Impact of Covid-19 Pandemic

on the

GDP of Pakistan

Omer Hussan Bajwa

Introduction

The history of mankind is marked with both natural and manmade calamities. Sometimes, it had to confront great disasters in the form of earthquake, floods or droughts; while, sometimes, it has to keel in front of widespread health issues in the form of a pandemic. Currently, the world is facing one of the worst pandemics of the recorded history. Covid-19, the disease caused by novel Coronavirus emerged in Wuhan, China, in December last year, and engulfed the whole world within a couple of months. The World Health Organization (WHO) declared Covid-19 as a pandemic on March 11, 2020. Since then, the virus has disrupted the supply chains and paralyzed all the continents. It not only cost around 0.8 million lives besides leaving deleterious impacts on the economies worldwide. The story of Pakistan is not much different. Besides devouring the lives of more than six thousand Pakistanis, the pandemic is wreaking havoc on the economy of the country.

Covid-19 and Pakistan’s GDP

In order to completely grasp the extent of impacts that the pandemic has on the GDP of Pakistan, a cursory glance over the economic situation of the country right before the pandemic is necessary. As per Pakistan Economic Survey 2019-20 (hereinafter PES), fiscal and current account deficits have been reduced by 4 and 71 percent, respectively, during July-April, FY2020. Besides this, 126 percent growth in FDI, stable credit outlook to B3 from negative by Moody’s, and improved ranking in World Bank’s ease of doing business index are some encouraging pictures from pre-pandemic time. Then, the pandemic engulfed the country. The rapid spread of the Covid-19 in Pakistan since February 2020 has brought economic activities to a near-halt. Undoubtedly, the economic fallout of Covid-19 depends on the effectiveness of containment measures taken by the government, the pathway of pandemic, the magnitude of supply disruption, and changes in spending patterns in the country.

Impact assessment of the pandemic on the GDP of Pakistan is done in two dimensions.

1. Component-wise impact assessment
2. Sector-wise impact assessment

1. Component-wise impact assessment

GDP is the sum of Consumption (C), Investment (I), Government spending (G), and net exports (X-M).

GDP = C + I + G + (X-M)

The impact of Covid-19 on Pakistan’s GDP can be assessed by analyzing its impact on different components of GDP separately.

a. Consumption (C)

Generally, consumption makes the largest component of GDP. All personal expenditures that come under the head of consumption can be categorized as durable goods, non-durable goods, and services. As per PES, considerable decline in private consumption expenditures (PCEs) from 82.9 percent to 78.5 percent of GDP have been witnessed in FY2020. Although, government’s import-discouraging policies also are responsible for this decline, the direct impact of the pandemic on significantly reducing PCEs including consumption of all durable goods, non-durable goods and services cannot be ignored.

b. Investment (I)

As per PES, in FY2019, private investment as a percentage of GDP dropped from 10.29 percent to 9.98 percent while improvement in public investment was witnessed over the same period last year. Decline in private investment is likely to increase in coming times as the pandemic has impaired the liquidity position of potential investors, heightened risk perceptions and made banks show reluctance to offer loans. According to the report released by the United Nations Conference on Trade and Development (UNCTAD), 30-40 percent drop in Foreign Direct Investment may be witnessed during 2020 and 2021.

c. Government spending (G)

Significant increase in the general government expenditures from 11.7 percent to 13.1 percent of GDP was witnessed during FY2020. In coming days, this share will increase further as the government is increasing expenditures on public health, strengthening social safety net programmes and giving relief packages in order to mitigate the impact of Covid-19 on national economy.

d. Net exports (X-M)

The pandemic has greatly jolted both demand and supply sides around the globe. Pakistan’s economy, because of disruptions in trade and increase in trade cost, may face loss in business activities. In April 2020, 55 percent and 35 percent decline in exports and imports (year-on-year), respectively, have been witnessed.  The major reason behind this decline is that five major trading partners with more than 50 percent share in trade of Pakistan (China, USA, UK, Japan, and Germany) happen to be the worst-hit countries by Covid-19. However, decrease in oil prices around the globe and less consumption of goods in the domestic market is responsible for decline in imports. Besides, growing grounds of dangerous lure of self-sufficiency will impact trade of goods and services from the country.

