Coronavirus and macroeconomic interventions
The incidence of the COVID pandemic was linearly increasing until it started affecting other parts of China and then exponentially increased as it spread globally. It has infected over 5 million people globally, with 335000 deaths (CFR 6.44%) and 2.1 million people recovered. The first case of coronavirus in Pakistan was reported on February 26, 2020. Over 50 thousand cases with more than one thousand deaths (CFR 2.15%) and over 15000 recoveries have been reported so far. It is indeed important to mention that the recorded incidence was highly dependent on the number of testing, which is very low in Pakistan.
The three problems which we are facing are; saving lives, saving livelihoods and salvaging the economy. Maintaining social distance leads to decrease in daily business as well as business closures. Hence, we are facing unprecedented job losses. Developed countries like USA have registered 35 million jobs lost by now. Due to this job loss, it is expected that half a billion people might go into poverty in developing countries.
Unlike USA and other developed countries, in Pakistan, 27.5 million (72 percent) people are employed in the informal sector; 4.8 million people are expected to lose their jobs in the services and industrial sectors, mostly daily wage workers and piece rate workers; 50 million people live below the poverty line; 120 million people are vulnerable to shocks. Above all, it is extremely difficult to tag people in dire need due to the presence of a large undocumented economy.
The GDP growth rate is negative for the outgoing year. This implies that the economic closure in the last quarter has offset the overall growth we have achieved during the first 3 quarters. This never happened since 1951-52. However, it shows the severity and extent of the pandemic, in urban societies especially.
Two months ago, when I wrote on the macroeconomic situation, the pandemic had started affecting the economy, livelihood and lives of the people. Nonetheless, experts were talking about the expected lower growth. IMF and a few experts already gave negative growth numbers in April, whereas many were not buying those numbers due to having different assumptions of the lockdown intensity and duration.
The economic situation is somewhat depicted by the movements in stock markets. The KSE 100 index was on an upward trajectory on February 26, 2020 (38338 points and hit the lowest on 25 March (27228 points). Whereas, the market is around 34000 index now and moving upwards gradually for the last one month. The initial decline was mostly associated with the decline in interest rate, reduction in oil price and the increase in coronavirus cases. The recent improvement in the market is associated with improvement in oil prices, the ease in lockdown albeit the corona cases are increasing, and the interest rate is decreasing. Overall, we can unambiguously say that investors are uncertain due to the situation and take their decisions very warily.
Notwithstanding, the Government of Pakistan has taken several steps to mitigate the impact of economic loss which eventually contributes to job loss. Full lockdown was not on the cards since day one, albeit social distancing was advised. Although the intentions were good, due to strong interlinkages among multiple sectors business activities were not normal.
The government has announced stimulus packages worth Rs1.24 trillion; offered several beneficiary programmes through Ehsaas including emergency cash transfer schemes; soft loans to business at discounted financing rates; rebate and tax exemption schemes to the investors. Nonetheless, many high-risk jobs are outside the scope of the Ehsaas programme, e.g., people working in the gig economy and other self-employed white-collar workers.
Following an ambitious target of Rs5555 billion in the Budget 2019-20, FBR was facing problems in tax collection due to numerous bottlenecks. Additional exemptions and loss in economic activities may reduce the overall tax revenues to less than Rs. 4000 billion. Furthermore, stimulus packages will lead to higher fiscal deficit than the commitment.
Global business shutdown is already affecting our exports by $2 to $3 billion. Remittances, on the other hand, might decrease by $0.7 to $1.3 billion. If there is a higher decline in imports than decline in exports and remittances then our balance of payment will improve.
It was expected that domestic as well as external demand for the local products will decline. As a result, overall investment will decline. People will be laid off. Consequently, inflation will decline. Evidence suggests that impact of quantitative easing or contraction may take nine to fifteen months to effect inflation. Whereas in the current situation it was very straightforward that demand will decline rapidly than contraction in money. Oil price declined in no time due to global recession. Thus, it was fair to assume that inflation would come down more rapidly to less than 7 percent, half of what we were having in January and February 2020. Therefore, I asked to reduce interest rate to 6 to 7 percent instantly in the last article. However, SBP has reduced the interest rate to 8 percent in two months and gave numerous other lower financing rates as a special package that increases the possibility of rent seeking.
Decline in interest rate has several implications; lower cost of fiscal deficit financing; lower returns on savings; higher private sector borrowing both for managing cash flow and clearing up other debts taken at higher borrowing cost; risk of outwards capital flight; fear of exchange rate depreciation etc. It will have a positive effect on the overall economy. Pandit Krugman recently called for a permanent deficit financed increase in public investment, arguing that debt sustainability is not an issue as long as interest rates remain below the nominal growth rate. Our nominal GDP growth is 8.6 percent thus a further reduction would be the icing on the cake.
Economically speaking, lower economic growth and higher unemployment are the two major obstacles of this pandemic. Furthermore, Pakistanis are being laid off and returning to the country, adding to the misery. Higher fiscal deficit along with lower revenue amid negative growth rate leads to higher tradeoff between saving lives and livelihoods.
We have just surpassed the first round of the impact of COVID. In the second-round, it is scary to presuppose that we will have more cases until we hit the peak, higher unemployment, an increase in nonperforming loans, in business closures, higher poverty incidence and higher inequality.
Recent Harvard Business Research suggests that the social distancing requirement will remain until 2022. Consequently, there is an urgent need to:
Strictly enforce social and physical distancing in every aspect of life;
The government should devise and enforce the SOPs for each sector as much as possible;
In support of the government, businesses must design their own SOPs for social distancing inside and outside the office/factory and implement hygiene standards following government SOPs. Albeit, it will increase the cost of production, but it will increase globally as well, hence relative competitiveness may remain the same;
Reduce the cost of production, the government must simplify the processes and lower administrative burden on businesses;
- Start construction activity such as new housing schemes, dams etc to increase employment;
- Start e-training for laid off individuals and others that do not have jobs;
- Increase effectiveness of tele-health and tele-education;
- Increase uninterrupted, high speed and inexpensive internet to all;
- Increase access to affordable and clean electricity to all;
- Tax cuts (corporate income tax and personal income tax) for at least two to three years for sustainable economic growth;
- 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.
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