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April 25, 2020

Covid-19 scenario: Govt fears GDP growth to go down by 1.3pc

Top Story

April 25, 2020

ISLAMABAD: The government has submitted a detailed report on macroeconomic losses before the National Coordination Committee, assessing that the GDP growth would go down by 1.3 percent, shove 10 percent population below the poverty line and there will loss of three million jobs in post COVID-19 scenario. The different ministries and divisions are going to face a reduction in their revenues of Rs638 billion in the ongoing fourth quarter (April-June) period and the FBR will face revenue loss of Rs800 billion till June 2020.

The fiscal deficit, according to the official report, could climb up to 9.6 percent of GDP for the current fiscal in post COVID-19 scenario against the official projection of 7.4 percent pre-COVID-19 situation.

In a 30-page report submitted before the high-powered NCC for COVID-19 comprising both civilian and military leadership, the official report on economic losses made startling disclosure when it stated that “assuming that no economic activity takes place in Pakistan and there is a complete lockdown, it would take 1.66 weeks for Pakistan’s growth to drop to nil (zero)." The IMF and World Bank had already projected shrinking of GDP growth and assessed real growth falling into negative 1.5 percent for the current fiscal year.

On poverty, the official report states that poverty is measured in Pakistan through household consumption expenditure on food and non-food items. Simulations conducted show that if annualized aggregate consumption of households goes down by 5pc in scenario-I, poverty headcount will rise from existing 24.3pc to 29pc and in case of 10pc reduction in household consumption, poverty could rise to 33.5pc.

Consumption is the smoother function and it hardly responds to short-term fluctuation of one quarter. In this case assumption of 5pc decrease in consumption is harsh but even in this case around 10 million people will fall below the poverty line.

During pandemic and post-crisis periods, short-term income losses will be offset by unprecedented rise in social safety nets. The government has extended outreach of its cash transfers to 12 million households from the existing five million. It means the government has extended its support to 78 million people, which is more than 32pc of population. This will be the largest cash transfer in this region in terms of coverage.

However, the Sub-Committee of the National Coordination Committee for COVID-19 on Economic Analysis assessed that the real GDP growth would be standing at positive in the range of 2 percent to 2.6 percent of GDP.

However, Adviser to PM on Finance and Revenues Dr Abdul Hafeez Shaikh chaired a high-level meeting on macroeconomic projections and took a strong exception to the State Bank of Pakistan (SBP) stance for aligning its GDP growth to fall into negative 1.5 percent as portrayed by the IMF. The Adviser to PM on Finance, according to the sources, was of the view that the country’s growth would remain positive ranging from 1 to 2 percent. The recent rains had impacted the wheat production negatively and it might fall by 1 to 1.5 million tons from projected output of 27 million tons to 25.5 or 26 million tons in the current fiscal year.

The ministries/divisions reported before the sub-committee of NCC that the Aviation Division reported reduction in its revenues of Rs13.6 billion, SECP (Stock market) losses of Rs 250 billion, Maritime Affairs Rs30 million, Petroleum Division Rs 87 billion, Ministry of Energy Rs 136 billion, National History & Literary Heritage Rs3.15 million, Railways Rs7.95 billion, Ministry of National Food Security & Research Rs55 billion, Ministry of Overseas Pakistanis Rs5.6 billion + Rs. 1- 5 billion as a loss in overseas employment (OEP) + Remittance may decline by 56-60 billion + unemployment loss + 60,000 with secured jobs but who could not travel, Ministry of Information Technology Rs 1 to 5 billion loss of withholding tax and 30,000 to 50,000 job loss and Ministry of Federal Education & Professional Training (FE&PT) around 75,000 youth will be affected due to delays in development projects.

The official report states that the lockdown was imposed in Pakistan in the second half of March 2020 which means economic activity was in full momentum for almost nine months and thus last quarter of 2019-20 will face major brunt of the crisis. April will witness peak of the crisis and hopefully lockdown will relax by May’ 20. Simulations were conducted under two scenarios: First assumes a gradually relaxing of lockdowns in sector by sector (phased) approach until 15th May with fully operative economy after 1st June.

