A LOT has already been predicted about the economic impact of Covid-19, especially its effect on remittances and supply chains. The export sector has been complaining about its orders getting cancelled and demanding that it must be rescued.

However, one aspect that commentators have largely missed so far is the future of services trade, which accounts for almost a quarter of global trade.

Even the World Trade Organisation (WTO), which recently projected that global trade could plunge by 13-32 per cent in 2020 on account of Covid-19, didn’t include services in its calculations.

However, it warned: “Services trade may be the component of world trade most directly affected by Covid-19 through the imposition of transport and travel restrictions and the closure of many retail and hospitality establishments. Services are not included in the WTO’s merchandise trade forecast, but most trade in goods would be impossible without them (eg transport). Unlike goods, there are no inventories of services to be drawn down today and restocked at a later stage. As a result, declines in services trade during the pandemic may be lost forever.

“Services are also interconnected, with air transport enabling an ecosystem of other cultural, sporting and recreational activities. However, some services may benefit from the crisis. This is true of information technology services, demand for which has boomed as companies try to enable employees to work from home and people socialise remotely.”

In Pakistan, services exports make up 19pc of the total proceeds earned. Hence, any change in its magnitude will have a sizable impact on the country especially as it struggles to build foreign exchange reserves amid recent hot money outflows. Similarly, the effect on imports would be crucial as well, considering we have a negative trade balance.

According to the Pakistan Bureau of Statistics (PBS), the country exported services worth $5.37 billion in 2018-19 against the imports of $9.66bn, leaving a negative trade balance of $4.28bn. A look at its breakdown can give us a rough idea of the worst-hit sectors.

‘Services are interconnected, with air transport enabling an ecosystem of other cultural, sporting and recreational activities’

In exports, five categories account for over 95pc of the total proceeds, which include transport; travel; telecommunication, computer and information; other business services; and government services. Of these, the first two look particularly sensitive to Covid-19 as flights have been mostly halted along with many transport and freight services.

However, a more sophisticated way to look at how much of services trade might be vulnerable due to lockdowns and social-distancing measures would be the one proposed by Anirudh Shingal of the Indian Council for Research on International Economic Relations in his VOXEU blog. Instead of the simple sector-wise breakdown, we can consult the WTO’s dataset on trade in services by mode of supply (TiSMOS).

This methodology classifies trade into four modes of service delivery. First are the cross-border supply services (Mode 1) supplied from the territory of one country into that of the other, and doesn’t require any movement on part of the consumer or producer. Legal advice and financial services are some of the examples.

The second, consumption abroad (Mode 2), are supplied in the territory of one country to the service consumer of any other country. For example, persons who travel abroad to consume services locally (visits to museums or theatres, visits to doctors, language courses).

Third is commercial presence (Mode 3) and incorporates services supplied by any type of business or professional establishment of a country, through presence in the territory of the other, such as a bank setting up operations and branches in another state.

Finally, the presence of natural persons are those supplied by individuals of a country through temporary presence in the territory of another and can include a lawyer going abroad to deliver legal advice to foreign clients.

Therefore, except for Mode 1, which is well-suited for remote working, all others require some physical presence or contact and are set to lose from social-distancing measures. But the question is: what share of our trade is accounted for by each mode.

Since the dataset doesn’t cover the last two years, we can compute the mean share in trade by category over 2005-17. We find that Mode 1 makes up for just over 65pc of exports on average, Mode 2 15.3pc, Mode 3 14.2pc and Mode 4 just 5.4pc.

It must also be noted that services exports were already on a downward trajectory, with July-February proceeds edging lower by 1.19pc (and much more sharply in the last month). Now add to that the impact that could be felt as a result of the coronavirus.

Say around 20pc decline in overall service exports (in line with the range provided by the WTO) across all but the first mode, total earnings could fall around $35m a month — a still small figure considering the extraordinary weight of “consumption abroad” in the aggregate. In fact, if anything, it’s an opportunity to further strengthen our comparative advantage, as India has done, in software, management consultancy and other services.

The more pronounced change could likely be recorded in imports as their relative distributions are somewhat different with 44.13pc of the bill coming from Mode 1, 10.7pc Mode 2, 42.3pc Mode 3 and 2.9pc Mode 4.

However, it must be pointed out that there is a lack of consistency between the figures provided by the WTO and the corresponding values by the State Bank of Pakistan or the PBS, especially since the former includes foreign direct investments as part of Mode 3, thus making up for its significant share among imports.

One way to exclude that is using the simple sectoral breakdown, which shows that over 90pc of the imports come from the largely contact-dependent sectors of transport, travel, and personal, cultural and recreational services. A decline to the tune of 20pc among these could reduce the overall bill by around $140m a month.

Published in Dawn, The Business and Finance Weekly, May 4th , 2020

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