Coronavirus and Livelihood

Published in Business Recorder on 25 March 2020
https://www.brecorder.com/2020/03/25/583040/coronavirus-and-livelihood/

Covid-19 has attacked more than 270 thousand people globally and numbers are ticking upwards. More than 11000 are already dead nonetheless more than 90 thousand are recovered. Alarmingly, close to 8000 are in very critical situation. Started in Wuhan, city of China and spreading in almost 160 countries it is the most common frightening thing globally.  
The entire world is shutting down. Factories have stopped production, businesses are stopped, schools and colleges are closed, due to keeping social distances there is lesser economic activity, no social gatherings and streets of the most happening towns of the world have become ghost streets.  
Covid-19 pandemics infects the global economy. International Labor Organisation (ILO) estimates that out of 188 million global base level employed labour force 5.3 million people might lose job (low scenario) to 24.7 million jobs (high scenario). During the financial crisis 22 million people lost their job. UNCTAD estimates $2 trillion loss in income of the people due to the pandemic.  
First case in Pakistan was confirmed on 26 February 2020, while today the tally has reached 534. The number has been increasing especially in the last week. Government may move towards the lockdown situation. Nevertheless, it seems they have plenty of other cards with them before locking down. Following the examples of China and Italy, Government would lockdown and working out on the possible challenges they can face. 
Karachi is the business hub of the country is already locked down. Government offices are closed, following social distances, having important meetings online. Most of the businesses are stopped and waiting for the things to improve. In this scenario, it will have significant impact on the livelihood especially dependent on the businesses linked to Karachi/Sindh.  
Besides lockdown, we can unambiguously say that supply shock due to global coronavirus outbreak mess up value chains. Outbreak in China forced factories in China stopped production that reduces the demand for oil, raw material, intermediate goods as well as supply for intermediate and final goods to the world from China. Soon after when the pandemics hit European countries, it affected their economy negatively. Thus, overall incomes of the world will be decreasing as well as raw material and intermediate goods for their factories will be reducing as well. Thus, negative supply shock of global economic downturn directly affects Pakistan's exports. Hence significant increase in the employment, especially the contractual workers and production workers linked with the exports sector.  
Before moving to the sectoral probe, let's look at the change in work environment and work habits. Due to decrease in demand as well as fear of virus many businesses are running from home, decreases their work hours. Consequently, underemployment is also expected to increase on a large scale. Hence, reduces the overall productivity per day. Lower demand and the emergence of involuntary unemployment leads to decline in economic activity. 
Wages and salaried workers and own account workers are more vulnerable than the employer. However, in our case self employed is also vulnerable because of restrictions on the movement of people. Three major sectors are considered in general, Agriculture and livestock, industry and services. As far as agriculture and livestock is concerned, they will be the less effected sector compared to the other two sectors. This implies an interesting fact that livelihood of the 38 percent of the employed labour force employed in this sector is safe. Divergent argument could be no. Agriculture sector has similar risks of livelihood as other sectors. 
Large scale manufacturing and small and medium enterprises will be hit hard, especially the ones who are exporting globally. Informal employment as well as production workers will be laid off as a result of production house shut down. It is imperative to see that not all the employees will be laid off. The manufacturing units will hoard important labor who are working with them for a very long time.  
Construction workers, generally, belong to labour class, work on daily wages or piece rate are very vulnerable. One can expect the pandemic will hit this sector the hardest. Similarly, labour working in wholesale and retail trade, transport, hotels and restaurants will be hit very hard. Similar to manufacturing sector, the employee especially the daily wage or contractual workers will have the strongest effect on their livelihood.  
Decline in employment implies large income losses for workers. ILO estimates for the world ranges between USD 860 billion and USD 3.4 trillion by the end of 2020. Out of 33.3 million vulnerable employment estimated by the PBS using 2017-18 Labour Force Survey, if we safely say that one third of the non-agriculture employed labour force will be affected in case of one and half to two months lockdown of different cities. It implies that around 5-6 million people will face job loss and 12-15 million people will experience significant decline in their incomes. 
Increase in unemployment, especially for the most vulnerable class will eventually results in increase in poverty. Provision of social protection for all would be difficult for the government at this time. Therefore, it is necessary to call for urgent action that must be coordinated around protection of workers in the workplace, stimulating the economy and employment, and supporting jobs and incomes. Social protection can be increased by involving private sector through proper identification using the government's existing infrastructure such as Lady Health Workers, although it is not their job description. Short term employment retention through government's tax relief to the corporate sector would work as well. Reducing the existing extra cost of business especially to the exporters may impact less on the laying off.  
For short term assistance, civil society long with private sector conducts a ration bag system to mitigate the impact of extreme hunger and poverty on the vulnerable group that loses job.  
These and other measures may impact the livelihood of vulnerable class lesser than otherwise. It is expected that corona pandemic will continue for the next 4 to six months and economic activity may pick up by the end of 2020 (if we are lucky) or by first quarter of 2021.

