Aleena Imran has an MBA from NUST and has worked as an HR professional at companies like MPCL, Coke, Jazz, and LMKT. In her spare time, she runs her home-based baking business. Apart from being an avid reader, she enjoys writing, photography, and art.
The novel coronavirus, also known as COVID-19, has been spreading like wildfire across the globe – and across Pakistan. The virus has spread to over two hundred countries, with a total of over 20.6 million confirmed cases, and over 749,000 deaths. While scientists all over the world are actively looking for cures and vaccines that might help combat the virus, no human clinical trial has been 100% positive yet. Moreover, even if vaccines are successfully tested, the timeline for production and dissemination of the vaccine (12-18 months) is worrisome, to say the least. The situation is undeniably bleak and the effects of the virus are starting to damage almost all aspects of people’s lives.
Given that social distancing is critical to avoid the spread of the virus (and quite possibly the only way to “flatten the curve”), countries are imposing curfews and lockdowns to ensure that people stay at home and that non-essential businesses stay closed. During the initial phase of the spread, India confined over 1.3 billion people, announcing a 21-day lockdown; South Africa imposed a 21-day lockdown; Italy declared an indefinite lockdown – a necessary measure considering their death toll. UK, Denmark, Spain, Norway, France, New Zealand adopted similar measures, alongside many other nations across the world. Pakistan is no exception and the country went into lockdown in March. The lockdown that was initially planned for three weeks, was extended until the end of April – and continued different levels of lockdown sporadically.
The virus, which originated from Wuhan, China – wreaked havoc on the Chinese economy in just a couple of months. The GDP fell 6.8%, which is the first contraction of this magnitude for China since 1992. Moreover, the economic growth for this year is expected to be the slowest the country has experienced in over half a century.
Given the speed of the spread of the virus globally, China is not the only country that is now feeling the damage of the pandemic. Considering that economies all over the world are experiencing near shutdowns, the IMF has predicted a global recession this year. The global aggregate economic effect is forecasted to be tremendous – and experts are comparing the impact to that of the Great Recession in 2008-2009 – where the GDP fell by over 2% worldwide. Additionally, the UN has shared forecasts of coronavirus leading to a potential shortfall in global income that could reach up to $2 trillion. Economists have now begun studying the trends and overall effects of the pandemic on economies across the world – and are applying their learnings to forecast the impact on their respective economies.
According to a study, two sectors that are the worst affected globally are Travel and Transportation, and Manufacturing. The chart below shows the impact on each sector using a 5 point scale – where 1 is considered low impact and 5 is considered high.
When talking specifically about the impact on global employment in terms of employment, four sectors stand out. Aggregated numbers for each are: Food and accommodation (144 million employees affected); retail and wholesale (482 million employees affected); business services and administration (157 million employees affected); and manufacturing (463 million employees affected). These numbers add to a shocking 37.5% of global employment – and an estimated 195 million jobs could be lost in the next three months alone.
In the case of Pakistan – as with many other fledgling economies – there are grave tidings for the rate of employment, GDP, and the overall financial health in the months to come.
With estimated losses ranging from 1.57% up to a staggering 4.64% in the country’s GDP, the implications for the country’s economic trajectory seem daunting. Bifurcating the challenges into two broad areas, it becomes easy to understand that there will be a local impact and an international one. While discussing the international impact, it is important to note that with the disruption in the Global Value Chain, Pakistan will struggle with both international imports and exports, and even with respect to exports between cities across the country. These halts in orders may very well lead to the dissolution of major international supply chain contracts – and could end up causing severe damage to the FDI and trade. Moreover, due to the expected rise in global unemployment, international remittances could reduce drastically. When analyzing the local scenario, offices have been asked to close down physical operations, and movements across the country have been impaired. Given the lack of technological advancement in the country, most businesses will be unable to work virtually, will start experiencing a lack of profits – and may eventually experience heavy losses or even closure. PIDE has estimated that job losses in Pakistan could cross millions.
Understanding the economic implications and threats to the living situation of the daily wagers, the prime minister unveiled a national plan for Rs. 1.2 trillion ($7 billion), which aims to alleviate some of the damage to the more hard-hit sections of society. Given that there are over five million Pakistanis who are at or below the subsistence line [as quoted in the National Socioeconomic Registry (NSER)], over 150 billion rupees have been allotted for the dissemination of cash payments to the lower-income classes. The plan also includes initiatives to protect the interests of businesses and industries across Pakistan. Over 100 billion in tax refunds have been announced, along with an additional 100 billion in deferred payments. In light of the same, the State Bank has also cut rates by 225 basis points to give relief to the borrowers – the federal government included.