However, the pandemic has some good impact on Pakistan’s import bill as well. As the major chunk of our import bill is for the import of oil, significant decrease in its prices has reduced the import bill and, hence, contraction in current account deficit (CAD).

2. Sector-wise impact assessment

The edifice of Pakistan’s economy is erected on three pillars: agriculture sector, industrial sector, and services sector. In order to assess the impacts of the pandemic on GDP, its impacts on all three pillars of economy should be analyzed. The Sub-committee on National Coordination Committee (NCC) has worked out an impact assessment of Covid-19 on the real sector of the economy.

 (Survey, 2020)

It has been estimated that if there were no pandemic, GDP growth rate would be 3.3 percent. However, now, GDP growth rate will be negative 0.38 percent. More importantly, the negative performance of both industrial and services sector has overshadowed the growth of agriculture sector.

a. Agriculture

As per the analysis done by the Sub-committee of the National Coordination Committee for Covid-19, growth rate of agriculture sector after the pandemic will be 2.7 percent. Agriculture sector, though, has not seen major disruptions, yet it has faced risks due to reduced labour mobility for wheat harvesting in Punjab and impediments to wheat procurement, storage and distribution. In addition, lockdown and border closure had disruptive impacts on agriculture value chain. There has been constant threat of reduction in or non-availability of agricultural supplies, for instance, Kharif crop seeds, livestock feed and fertilizers. Moreover, there will be direct impact on the people connected with forward and backward linkages of agriculture produce.

b. Industrial sector

According to Pakistan Bureau of Statistics, significant impact has been observed on manufacturing sector, particularly large-scale manufacturing and small-scale manufacturing. As per PES, industrial sector growth rate has been estimated at -2.64 percent as the growth rate of mining and quarrying sector, large-scale manufacturing sector, and small-scale industrial sector has been estimated at -8.82, -7.78, and 1.52 percent, respectively.

c. Services sector

Like industrial sector, services sector, too, particularly in wholesale and retail trade and transport sectors, has witnessed significant impact. Negative 0.59 percent growth rate has been recorded in the services sector. Wholesale and retail trade sector and transport, storage and communication sectors have growth rates of -3.42 and -7.13 percent.

Following points categorically explain impacts of the pandemic on the services sector.

• In order to reduce the spread of Covid-19, the government resorted to social distancing policies. These policies reduced activities requiring proximity of people. Resultantly, many areas of services sector have come to their knees.
• Provision of healthcare for non-Covid illnesses is currently facing disruptions and closures. This includes primary healthcare services such as routine immunization and general child healthcare.
• Covid-19 has directly impacted 42 million school-going children. This situation will exacerbate risks and vulnerabilities of an already weak education system and steepen illiteracy levels in the country.
• During FY2020 (July-February), gross earnings of Pakistan Railways grew by 8.4 percent. However, after the pandemic outbreak, Pakistan Railways incurred a loss of around Rs. 10 billion in just two months.
• Achieving revenue targets of both tax and non-tax segments would be challenging in the short run. After the outbreak of Covid-19 pandemic, an average negative growth rate of 13.4 percent was recorded during March 2020 and April 2020 as compared to last year. FBR tax collection is expected to remain at Rs 3.9 trillion during FY2020 against the target of Rs 4.8 trillion.
• The Covid-19 pandemic has jolted the capital market. After the outbreak, capital began flowing out of the Pakistan stock market and the index plunged to 27228.8 points from 38,450 points. However, the government’s stimulus package has provided relief to investors and restored their confidence in the market.
• According to the preliminary estimates conducted by Pakistan Institute of Development Economics (PIDE), the Covid-19 pandemic can have adverse impact on employment-generation during the last quarter of 2019-20. In case of limited restrictions, about 1.4 million jobs will be lost, and, in case of a complete shutdown, employment loss could reach to 12.3 million and 18.53 million people. Loss of workers would be the maximum in wholesale and retail trade and will be followed by manufacturing, construction and transport. Same situation has been happened in the USA, where unemployment rate stood at 3.5 percent in February 2020. However, as per the Bureau of Labor Statistics USA, now, unemployment rate is at 14.7 percent, the highest since the Great Depression. It has been estimated that unemployment will not reach to pre-pandemic level till 2024.
• The growth in global remittances flows is expected to fall as the UN’s work agency warns that hundreds of millions of people could be left without work due to the impact of Covid-19. This will impact Pakistan’s GDP severely.
• The pandemic has significantly dropped travel services thus has impacted tourism industry of the country greatly. Hotels and restaurants are among the hardest hit, and they may lay off up to 90% of their workforce which is 0.63 million vulnerable employees. It currently employs 1.97% of the total labour force.
• There will be a shift from public to private transport. In Pakistan, a major chunk of population uses already ramshackle public transport. Unless the government gives any bailout package to them, severe cuts in jobs and services will become inevitable.
• Owing to increase in public spending due to fiscal stimulus package, budget deficit is expected to exceed the target of 7.5 percent of GDP and may go up to 9.4 percent of GDP.