Coronavirus and macroeconomic interventions

https://nation.com.pk/22-Mar-2020/coronavirus-and-macroeconomic-interventions-
Published on Sunday 22 March 2020

The world economy has turned upside down in the last few months after the coronavirus outbreak in China. Globally, stock markets have collapsed. Factories are shut down, airports are deserted, offices have stopped their operations and shops are closed to try to contain the virus. Social distancing, self-isolation and a few other practices are being adhered to. As a result, UNCTAD estimates $2 trillion loss in world incomes.

Employees have started worrying about their jobs. Investors have started becoming concerned about their money invested in companies. Everyone has been experiencing the sharpest economic decline since the great depression. China’s GDP probably shrank by 10-20% in January and February compared with a year earlier. A similar drop is expected in other countries as well, especially European countries and Iran. Massive government interventions are required to lessen the shock to economy.

The outbreak in China forced factories to stop production, which reduces the demand for oil, raw material, intermediate goods as well as the supply for intermediate and final goods to the world from China. European countries face a similar situation. Hence, we see an overall downturn in the global economy. Developing countries, especially outward-oriented countries will be affected the most.

In the last ten days, the Pakistani stock market has been losing 1500 points daily. Investors are reluctant to invest as well as selling their shares to reduce the overall losses. The reduction was associated with the decline in interest rate first, reduction in oil price second and coronavirus proved to be the last nail in the coffin. Billions of rupees invested in different shares are reduced by one third and in some case half of the value according to three weeks ago.

On the other hand, the manufacturing sector, especially exporters, are facing difficulties due to the decline in the demand for imports from Pakistan and other developing countries. Numerous consignments of the textile sector are stranded on sea because, in the wake of the pandemic, no state wants to bring them inside the country unless everything goes to normal. Exporters are also facing problems in capital management in this scenario. Moreover, small businesses, especially freelance entrepreneurs, are struggling as supply chains dry up, leaving them without products or essential materials.

Pakistan has been facing high fiscal deficit. The decline in economic activity would reduce tax revenues, hence higher fiscal deficit. However, given the current scenario we can propose a few interventions which mitigate the overall negative impact on the economy. However, these interventions necessarily need coherent support through smaller interventions.

Several sectors would face a low volume of business. Hence, they will lay off their employees especially contractual workers who are among the vulnerable class. Consequently, we might see poverty increase. Nonetheless, a million-dollar question is whether we can reduce the impact of increase in poverty. The answer would be to increase social protection.

The government needs to increase its budget if it wants to increase social protection. However, civil society as well as the private sector (following corporate philanthropy) must step up and contribute significantly in identifying the vulnerable (people in need) and monetary contribution.

Unemployment insurance and nutrition assistance would be beneficial especially in transition to meet basic needs through the crisis and after. This policy would have a big multiplier effect on the overall economy because cash-strapped people are the most likely to spend additional money, which comes back immediately into the economy. A positive outcome of the pandemic is the reduction in oil prices. It will lessen the burden on the overall oil bill which is around one-third of our overall import payments. Thus, our current account deficit will be reduced.

Another positive outcome of the decline in oil prices is reduction in overall inflation.

Due to lower economic activity overall, the private sector would not want credit. Subsequently, it is expected that inflation will remain lower in the next six months to one year. Therefore, now is a good time to reduce the interest rate.

If the State Bank of Pakistan (SBP) lowers the discount rate, the private sector would urge to take credit. Nonetheless, this also depends on how much SBP reduces the discount rate and the timespan of decreasing the interest rate.

My recommendation would be to reduce discount rate to 6 or 7 percent from 12.5 percent in the next monetary policy statement or by next week in special circumstances. There is a fear of having higher inflation but in the current scenario when we know that economic activity is continuously declining, it is the best time for quantitative easing to pick up aggregate demand.

Reduction in interest would reduce the cost of government borrowing. Therefore, they can social protection to mitigate the consequences of COVID-19 on job loss that may push them to poverty and increases inequality. Lower interest rate would urge small and medium enterprises to ensure they can continue to stay in business and meet payrolls.

Another important policy intervention for the exporters is to give incentive of zero interest rate on the LC with banks. This would reduce their cost of delaying consignments by importers. The government must impose a condition not to lay off their workers in the wake of their declining economic activity.

Tax cuts (corporate income tax and personal income tax) for one year or two years stimulate the demand that reduces the downturn of economic activity and helps in early pick-up after the lockdown is over.

For a longer-term impact, it is a good time for the government to organise the unorganised sector. It must also make special regulations for the registered sector which are working informally, and document the entire regular sector which is registered, organised and have electricity and gas connections.

The downturn of the economy gives space to the government to improve the institutions as well as rationalise the tax rates and other numerous vital interventions which will have longer term positive impacts on the economy.