The second scenario assumes a relatively prolonged lockdown until end-May and gradual opening from 1st June with stringent protocols. Results show that in the first scenario, Pakistan will witness contraction in GDP growth by 0.7pc from the expected 3.3pc before the crisis to 2.6pc after the crisis. However, in the second scenario (prolonged lockdown), growth rate drops to 2.0pc. Agriculture sector will not see major disruption but still some risks linger such as labor mobility for wheat harvesting in Punjab and partial impediments to wheat procurement, storage and distribution. Sugarcane crushing is already in its final stages as such impact on the same is not expected to be much. However, livestock and poultry sectors are facing headwinds due to falling demand as consumption pertaining to social events has fallen significantly.

The SME sector is the hardest hit by the crisis; most large-scale industry have their own colonies which minimize the risk of labor mobility. Supply disruptions again are expected to remain a problem for SMEs as their capability to switch suppliers is limited compared to large-scale industry. Further, the informal nature of the sector is expected to hinder their access to concessions extended to the industry. However, national income accounting will not be able to capture the impact on SMEs because of lack of data. Bulk of employment losses will be in the SME sector because of their weak financial position to sustain lockdown(s) for two continuous months.

Large-scale manufacturing which was already facing contraction but were showing signs of recovery for the last three months will be affected especially in the automobile and appliances industry. Textile being an export sector will be given special concessions to prevent loss of livelihoods and ease burden on financing for social protection by contributing to national exchequer. However, its recovery from contraction will be interrupted in the coming three months because of risk aversion behavior and lack of mobility of labor. The auto sector, already facing impact of demand compression, will also face supply side constraints in the shape of closure of its downstream industry and imported intermediate goods. Services sector has been the worst affected by falling tourism revenues, lower mobility in the transport sector (air, rail, ships and road), lockdowns inflicting complete halt of trading activities, closure of education, event management and community services.

Financial sector will be under-performing as well due to falling interest rates, risk aversion and potential increase in non-performing loans. However, few services have registered increase such as health services, CSO operations and online digital content and product delivery. Pakistan will face severe crisis of unemployment and livelihood. The mitigation strategy during the lockdown(s) is provision of cash and kind to the vulnerable. Pakistan’s 72% of non-agriculture workforce is engaged in the informal sector which is at risk. The size of informal employment around is 27 million and only food, pharmaceuticals and few other services are functional which indicates that this could be the worst-affected sector. Out of 27 million, around 86pc are engaged in wholesale and retail trade, transport, construction, manufacturing, hotels and restaurants sector. Air and rail transport have been shut completely till recently, which will add further to PSEs loses, already a drain on fiscal resources.

Results of the same are visible already with Ministry of Finance providing funding to Pakistan Railways recently for its operational needs. Construction sector, while shut in the first few weeks of the lockdown(s), has been opened recently with the announcement of an ambitious stimulus package to encourage economic activity.

Food, pharmaceutical, cement, fertilizer and some export-oriented textile sector are already open, which will ease pressure on employment. Hotels and restaurants are mostly out of business, though there is some support from home delivery sales; people are hesitant to order from outside. Financial sector is expected to be a victim of hesitant investment and consumption decisions. Second round will add more to misery with bankruptcies and non-performing loans. Closure of malls, and main markets is impacting trade activities.

Overall employment loss in the industrial sector is expected to be around one million and, in the services sector, loss could go up to two million. In total, 3 million jobs are likely to be lost in the initial round of the crisis. In the post-corona period, if effective hand holding of businesses is done, it could prevent not only further erosion of jobs but also facilitate reversal of job retrenchments of the first round.

Of the total workforce of 61.7 million in Pakistan, the 27.3 million informal sector workers are most at-risk of losing their jobs due to the prevailing lockdown situation across the country. These informal workers are mainly engaged in sectors most likely to be adversely impacted due to shut down of economic activity. The distribution of Pakistan’s 27.3 million informal sector workers by sector shows that 8.88 million work in the wholesale and retail trade sector, 6.22 million in the manufacturing sector, 4.43 million in construction, 4.37 million in community/social & personal services sectors, and 3.14 million are engaged in the transport/ storage and communication sector, the report concluded.