‘Weak consumption to cause delays in investment’

KARACHI: Weak domestic consumption and consumer sentiments will cause delays in commercial investment, which will in turn put additional pressure on macroeconomic growth to offset the losses, a chartered accountants firm said.

KPMG Taseer Hadi and Co., a member firm of the big-four KPMG International, said some nations are expected to adopt de-risking strategy and shift their manufacturing hubs from China, “which would create opportunities for Pakistan”.

“The extent to how this opportunity can be leveraged depends on how quickly economic recovery and supply issues are addressed,” KPMG said in a report of COVID-19 impact on Pakistan’s economy. “The ongoing pandemic may hold implications for existing low-income groups, conditional in terms of magnitude on the duration of the lockdown and lingering effects of the outbreak, if it is contained within a short period of time. In the predicted worst case scenario of a long-term outbreak, 125 million citizens could fall under the poverty line.

On the positive side, KMPG said Pakistan received diverted export orders from foreign buyers as Chinese manufacturers had majorly ceased production activities. This led to a favorable trade balance for Pakistan in terms of increasing demand for exports from the textile sector.

However, shutdown of factories and the resultant delay in supply of goods in China could result in a shortage of both raw materials and intermediate goods for Pakistani importers.

“A disruption in global supply chains could impact the economy as a whole due to the Pakistani industry’s trend of reliance on intermediary goods for value-addition purposes,” it said. “Demand-side shocks – on part of COVID-affected foreign countries – are also bound to affect the export flow of Pakistani goods for foreign market.”

KPMG sees food shortage as unlikely.

“However, the food supply situation may drastically change if there is an extension in the duration of the lockdown,” it said. It is to be seen if agriculture sector would be able to adapt on a medium- and long- term timeframe if the lockdown extends to a prolonged basis.

The accountancy firm said the lockdown has exacerbated the dire state of automobile sector already affected by high interest rates, rupee devaluation and additional custom duties. Grey market auto and mechanic shops will not be able to operate without the requisite daily demand for their services and supply for their parts.

Informal sector accounts for about 72 percent of non-agriculture employment, more prominently among rural localities (76pc) than in urban areas (68.3pc).

KPMG said construction sector is relatively insulated to employment shocks nationwide in the short-term scenario that COVID-19 runs its course.

“However, the situation may change drastically if other coinciding sectors such as education and hospitality are affected on a long-term basis as these sectors provide a source of demand for the construction sector’s services,” it said.

The firm said banks’ profitability will be under pressure due to reduced offtake of loans under recessionary market conditions and cautious customer outlook, drop in fee income on distribution of wealth products due to volatility in capital market, increased credit losses / delinquencies as a consequence of lockdowns.