Coronavirus Is Killing Pakistan’s Economy. And Govt’s Inaction Isn’t Helping
Ali Salman Andani explains how Coronavirus is taking a toll on the dollar-strapped Pakistani economy. “A 225 basis point reduction in policy rate at a time when at least 400-500 reduction is necessary to induce consumption and investment demand was equivalent to turning a blind eye to a failing economy”, he argues.
The World Health Organization has advised practising social-distancing so as to reduce the spread of the Coronavirus, but in a country like Pakistan, where there are millions of such clerics promoting social gatherings and spreading misinformation, WHO’s advise is considered a ‘Yahoodi Saazish’ (Zionists’ conspiracy) by many of its educated and illiterate citizens.
The coronavirus curve for Pakistan is getting steeper with each passing day, and that is not good news. 900+ positive cases and 7 deaths have already been reported. The country is under a partial lockdown. Businesses are operating at less than half of their normal capacities due to the shortage of raw materials, shortage of labor or restrictions on the movement of the citizens imposed by the provincial governments. All this is taking a toll on the aggregate demand and supply.
There is no good sentiment in the air on the trading floor of the Pakistan Stock Exchange since the beginning of the month of March. And it all fell like a house of cards on Monday (March 9) when the Kingdom of Saudi Arabia announced waging price war against Russia to capture the oil market share after Putin’s egotistical move against the US shale producers. The demand for crude has been sliding down with China, Europe and the rest of the world sneezing hard due to COVID-19 spread.
KSE 100 was down 2106 points just moments after trading started and circuit breaker had to be triggered to halt trading to reduce the floor’s temperature. But nothing can provide comfort to an investor in the middle of a looming recession. Karachi Stock Exchange after a series of bearish sell-offs since then is standing at 30,667 – 20pc down –as it went through highly volatile two weeks of trading. A sell-off will indeed leave the firms short of liquidity. Insufficient cash flow as a result of slowing demand up and down the country with 11% central bank’s policy rate will make it hard for the businesses to ‘breath’ normally, having the Coronavirus around.
Almost 60pc of all that Pakistan’s exports are textile-based. The problem this sector is currently facing is that the majority of the raw material – dyes & chemicals – that is required to produce textile is imported from China. The industry highly contributes to the foreign currency reserves of the dollar-strapped country that finds itself quite frequently with just enough reserves to pay for 1.5 to 2 months of imports.
The textile industry has already been suffering from the liquidity shortages as the highly incompetent Imran Khan government after ending zero-rated status of the important export-based industries, failed to refund the sales tax proceeds and custom duty rebates of these firms. The last quarter of the ongoing fiscal year and the first two quarters of the upcoming fiscal year FY21 would bring unprecedented levels of cash-shortage problems as the investors have started investing in safe-haven stocks – gold and dollars.
Cash is everything as we move through one of the worst recessionary intervals. It’s quite foolish of Pakistan’s government to not refund the amount that exceeds $130 million to the textile exporters for the past thirteen months – who needs an enemy when your Prime Minister is Imran Ahmed Khan Niazi?
I was worried about the vast sums of hot money flowing into Pakistan for past one year, and that all ended with almost $1.4billion of the capital flowing out of the country’s suffering capital markets during this month. The dollar is indeed controlling the ‘heaven’ at this point in time and Pakistani Rupee like any other emerging market currency is losing its value. That’s not going to help the exports as the flow of raw material plus the cash-crunch and capital outflow at an unprecedented pace poses tons of challenges to unprepared exporters and the government of Pakistan.
Furthermore, there is quite a chance for European and American ports to get overwhelmed with the incoming cargo from China in the next few weeks. I don’t believe a word of President Xi Jinping, and that also includes what his administration is reporting about how China has ‘defeated the virus’. But just for the sake of making a point about the situation of global logistics, if China has stopped coughing on ‘Coronavirus’, and the fact that Europe and North America have failed to flatten the curve, the situation would get much difficult for Pakistani exporters. But I strongly believe that the situation is not under control in China just like it isn’t in Europe and North America. The shortage of truck drivers and crane operators will reduce the operations at the ports. The virus is spreading and the labor is either sick or has been self-quarantined (practicing social-distancing). A buildup of cargo at the ports of China, Europe, and North America will continue digging holes in the global supply-chains. Pakistani exporters will face the delay in receiving the imports and sending the exports to the intended destinations. Demand shortage will make things worse.
One of the major ‘deficit-powerhouses’ of Pakistan is its national flag-carrier Pakistan International Airline (PIA) that has been running a net operating loss for quite some decades now will end up furloughing the workers if the situation would persist for the next two to three months. The airline will keep running a loss of about $63 million a month if its operation remains suspended for the next 25-35 days. The loss of demand is hammering the global aviation sector, with many small private airlines standing on the verge of facing bankruptcies.
I believe, by the end of May – if we won’t see the pandemic fading away – the unemployment rate in Pakistan could surge by 4-5 percent. A rough estimate suggests that approximately 4.2 million salaried-class labor could end up getting unemployed by the end of this period. The shortage of foreign exchange reserves on the shoulders of plunging demand and global supply-chain contagion could send Pakistan’s economy to the morgue.
What the State Bank of Pakistan did this month was an explicit intervention in the matters of fiscal policy. When a country’s central bank crosses the line – even for the sake of protecting its economy – without first taking the permission of the Parliament, it loses the trust of the members of the public. SBP announced a lending package for the hospitals to purchase equipment and other necessary items to face the Coronavirus outbreak; also, it announced a package for the investors who want to build new plants in the country. It was something that the hospitals and investors were expecting from the government. Sooner or later this intervention will be questioned by the world.
A strong fiscal and monetary stimulus is the need of time. A 225 basis point reduction in policy rate at a time when at least 400-500 points reduction is necessary to induce consumption and investment demand was equivalent to turning a blind eye to a failing economy during a recession. It is high time for the Khan-administration to opt for a $12-15 billion fiscal stimulus to cope with the crisis. Imran Khan’s logic that the Coronavirus is something similar to common flu and therefore a complete lockdown of the country is not necessary shows how ignorant he is!
The economy can’t be saved if his Punjab province’s health minister Dr Yasmin Rashid keeps threatening the journalists after every other press conference just because they try to hold her to account for her incompetence in relation to containing the spread of the virus.
The author is an economic and political analyst. He writes for Asia Times, DailyO, Modern Diplomacy and others. Tweets @an_alisalman