The Economic Fallout Of Coronavirus: Why Things Cannot Be Left To The Market’s Invisible Hand
We all are living in strange times. Yuval Noah Harari in his book Sapiens wrote that many short-term emergency measures become a fixture for life because the risk of doing nothing becomes bigger in a crisis-like- situation. Decisions which could take years of deliberation are then made promptly in a few hours keeping in view the idea that desperate times call for desperate measures.
The world has come to a standstill due to the outbreak of the novel Coronavirus. The economic consequences are going to be manifold with the passage of time, in case the deleterious effects of the pandemic are not controlled. It takes us back to year 1918 when similar effects were witnessed in US due to the spread of the pandemic of the Spanish flu.
The current situation also reminds us of the 1930s when the economies of the US and European countries plunged into deep recession which led to an abrupt rise in unemployment levels. For the first time in Pakistan, due to the spread of this deadly virus and its looming threat, economic activity has been brought to a halt.
The world has never seen such drastic effects on the global economy due to the spread of disease in living memory. Financial markets have slowed due to the capital outflows; production of multinational companies has reduced; people are becoming unemployed; poverty levels have risen due to the decrease of real income; tourism activities have been curtailed; exports have decreased; flights operations have been canceled and there has been an overall drastic cut in GDP growth rates. Due to the drastic fall in economic activity, the size of the global economy has shrunk and eventually its spillover effects on developing countries like Pakistan will be aggravated if the situation further worsens.
Pakistan is a developing country and its exports primarily comprising of agricultural and textile products. While the pandemic has taken its toll over the entire global economy, the situation is likely to result in a decrease of exports for Pakistan. However it will be offset by the decrease of oil prices which at present, are at their lowest ebb in the past thirty years. The decrease in petroleum products’ prices is likely to save costs for Pakistan’s oil import bill. The government has taken a good step by decreasing petrol prices by Rs 15 per litre to ameliorate the woes of common people in the ongoing turbulent situation.
However it has kept the interest rates high at 11 percent. Let us consider the matter of interest rates in this crisis.
Although the government has cut interest rates from 13.25 percent to 12.5 percent and then recently further brought down to 11 percent, economic experts still say that interest rates in Pakistan are among the highest in the world. Contrary to this, in the US and European countries, interest rates have been drastically cut to zero percent in order to keep the cost of capital low in this recessionary period and boost demand.
Keeping interest rates as low as possible has become indispensable to keep the cost of doing business low. The government of Pakistan also needs to pay attention towards its monetary policy and bring interest rates to zero percent, keeping in view the economic losses suffered by big businesses, as well as small and medium enterprises.
It is further notable that at present the government is offering financing at 7 percent to those entrepreneurs who want to start new business enterprises. Already established businesses are being granted financing at higher interest rates of 11 percent – which is a poor policy. The government, at present, is only keen to attract hot money in its treasury bills to keep the currency afloat and reduce its current account deficit level. It is not bothered about the woes of local businesses that are aggrieved by high interest rates and further bogged down by high import duties. Reducing interest rates would not only help local entrepreneurs, but the government too. At present, most of the credit – more than 70 percent – has been taken by the government and by reducing the interest rate, the government would be saving its interest payment cost.
A number of other measures will be necessary to give the economy a much-needed stimulus in this difficult period.
The Federal Board of Revenue has control over the sales tax refunds of business enterprises – which it must pay back immediately as a relief. At present there is a lack of liquidity and hence in this hour of need the government needs to give stimulus to businesses so that liquidity is injected.
Farmers should be given cheaper credit and fertilizers at reduced prices.
People who are likely to suffer the most are daily-wagers who are likely to be laid off if businesses are not doing well or risk closure in the near future. The government should identify the people who are living below poverty levels so that they are given financial support through either income support programmes or the Employees Old Age Benefits Institution (EOBI). In this, the federal government must coordinate with provincial governments to launch income support programmes for the working class and clamp down upon hoarders who are responsible for causing shortages in basic food items.
It was the slogan of the present government before elections that it will play an instrumental role in framing policies that would reduce the disparity between rich and poor in order to make Pakistan prosper and ensure that it becomes a welfare republic. Hence the state must fulfill its constitutional responsibility by acting promptly, rather leaving matters to the invisible hand of market forces.
The writer is a human rights activist,lawyer and teacher. Write to him at [email protected]