Economic impacts for Pakistan of the coronavirus 2nd wave
Dr. Vaqar Ahmed
The second wave of COVID-19 is beginning to show grave consequences for the lives and economy of Pakistan. Contrary to the first half of this year, the country is now consistently witnessing a higher number of daily deaths.
At the start of the second wave, federal and provincial governments were clear that no country-wide lockdowns are expected. However, as the COVID-19 positive rate increased, we have seen the shutting down of several economic activities as well as the closures of some services like schools.
All this will have implications for next quarter’s and the full year’s economic growth– with job losses inevitable. If the number of critical patients increases too much and places a higher burden on health infrastructure, lockdowns akin to the first wave are possible. If the numbers on economic loss are of any guidance, we can easily construct a scenario to see what the fiscal costs in the coming months could be.
Recent estimations for fiscal year 2020-21’s macroeconomic framework by Sustainable Development Policy Institute, tell us that Pakistan’s economic growth could range between 1.5 to 1.7 percent depending upon the severity of the second wave and delays in medical solutions.
From the viewpoint of a common person, a concerning result from the simulation reveals that prices of essential items faced by consumers all across the country could remain high – with the inflation rate in the range of 8.5 to 9 percent. This could also have political repercussions for PTI which is already finding it hard to manage food prices in a manner that doesn’t distort markets or reduces consumer welfare.
The low economic expansion has adverse impacts for government revenues and its ability to spend on its citizens. Our workings forecast that total government revenues could fall from 15.1 percent of GDP in FY20 to 14.5 percent of GDP in FY21. One cannot expect a large increase in revenues of provincial governments either during these difficult times.
With government expenditure projected at PKR 10.4 trillion, this could result in fiscal deficit ranging between 8 to 8.5 percent of GDP. Even curtailing deficit at this high level is only possible with unprecedented increases in non-tax revenues which are regressive and have implications in terms of increasing income and consumption poverty.
What will this mean for pandemic-related needs for Pakistan? A lot of expenditure and prioritization will be required in the government’s current and development budgets to increase and sustain health sector operations during the second wave. As schools go back to teaching online, increased budgets will be required for transitioning to complete online operations in this sector.
Fortunately, the risks to the balance of payments are expected to remain low. However, given that global demand is projected to remain depressed, this could exert downward pressures on Pakistan’s non-debt creating inflows – exports, foreign investment, and remittances. The current account indicating the difference between foreign receipts and payments is projected to show a higher deficit – from 3 percent in FY20 to somewhere between 3.8 to 4 percent in FY21.
This may be attributed to almost stagnant growth projected for exports and remittances owing to uncertainty around lockdowns in countries where Pakistani goods and workers are demanded. If a global second wave results in another round of strict trade and travel restrictions, the outcomes for the current account could be worse.
In terms of future debt repayments, Pakistan seems to be comfortably placed during the short-term due to new debt inflows, extension in relief provided for maturing debt, and room created by a reduced level of imports and low demand for foreign exchange on account of travel and services exchange.
Going forward, both the ministry of finance and central bank will have to keep a close eye on how health sector indicators behave in the second wave and what implications these will have for the exchequer.
Currently, macroeconomic forecasting methods at both institutions do not make use of epidemiological data. This capacity is now urgently required so that the economic implications of health are studied on a regular basis.
Provincial governments will also require increased fiscal discipline given the pressure to cover higher budgetary needs during the second wave.
A bigger effort is expected from the provincial revenue authorities who have control over collecting taxes from agriculture, property, transportation, and almost all services. The provincial finance departments will also need to look into the reasons behind why COVID-19 emergency funds could not be fully disbursed.
Why are several donors downgrading their support towards COVID-19 and citing repeated procedural delays?
Finally, the second wave could threaten the resilience of Pakistan’s financial sector. If the incidence of the pandemic is prolonged, private sector businesses who were able to get refinance and several other opportunities to defer borrowed amounts, may not have the same luxury in following year.
Their defaulting could result in heightened vulnerabilities for the banking sector.