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Default COVID 19 and dwindling Economy

Source Tribune

For the first time in 68 years, Pakistan’s economy has marginally contracted by 0.38% in the outgoing fiscal year due to adverse impacts of novel coronavirus coupled with economic stabilisation policies that had hit the industrial sector much before the deadly pandemic.
Except for the agriculture sector that grew 2.7%, the industrial and services sectors witnessed negative growth rates, pulling the overall growth rate down to negative 0.38% in the fiscal year 2019-20, ending on June 30. The per capita income in dollar terms has also dipped to 1,366 – a contraction of 6.1%, but it increased in rupee terms to Rs214,539.
The National Accounts Committee approved the provisional gross domestic product (GDP) growth rate for the outgoing fiscal year besides a downward revision of the economic growth rate for the first year of the PTI government. For fiscal 2018-19, the NAC cut the provisional growth rate of 3.3% to 1.9%, which is the lowest in 11 years.
The SBP’s quest for hot foreign money has adversely hit the industries even much before the Covid-19 started impacting the economy. In the end, neither the hot foreign money stayed in Pakistan nor the country achieved sustainable economic growth. There is a need to investigate the sources of hot foreign money inflows in Pakistan that created an artificial sense of economic stability.
Former finance minister Dr Hafiz Pasha had disputed the PTI government’s claim of a 3.3% growth rate and instead claimed a year ago that the growth in the first year of the PTI government was 1.9%. His assessment has become true and finally admitted by the government.
The Planning secretary chaired the National Accounts Committee meeting, which has representation of all the federal and provincial departments concerned, including the State Bank of Pakistan (SBP).
It is for the first time since 1951-52 that Pakistan’s economy contracted, although the pace of contraction was far lower than -1.5% growth rate predicted by the International Monetary Fund (IMF), the World Bank, the finance ministry and the SBP.
The GDP — the monetary value of all goods and services produced in a year — is projected to have a negative growth rate of 0.38% during the fiscal year 2019-20 ending on June 30, according to the NAC. These estimates are based on six to nine months provisional data projected for the whole year and adjusted for the impact of Covid-19 followed by the lockdown, it added.
The economic contraction coupled with currency devaluation has caused the size of the economy — in the US dollar terms — to slip to around $265.6 billion from $280 billion a year ago. At the end of the Pakistan Muslim League-Nawaz (PML-N) government’s term, the size of the GDP in dollar terms was $313 billion.
The GDP at the current market prices stands at Rs41.7 trillion for 2019-20. This shows a growth of 9.9% over Rs.37.9 trillion for 2018-19 due to double-digit inflation. The per capita income for 2019-20 has been calculated as Rs214,539 for 2019-20, showing a growth of 8.3% over Rs198,028 during 2018-19. However, in dollar terms, the per capita income has shrunk by 6.1% to $1,366.
The NAC also confirmed the 5.53% economic growth rate for the last year (2017-18) of the PML-N government. The growth came largely from the services sector, which was less job intensive.
Planning Secretary Zafar Hasan chaired the 102nd meeting of the NAC that endorsed the provisional economic growth rate figure on the basis of data received from the federal and provincial governments.
It was the second meeting of the NAC in the past three days. Earlier, on Friday the NAC tried to approve a -0.34% GDP growth rate for the last fiscal year but some members objected to the methodology. The figure is provisional and subject to variation until the final results are available at the end of the fiscal year.
The economic contraction depicts the challenges that the PTI government faced in its second year in power and the miseries caused by the Covid-19 that hit the world at the beginning of December 2019. However, Pakistan started getting affected by the pandemic in the fourth week of March and the government has now completely lifted the lockdown.