There is constant fear of low growth in years to come. As per one of the estimates, next year, GDP growth rate of Pakistan will be below 2 percent. However, a second round of the outbreak could further threaten macroeconomic stability; bring liquidity issues in businesses; dampen global trade by decreasing exports and remittances inflows; and bring higher debt accumulation and less financing for development projects.

Government steps to reduce Covid-19 impacts

Following steps have been taken by the government to reduce economic impacts of the Covid-19 pandemic.

• A Rs 1.24 trillion relief package including various incentives for export-oriented industries and direct assistance to poor segment of the society including a relief package of Rs 144 billion to provide immediate cash relief of Rs 12,000 to 12 million poor families under Ehsaas programme.
• The State Bank of Pakistan (SBP) has reduced policy rate by cumulative 625 bps to 7 percent in five consecutive decisions between March 17th and June 30^th.
• Similarly, the SBP has introduced “Temporary Economic Refinance Facility,” “Refinance Facility for Combating Covid-19” and “Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns” which are aimed at facilitating businesses to remain afloat during the crisis.
• The government has resorted to the imposition of ‘smart lockdown’ instead of ‘complete lockdown’ just in order to save the marginalized segments of the society from the economic blow of the lockdown and to keep the wheel of the economy moving.
• The government has secured numerous assistance packages from international organizations. For instance, the IMF has given a one-year relief to Pakistan and has provided US$1.386 billion under the Rapid Financing Instrument to address the economic impact of the Covid-19 pandemic. Besides this, the Asian Development Bank and the World Bank, too, have given aid packages to Pakistan.

Recommendations

Following are some recommendation for improving the economic landscape of the country in the post-pandemic era.

• Digitalize rapidly the supply chains across various industries and agriculture as the pandemic has exposed vulnerabilities of conventional supply chains.
• Diversify export base as the virus has highlighted detrimental impacts of overreliance on certain export areas. More export markets should be explored.
• Invest in research and development, as most countries are thinking about having self-sufficiency in certain areas to save themselves from detrimental impacts caused by disruption of supply chains, Pakistan should follow suit, especially in the areas of health, medicine and related equipments. Such measures will save the economy from any future pandemic.
• Focus on the availability of reliable data and data banks as it will help in monitoring the effectiveness of policy interventions.
• Encourage public-private partnership for plugging the loopholes exposed by the pandemic.
• Expedite 5G deployment as it will enable the industrial cooperation in technology. Resultantly, in the future, industries will be more resilient to any such untoward circumstances that the world is experiencing right now.

Conclusion

The Covid-19 outbreak is a human tragedy that has affected hundreds of thousands of people globally. It has cast adverse impacts on the economies around the world, including Pakistan’s. In the current situation, the government has dual challenge; to contain the spread of the Covid-19 pandemic and to mitigate the economic losses in order to protect the most vulnerable. Although the current situation exposes flawed policies of previous governments, yet it is never too late to tread the right path.