleges, medical colleges, deeni madaris, tuition centres, technical and vocational institutions and universities both in the public and private sector shall remain closed for three weeks i.e. until April 5. All religious congregations and ceremonies will remain suspended during this period. All of this will also impact the transport sector.

Many areas in the country’s economic supply chain that were not originally anticipated to suffer by the initial estimates of local and international experts are now coming under pressure

Shortages of food items are consequently anticipated by the National Security Council that is represented by all the stakeholders including federal, provincial and armed forces. Therefore, the Ministry of National Food Security and Research and the provincial governments have been advised to work out contingency plans in consultation with each other to face this eventuality.

While the situation on the ground is still evolving, the United Nations Conference on Trade & Development has estimated a maximum loss of about $44m loss to the Pakistan economy in the textile and apparel sector in case of a 2 per cent reduction of China’s exports of intermediate inputs.

On the other hand, the Asian Development Bank has estimated that in a worst-case scenario based on the hypothesis of corona outbreak in Pakistan (which is not the case until now), the country could suffer an economic loss of about $5bn.

Otherwise, the losses would remain limited to a few million dollars if there is no outbreak inside Pakistan’s borders.

The Manila-based lending agency said depending on how the outbreak evolved, the magnitude of economic losses in developing Asian economies would be in the range of $77bn to $347bn, or 0.1pc to 0.4pc of the global GDP. China alone would face about $103bn of these losses or 0.8pc of its GDP.

Published in Dawn, The Business and Finance Weekly, March 16th, 2020