The country experienced some relief after the IMF announcements of $1.4 billion in aid –alongside the addition of Pakistan to the list of countries that can potentially benefit from the G20 relief package – but the soaring number of cases will continue to have implications for every sector in Pakistan.
When trying to understand the intensity of losses Pakistan is facing in terms of its business operations, it is important to note that out of more than 2500 factories in the Karachi SITE area, only 50 were allowed to operate during the lockdown. These factories were primarily manufacturing essential goods such as medicines and food. The movement of cargo was impaired – even though ports were operational – mainly due to the lack of workers being allowed to commute. Additionally, defining “essential services” proved to be a challenge since all elements of the supply chain directly or indirectly contribute to the final products. Serious disruptions for most businesses across Pakistan are now being analyzed in all major sectors i.e. agriculture, mining, trade, hospitality, manufacturing, construction, and transport. The Asian Development bank has shared a bleak estimate of overall losses crossing $32 million – with private businesses facing losses up to $1.9 billion, agriculture and mining losing up to $1.5 billion, hotels and restaurants losing over $250 million, transport losing over $566 million and engineering losing over $671 million. Delving into details of each, some of the major sectors are discussed ahead.
Food & Agriculture
Agriculture contributes over 22% of Pakistan’s GDP – and the high contribution is further evidenced by the fact that Pakistan is self-sufficient when it comes to most major staples. Globally, it currently ranks 8th in wheat production, 10th in rice, 5th in sugarcane, and 4th in milk production.
However, the circumstances surrounding Pakistan’s agriculture have been dire in the past couple of months – and forecasted to be such in the future. One major reason was the recent locust attacks, considered the worst of their kind in over two decades. The second is the looming threat of the coronavirus.
Given that Pakistan is heavily invested in agricultural exports – the impairments in international trade could set the country back majorly. Taking the example of rice, Pakistan exports over 2 million tons of rice annually (10% of the world’s rice trade) and is the second-highest source of foreign exchange for Pakistan. In case of reductions or cancellation of orders for Rice, the country will take an unbearable hit to the GDP. Additionally, Pakistan’s heavy reliance on foreign pesticides, seeds, and fungicides, may lead to a majorly negative impact on the production of crops this year.
Four major crops i.e. wheat, potatoes, corn, and rice are experiencing precarious conditions. There has been a decline in the wheat yields, and recent shortages led to the govt. approving the import of 300,000 tons a few months ago. This year’s harvest is almost ready, but the uncanny frequency of rains may damage the yield. Moreover, the lockdown may lead to a lack of readily available labor/harvest machines which could result in serious wastage. Similarly, potatoes may also face a late harvest due to rain damage. Since corn is a relatively early stage, it would require added effort, nutrition – and chemicals to protect the yield – some of which may need to be urgently locally produced to avoid the risk of impaired imports. The sowing of the next rice crop will have to be critically handled since the lack of imported chemicals may pose the risk of diseased crops – and the delay in sowing may affect the total supply altogether.
Due to the lockdown, the decrease in vendors selling produce, and the difficulties in exporting goods to other localities, the country is experiencing major swings in prices. Some items (such as tomatoes) are experiencing huge decreases in prices due to the lack of exports to other cities – while other items such as sugar and flour are seeing record highs due to hoarding and bans on inter-city transport.
The government is currently planning to abolish taxes on food, and over fifty billion rupees have been allotted to the government-owned utility stores to ensure a steady supply of goods. Around 280 billion rupees have been allotted to ensure that the supply of wheat is not impaired across the country. NDMA has been assigned the responsibility to ensure food supplies and funds have been set aside for the same purpose.
It is important to highlight that the ADB has forecasted a turnaround in 2021, with growth accelerating to 3.2%. This is mainly due to the correction of macroeconomic imbalances, containment of currency depreciation – and the control of the locust infestation.
Manufacturing & Mining
Manufacturing & mining contribute over 15% to the country’s GDP. In the initial lockdown, there were some reservations around whether the closing down of manufacturing facilities and mining companies would lead to long term losses. After an initial working to understand the economics (and potential losses), the government thought it prudent that some essential businesses and industries remain operational. These include cement, chemical manufacturing, glass, e-commerce, mines, packaging/paper, fertilizer – amongst others.
