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Imbalances exposed economy to COVID-19 shocks: State Bank


May 31, 2020

KARACHI: The central bank on Saturday said the government’s low per capita spending on healthcare and education, increased debt level, and unavailability of adequate data about some sectors, left the country’s economy vulnerable to the novel coronavirus pandemic.

“After the period of stabilisation, the economy was beginning to show green shoots of recovery. Pakistan’s fundamentals were much improved before the COVID-19 struck the global economy and this should help Pakistan recover once the pandemic subsidies,” the State Bank of Pakistan (SBP) said in a video presentation uploaded on its Twitter account.

However, there are vulnerabilities remain in some areas, it added.

“Inadequate focus on social sector spending has left us vulnerable to shocks such as COVID-19,” the central bank said.

The government expenditure on health and education in Pakistan is relatively low compared to regional countries, it said adding “the country spends 5.8 percent of gross domestic product on these sectors compared with 7.3 percent of GDP spent on the development of health and education by India.

“Having a strong healthcare system and an adequate level of awareness among the public is important in the current scenario.”

According to the United Nations, roughly 4 out of 10 people experience multidimensional poverty in Pakistan. This has raised challenges of food and social security in the extended lockdown situation.

The central bank said Pakistan’s debt level was persistently high, despite fiscal sector improvement. The country’s debt rose to 94 percent of GDP at the end of December 2020 from 78 percent of GDP in the fiscal year 2015/16.

The increase in public debt has constrained the government ability to spend on social sectors.

“We have limited monthly and quarterly data regarding key sectors such as livestock, SMEs, health, real estate and housing, and employment,” the central bank said.

The country’s GDP is heavily dependent on consumption. Pakistan is the highest amongst the regional countries which means the GDP growth is vulnerable in limited mobility scenario.

The informal employment’s share is considerably high at 72 percent, while formal employment’s share stands at 28 percent.

The SBP said the economy was starting to do well before the onset of the pandemic. “The external sector performance was improving, and trade dynamics were becoming more favourable with increasing exports and declining imports. This led the country to earn more foreign exchange,” it said.

The foreign exchange reserves held by the SBP were $12.8 billion in February 2020, compared with $7.3 billion in June 2019.

Credit rating agencies were satisfied with the progress also either maintain or raised the outlook for Pakistan stable. Meanwhile, on the government front, tax collections started growing during the fiscal year 2019/20 which led the government ability to spend was increasing.

The development spending increased to Rs456 billion in July-February FY2020 from Rs319 billion a year ago. The primary balance was in surplus for the first time since 2016.

“The COVID-19, which is primarily a health emergency, could turn into an economic shock. The economy could be affected through a number of channels. This shock has affected emerging markets like Pakistan both external channels and domestic channels,” it said.

External channels include the slowdown in trade of goods and services and income, workers’ remittances channel financial flows channel. However, it has also brought some respite for importers in the form of lower oil prices. Domestically heightened uncertainty has adversely affected consumer demand business activity investment as well as government revenue in emerging markets.

To fight the pandemic, the governments imposed lockdowns of varying degrees, which has led to lower mobility and higher employment resulting in reduced household consumptions and this in turn has created cash flow problems for businesses and factories.

“If it looks continuing for too long, it could lead to bankruptcies of businesses and factories and layoffs of workers,” the central bank warned adding, “If the pandemic is prolonged, heightened liquidity issues and bankruptcies of firms might translate into losses … putting the financial system under pressure”.

Overall these macro-financial linkages could further depress domestic economic activities, it added.