COVID-19 Has Destroyed All Economic Gains: SBP

Pakistan’s economy attained stability in the first half of the current financial year 2019-20 with major indictors showing substantial positive signs during the period.

Unfortunately, the spread of the COVID-19 pandemic hit Pakistan and the global economy, lowering the GDP growth for the near future.

According to the quarterly report “The State of Pakistan’s Economy” released by State Bank of Pakistan, the GDP growth rate, which was revised down to 3 percent for the current financial year, will likely be revised further downwards.

Post Covid-19 Economic Scenario

In Pakistan, the number of confirmed Covid-19 cases has surpassed 5,700 – including both primary infections and secondary spreads. To minimize incremental infections, the government has taken various measures including the lockdowns across the country which slowed down the wheel of economic activities in the country.

Moreover, the spillover from the global economic slowdown is also significant. The outbreak of the virus in Europe and North America and the ensuing lockdowns may have an adverse impact on Pakistan’s exports. Domestic exporters have already warned of cancellation of orders as retail sales in destination markets weaken and port and shipping activities are restricted.

Under such circumstances, exporters may face a cash crunch for some time.

Meanwhile, remittances from major destinations may decline temporarily in the coming months, with some transient downward impact on domestic consumption.

Financial markets too have come under severe pressure. The equity market was the hardest hit, as domestic investors grew wary of the pandemic’s trajectory. The corporate sector was already struggling with subdued demand and thin margins, which has now been compounded by the Covid-19 related uncertainty.

On the positive side, as a net oil importer, Pakistan will benefit from the substantial decline in global oil prices. Apart from contributing to the SBP’s disinflation efforts, this will further reduce the import bill and the current account deficit.

The debt market too faced selling pressure, as foreign investors took billion of Dollars from T-bill investments in the month of March 2020, contributing to depreciation pressures in the foreign exchange market. At this point, it is important to note that the situation with respect to Covid-19 is extremely fluid and uncertain.

Govt Measures to Combat Covid-19 Pandemic and Economic Slowdown

The government is responding fast to unfolding developments. Preventing the spread and ensuring robust healthcare facilities to test and treat patients, remains the top policy priority of the government.

Ensuring food security is another important agenda on which the government is strategizing proactively and carefully. Moreover, social safety nets are also being beefed up to help minimize the impact of lockdowns on daily wage earners and laid-off workers.

Certainly, all this requires a sizable amount of fiscal spending.

The government has announced a Rs. 1.2 trillion economic relief package which includes a steep cut in domestic petrol prices, stipend for daily wage earners and expansion in the scope for cash assistance under the Ehsas program, immediate release of export refunds by the FBR, deferment of utility bill payments, and additional allocation for the Utility Stores Corporation.

As for SBP, it has taken important measures to minimize the impact of Covid-19 on the economy. Within a span of 8 days (March 17 – 24, 2020), the Monetary Policy Committee (MPC) cut the policy rate by a cumulative 225 basis points.

Furthermore, the SBP has announced multiple measures to facilitate the general public’s access to financial services amid the Covid-19, simplified procedures for exporters and importers, and allowed banks leeway in booking losses pertaining to the outbreak on their financial statements.

Economic Stability Before Covid-19 Spread

Pakistan’s economy had clearly moved out of the crisis-management mode before the Covid-19 infections started to be detected in the country.

The stabilization efforts and regulatory measures yielded notable improvements during the first half of FY20. The current account deficit contracted to a six-year low, foreign exchange reserves increased, the primary budget recorded a surplus, and core inflation eased.

Importantly, export-based manufacturing showed signs of traction and construction activities picked up, indicating that the economy was on the path of recovery.

Regarding the fiscal sector, the primary budget recorded a surplus, while the fiscal deficit was contained during H1-FY20 compared to the same period last year. This was due to a significant growth in revenues despite a slowdown in the economy and the compression in imports.

Nevertheless, achieving this year’s real GDP growth target of 4 percent was unlikely, as the agriculture sector’s performance was lower than expectations, whereas the export-driven growth in LSM was not sufficient to compensate for the subdued domestic market activity.

Therefore, the SBP’s projections for GDP growth were revised to 3.0 percent in FY20, down from 3.3 percent last year. It will be revised further downwards.

In addition, headline inflation was expected to revert to the medium-term target of 5–7 percent over the next 24 months.

But more broadly, with the twin deficits relatively under control, encouraging progress on FATF, a stable outlook from the credit rating agencies and confidence provided by the IMF program, Pakistan’s economy had begun to improve.

However, this optimism is now subject to risks arising from the global and domestic spread of Covid-19.