Almost every sector of the economy witnessed negative growth. The provisional growth rate in the second year of the PTI was significantly lower than the pace needed to absorb the youth bulge. In the pre-Covid-19 situation, the IMF and the finance ministry had a projected 2.4% growth rate due to stabilisation policies adopted under the Fund programme.
About 87% of the growth came from the services sector and its share in the total size of the economy has increased to 60%. The sectoral shares of various sectors in the economy have also slightly changed. The agricultural sector’s weight in the GDP has further reduced to 18.99% from 19.27% a year ago.
The industrial sector’s weight in the size of the economy was 20.8% a year ago that has gone down to 20.58%. However, the share of the services sector, which is less job intensive, has increased to 60.43%.
The government missed the growth targets set for the services, agricultural and industrial sectors with a wide margin. The sub-sectors of electricity generation, housing services, general government services, and other private services relatively performed better.
The electricity generation and gas distribution is the only sector that outperformed others, as its growth stood at 40.5% against the 10% target set for the outgoing fiscal year.
Adviser to the Prime Minister on Finance, Dr Abdul Hafeez Shaikh, will formally announce a provisional growth rate of 3.3% on June 11 with the release of the Economic Survey of Pakistan 2019-20.
After witnessing a 0.6% growth rate in the last fiscal year, the agricultural sector grew this time by 2.7%. But the government missed all its sub-sector targets except forestry and other crops. The government had set a target of 3.5% growth in the agricultural sector for this fiscal year.
The production of major crops increased by 2.9% and other crops by 4.6%. Cotton ginning contracted by 4.6%, according to the NAC. The livestock sector grew by 2.6% and the forestry sector grew by 2.3%. The fishing sector grew by only 0.6% against the 4% target.
Cotton production declined by 6.9% to 9.2 million bales. The production of rice increased by 2.9% to 7.4 million metric tons but sugarcane production fell by 0.4% to 66.9 million metric tons. The output of wheat grew by 1.7% to 24.94 million metric tons. The production of maize showed a growth of nearly 6% to 7.2 million metric tons.
The industrial sector is the worst hit by the Covid-19 situation, although there was a partial lockdown in the country and some industries kept running. The sector was already facing the brunt of the heavy taxation and unrealistically tight monetary policies that the SBP pursued the sake of hot foreign money.
The government missed some key sectoral targets except for slaughtering, electricity generation, and construction. Against a target of 2.3%, the output in the industrial sector stood at -2.64%. For the previous fiscal year too, the NAC revised the economic growth rate down to -2.2%.
The output of large-scale manufacturing contracted by 7.8% in this fiscal year while small-scale manufacturing grew 1.5% after the government adjusted the adverse impact of the Covid-19.
The slaughtering sub-sector grew at a pace of 4.1%, electricity generation and distribution by 17.7% and mining and quarrying sub-sector registered a negative growth of 8.82%. The construction sector also posted a growth of 8% this year as against a negative growth of 16.7% in the previous fiscal year.
The services sector, which accounts for 60.4% of the size of the economy, contracted by 0.6% against the target of 4.6%. The wholesale and retail trade sector posted -3.4% growth against the target of 3.9%. The transport, storage, and communication sub-sector saw a -7.1% growth rate. The finance and insurance sector marginally grew by 0.8%, housing services grew 4%, general government services by 3.9% and other private services grew by 5.4%.
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Default Impact of Covid-19 on Economy of Pakistan

