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April 1, 2020

Covid-19: Economy may face GDP loss of up to 4.64 percent

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April 1, 2020

ISLAMABAD: Pakistan’s economy is projected to face a loss of up to 4.64 percent in gross domestic product (GDP) because of disruptions in trade, both in imports and exports after the outbreak of COVID-19. The Planning Commission has assigned the Pakistan Institute of Development Economics (PIDE) to come up with estimates of COVID-19 losses on account of GDP growth front.

The PIDE presented three different scenarios as the first, there will be negative impact of GDP growth of -0.30 percent in case of reduction in imports by 2 percent; the second, there will be negative growth impact of -2.3 percent in the case of 10 percent reduction in imports and exports; and the third, there will be negative growth impact of -4.64 percent with reduction of 20 percent in imports and exports.

The PIDE, under the supervision of its vice-chancellor and renowned economist Dr Nadeem-ul-Haq, estimated that in the first scenario, when there is only 2 percent decline in imports, the overall loss to the GDP would be negligible. In the second scenario, with 10 percent decline in the intermediate and capital goods, that would likely bring a big fall in investment, as well as a similar reduction in exports would result in a loss of 2.3 per cent of GDP in the fourth quarter of FY2020. A 20 per cent decline in export and import is estimated in the third scenario and the GDP loss would be 4.6 per cent.

It may be mentioned that the impact entirely relates to trade disruptions, while the impact of internal lockdown was not considered, the potential decline in foreign direct investment (FDI) and remittances, and disruptions in other sectors such as aviation, tourism and hospitality, etc., would also be expected.

It stated that the countries around the world have started experiencing the negative economic impact of COVID-19. Countries that are part of the global value chain (GVC) would feel the hit even if spread of coronavirus is mostly contained now and has not disrupted the internal economic functioning of the economy.

Several sectors of the economy were affected by the ongoing lockdown in Pakistan. The analysis focused on the quantification of the potential loss in economic activity for the last quarter of FY2019-20 resulting from trade disruptions.

Although, Pakistan may not be ranked higher on the GVC, the country has enough integration with the global market to feel the impact of international lockdown. The five major trading partners of Pakistan with more than 50 percent share are including China, USA, UK, Japan, and Germany. Four of these are the worst-hit countries by the COVID-19.

There have been significant disruptions in the international trade flows of these countries. China and Japan experienced more than 15 percent reduction in their exports. Rest of the three partners had a reduction of around 5 percent. Some of them have also experienced reductions in their imports.

The USA and China are the major importing partners and we heavily rely on them for the import of capital and intermediate goods. These raw materials are then utilised in the production of final goods for exports and domestic consumption. Similarly, being our major export partners, any economic downturn to these economies may face, would directly affect our exports as well as our GDP. It is interesting to see that in post-COVID outbreak in China, Pakistan’s exports to other major partners were on the rise in February. This could possibly be because of the trade halt of these countries with China as it closed its border and stopped trade with the world. The resulting vacuum was filled by Pakistan through exports to these countries.

This trajectory, however, may not continue in the coming months because of: (i) disruptions in our imports of intermediate and capital goods; (ii) China is recovering from the outbreak; and (iii) demands reduced by the partner countries due to deterioration in their economic activities.

We can also see a decline in our imports from Germany and the UK. If we have data for China for February and March, we would also see decline in imports. All this can have detrimental effects on our economy. There are 32 per cent of our imports that are in the form of final goods. Reduction in these would not affect the GDP.

However, the rest of 68 percent constitutes the raw material, intermediate goods, and capital goods. These are used to produce final goods which are then consumed domestically or exported to other countries. A decline in these will therefore have a negative impact on investment spending as well as on exports. Consequently, the country will experience losses in GDP.

In conclusion, the PIDE stated that they presented the very preliminary estimates of likely impacts of the trade disruptions caused by the emerging corona affected economy. It is almost certain that the 4th quarter growth will be negative and could be as high as 4 percent even in these preliminary estimates. More than likely as things emerge there will be a larger negative impact on the economy. After all, the corona is a big event, where any previous estimates will no longer be valid.

It is worth noting that there has been much policy and business talk on diversification but without real progress on that front. Our dependence on commodity exports with falling commodity prices amid Covid-19, shock and reliance on intermediate products for export productions on importing countries such as China would hurt our exports. Resilience to such shocks could have been built if domestic commerce and supply chains had been built to lead to the diversification of exports.