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March 24, 2020

Forecast of COVID-19: Pakistan may face 12.3m to 18.53m layoffs, says Study

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March 24, 2020

ISLAMABAD: Pakistan could expect 12.3 million to 18.53 million layoffs out of those employed in different sectors of economy in the aftermath of partial or complete shutdown due to the countrywide outbreak of coronavirus across the country.

Three renowned economists belonging to the Planning Commission’s think tank: Pakistan Institute of Development Economics (PIDE) including Dr Nasir, Naseem Faraz and Mahmood Khalid in their research paper “Sectoral Analysis of the Vulnerable Employed COVID-19 and Pakistan’s Labor Market” stated that all the provinces in Pakistan are now experiencing lockdowns, though of different intensities, to ‘flatten the curve’ of the spread of pandemic COVID-19. They distributed the lingering crisis into Stage-I, Stage-II and Stage-III.

The average monthly loss of stage-I is estimated at Rs22 billion, stage-II Rs186.86 billion and stage-III Rs260.9 billion. The estimated monetary value of the layoffs of vulnerable employment in each sector has been calculated. Since Pakistan has already passed Stage I in most of its regions, the government should be looking at the cost of Stages II and III while thinking about the possible mechanisms to reach out to the laid-off workers. It is worth mentioning here that this is the monthly cost only. As the period of lockdown would extend, the cost would also increase proportionally.

If the viral spread can be tracked to a possible extent and lockdown of clusters or cities can be phased out, the monthly cost can be mitigated.

It is imperative that the government uses all its administrative and other resources to track the virus spread to create firewalls through selective lockdowns and hold the costs down. These lockdowns would have economic effects which could emerge through several channels including, but not limited to, sharp declines in domestic demand, decreased tourism and business travel, export-imports and production linkages, supply disruptions, and health effects. The issue of immediate concern, however, is the effect on the employment situation in the country resulting in major layoffs, especially of those that fall in the vulnerable employment group. It is important to understand that various stages of social distancing have differential effects on different economic sectors, and consequently on the layoffs among the vulnerably employed. Similarly, sectoral effects also vary under each stage of social distancing. This is important because the government protection policies must take these differences into account.

To assess the impact of the three different stages such as Stage I as limited restrictions (which probably happened), Stage II where moderate restrictions (we have probably also seen stage 2) and Stage III where complete restriction (most likely, we are now close to stage 3). The Stage-1 does not have a strong impact on layoffs generally, however, education, hospitality, and wholesale and retail trade sectors are strongly affected. These sectors are also very vulnerable across stages. The vulnerable employment gets severely hit in Stage II and its intensity of severity worsens in Stage III.

Pakistan is somewhere between Stages I and II at the moment. It will, however, quickly find itself between Stage II and III if the numbers of confirmed cases continue to grow exponentially. Since the vulnerable job loss has already started in different sectors, a scenario analysis of the three stages may give us some idea of the potential layoffs in the economy for designing an adequate relief package. It is evident that moving from Stage I to II would result in more than 10 times increase in the layoffs in vulnerable employment. Going into a complete lockdown (Stage III) would push this number to above 18 million.

For an adequate policy response, we must explore the number of sectoral layoffs for these stages. Interestingly, the impact on agriculture sector would not be experienced in Stage I. In Stage II and III, however, layoffs may result from reduced domestic and foreign demand for textiles and other agriculture products.

The most hit sectors in Stage II are wholesale and retail trade, agriculture, manufacturing, and transport and communication. The vulnerable employment is high in these sectors and they are also more sensitive to lockdown. Based on the estimates, we assume the proportions of layoffs for Stages I, II and III would be 10% 50% and 60%, respectively. Using these proportions, we look into the expected layoffs by employment status. We see that for Stages I, II, and III, the majority of layoffs would be of the daily-wage workers and paid workers by piece rate simply because they constitute the bigger proportion.

The research paper suggested policy response by giving benchmark estimates for the monetary value of job loss (economic impact), the requirement of fiscal space for coping with the economic and medical cost is yet to be determined. This would require an income protection level to be decided.

The possible ways to address this crisis are: i. Out-of-the-box solutions for doing business are needed. For example, it is estimated that in Stage I restaurants are going to face up to 20% reduced sales. This will further go down to about 90% when situation moves to Stage II. Government should reduce the GST on the sales of restaurants’ takeaways. This will help them in keeping of about 50% of their usual business. This way major layoffs can be averted. Same goes for other type of businesses and transactions which can use technology platform and provide social distance as well. ii). The livelihood payments be made mandatory as PIDE COVID-19 Bulletin No. 1 discusses the available options. iii). Directed credits at lower cost can be provided to those businesses which employee daily and low wage worker to compensate for the output loss and still keep employing a certain number of workers. iv). Such pandemics have short and long-run economic costs related to it.

Considering the low to zero real growth scenario, significant tax collection shortage will happen both this year and in the next fiscal year. The current tax collection target will need to be revised downward to prevent the FBR from unnecessary revenue pursuit. v). In order to provide relief to businesses which engage the most vulnerable workers (especially daily wage workers) GST on their product should be waived. vi). For exporters whose containers are stranded in the sea or importers asked to wait for 6 months, government should give them relief for six months to convert their letters of credit on zero rate on the condition that they will not lay off their workers.