The pandemic termed the COVID-19 (coronavirus) has exponentially spread across the globe since the first case was reported in Wuhan China in late December 2019. The virus has led to more than 3.1 million cases and 215 thousand deaths across the world. And the numbers are rising. In order to ‘flatten the curve’ of growing numbers of infected people, governments around the world have been forced to impose complete lockdown of their societies and businesses. The main concern for the Government of Pakistan (GOP) has been the economic impact the lockdown will have on the poor segments of the society, and fragile economy on the whole. The Pakistani Stock Market’s benchmark KSE-100 Index has plunged by over 25% in March, and the rupee by over 6%. Pakistan’s economy is projected to face a loss of up to 4% of its GDP due to disruptions in trade, potential decline in FDI and remittances, and fluxes in other sectors such as aviation, tourism and hospitality, caused by the lockdown imposed in the country. The dire economic effects can already be seen, with widespread lockdowns freezing most normal activity, export orders cancelled and vast numbers of daily workers suddenly jobless.

Pakistan's forex reserves slumped 12% in the month of March amid virus outbreak, from $12.8 billion to $11.2 billion. This decline is due to multiple factors, including panic selling of debt and equities, and reserves are expected to fall further in coming weeks according to State Bank of Pakistan (SBP). The policy rate decrease of 2% announced by the SBP led to a total of about $1.5 billion leaving Pakistani Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs). The World Bank (WB) has projected a 23% decline in remittances for Pakistan, totalling about $17 billion in 2020 compared with a total of $22.5 billion in 2019 due to the economic crisis induced by the pandemic, and lockdowns in most cities abroad.

As demand in economies across the world stagnates with the spread of the virus, Pakistan’s exporters will see significantly fewer orders for their products from buyers abroad, at least for the next few months. USA and China are Pakistan’s major export partners, any economic downturn that these economies may face, would directly affect countries exports as well as the GDP.

The World Trade Organization (WTO) projections show that world trade could contract by 13% in an optimistic scenario, and by a third of its value in a pessimistic scenario. Global markets are down 35%, credit markets have seized up, and credit spreads have spiked to 2008 levels. According to the UN Conference on Trade and Development (UNCTAD), the economic uncertainty that this has sparked will likely cost the global economy $1 trillion in 2020 and lower the world GDP to 2% from earlier projected 3%. The economic slowdown in some of the richest economies of the world has caused unprecedented damage: in the US and Europe. In China too, any hopes of a quick recovery are being dampened as the possibility of new outbreaks cannot be ruled out.

The rapid spread of the Covid-19 virus in Pakistan since February 2020 has brought economic activity to a near halt. Most of the country has been placed under a partial lockdown. The closure of nonessential businesses and domestic supply chain disruptions are having a significant impact on wholesale and retail trade and transport, storage and communication, the largest sub-sectors of the services sector. UNCTAD also placed Pakistan among the countries which would be the hardest-hit by the global pandemic of coronavirus, causing a $2-$3 trillion financing deficit in 170 developing countries over this year and next, therefore a need for a raft of measures for their relief.

Pakistan, so far, has seen a steady increase in cases with the government of Pakistan confident that the lockdown it has put in place has slowed the pace of growth of virus in the country, with about 14,885 cases and 327 deaths as of April 28. The response measures that the federal and provincial governments have implemented included quarantining more than 3 thousand zaireens (religious pilgrims) from Iran, creating quarantine setups at tablighi (preaching) centres, closing borders with all neighbouring countries, international travel restrictions, social distancing measures, and lockdowns of differing scales across all the provinces of the country.

On the whole, the government’s economic team has responded admirably by announcing a stimulus package worth Rs1.25 trillion, partly made up of fiscal measures such as tax breaks and concessions to the industry. This package also includes the largest social protection effort in the country’s history worth nearly $1 billion and targeting over 12 million households across the country under the Ehsaas Emergency Cash Program. Additionally, SBP has introduced a refinance facility to incentivize businesses not to lay off workers. The month of Ramazan, during which remittances spike every year, may still provide significant remittance inflows.

The immediate challenge for the GOP is to contain the spread of the COVID-19 pandemic, while minimizing economic losses and protecting the poorest. In the medium-to-long term, the government should remain focused on implementing much needed structural reforms to boost private investment sustainably. However, in dealing with the global economy, a more structured approach should be adopted. Solely personalized attempts at economic diplomacy seldom work, which is why the Prime Minister’s well-intentioned appeal to donors for restructuring foreign debt needs to be followed by a concerted effort on the economic diplomacy front.

Dwindling exports will be accompanied by a drop in the import bill, as demand at home falls as a result of lockdowns in major cities. There will also be some relief from the recent fall in global crude oil prices. Existing partnerships need to be strengthened, and new ones based on evolving principles of the global economy must to be forged. Ongoing efforts must be complemented with further structural reforms to ensure that the stabilization measures lead to a sustainable growth path for the country.
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