For factories producing non-essential items such as textiles, the conditions are glaringly depressing. The global supply chain has been disrupted, and many local and international orders that were placed before the outbreak, have been canceled. The Pakistan Workers’ federation reported that over half a million textile and garment industry workers have been let go in Punjab alone. To alleviate the threat of layoffs, the Sindh government has ordered companies to ensure their staff is retained and paid their due salaries. However, more than a million garment and textile workers are still set to lose their jobs due to the sheer losses the employers are facing.
Head offices for most companies across Pakistan are closed but exploration sites and production plants currently remain open and operational. According to a report by the ADB, the best-case scenario for agriculture, mining, and quarrying in Pakistan, is a loss of $16.23 million – and the worst could reach up to $5.5 million. It remains to be seen whether the operations will remain open (given the increasing number of cases), and whether these businesses will be able to bear the losses if operations close down.
Tourism
An illustrious sector, Tourism generated around $6 trillion globally in 2019 – with 1.5 billion international tourist arrivals recorded globally. In Pakistan alone, tourism contributed around $800 million which contributes to 2-3% of the GDP. Pakistan, well on its way to becoming an increasingly popular tourist destination, has been investing heavily in the sector and was considered by Forbes to be one of the “coolest” places to travel to in 2019. The contribution to the GDP was expected to double and as per reports published by the World Travel and Tourism Council, the revenue is forecasted to jump from $22 billion in 2017 to a staggering $40 billion by 2028.
Given the coronavirus threat, tourism could face an extremely adverse impact with most airlines closed down and countries sealing their borders. The current scenario for tourism is bleak since it is estimated that international tourist arrivals could decline by 20-30% in 2020. This means potential losses of $350-$400 billion in international tourism receipts (in the worst-case scenario). The current numbers being projected are a reduction of 290 to 440 million international tourist arrivals; 5 to 7 years lost in terms of the number of tourists and one-third of the $1.5 trillion being lost in tourism exports.
In Pakistan, the coronavirus is seemingly putting a huge damper on the government’s plan to increase tourism. International flights were halted in the initial days of the lockdown, and local tour companies have been forced to halt their operations. There is an expected decrease in local tourism as well. Local tourism, which escalates during the summer months under usual circumstances (evidenced by the fact that in June 2019, four popular tourist destinations received 2 million tourists in the four Eid holidays) will be brought to a screeching halt in case the threat prevails.
While it is too soon to assess the real-time damage, an initial assessment has projected losses to Khyber Pakhtunkhwa’s tourism of around $20-25 million in revenue – with a slash of around 260,000 direct jobs.
However, it is important to note that given the relaxations to the construction sector, the time is ripe for local investments in tourism infrastructure. Investors could take advantage of the relations and potentially invest in the construction of hotels, resorts, and recreational infrastructure which could amount to a hefty profit – once the tourism trajectory resumes its upward movement.
Small & Medium Enterprises
Globally, SMEs account for a large majority of the businesses running across the world. They represent over 90% of all businesses and are responsible for over 50% of employment worldwide. In many developing economies, formal SMEs account for around 40% of the GDP.
To better understand the threat to SMEs, one can exemplify the scenario in the Great Recession and the impact on SMEs in America. These small businesses contributed to 45% of the employment nationally – but as the economy began shedding jobs, SMEs accounted for 62% of the overall job losses. Small businesses operate with a few months’ worth of cash flow at best – and during times where they can’t operate – the question between keeping the business vs. keeping the employees arises. An example of the situation of a country with massively threatened SMEs is that of Romania – where a whopping 72% of small businesses had no business continuity plan in place.
In Pakistan, small and medium enterprises form around 90% of all businesses – and generate 40% of non-agricultural employment. The government, realizing the threat to small and medium enterprises, has allotted a hundred billion rupees for SMEs – and has provided a host of measures to help them sustain themselves. These include tax breaks, financial support via utilities, concessions, tax refunds, and fuel subsidies. New investors are also being encouraged through the State Bank’s initiative of a “Temporary Economic Refinance Facility”. This is essentially the provision of subsidized loans for the manufacturing industry – in addition to the Refinance facility, which will allow banks to get loans at zero markups. Those loans can sub sequentially be offered to hospitals at a nominal rate of 3% for five years.
While the Pakistani government and governments around the world are trying their best to curtail the numbers of infected individuals, it remains to be seen what the financial impact on Pakistan – and the world will amount to – especially since cases are rising, and the hope for a cure is dwindling. The question that comes to mind now is just this: How long till the world goes back to normal?
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