Ali Munib Nizami

COVID19 and Pakistan: The Economic Fallout

Pakistan has been one of the countries worst affected by COVID-19, with the economic
disruption caused by the pandemic exacerbating an already existing crisis. This paper discusses
how the public health crisis has affected some of the most critical sectors of the Pakistani
economy. While the government has implemented some mitigation measures, they are
inadequate to counter the impact of the pandemic. The article analyses the likely fallout of a
near-meltdown of Pakistan’s economy on the nation’s hybrid political system that is dominated
by the military. Finally, it examines the possible impact of Pakistan’s economic crisis on its
strategic environment and strategic alignments

1. General situation

Due to very low number of tests performed (+/- 647030) in respect to the population of the
country (220 Millions) it is difficult to gauge the real spread and its impact on social and
economic level. Two of the largest industrial and commercial centers (provinces of Punjab and
Sind) have announced partial lifting of lockdown; opening of businesses related to construction
and building industry and export industries.

The Ministry of Commerce is considering special tariff measures in the upcoming budget to
reduce customs and regulatory duties on more than 1600 raw materials and semi-finished
products that are currently subjected to custom duties of more than 5%.

Confirmed positive cases: 92460

Total test performed: 647030
Deaths reported: 1943
Recovered: 31083

2. Preventive measures

All travellers coming from abroad are quarantined. Federal and provincial governments are
planning imposition of smart lockdown based on ‘tracking-tracing-screening’.

The government has allowed outgoing international flights from Pakistan to be operated under
condition imposed by the relevant authorities of the destination countries.
Following a sharp rise in the number of positive cases and deaths related to COVID-19 after the
partial lifting of lockdown during the Eid holidays, wearing of facial masks in all public places
has been made mandatory by the Federal government.

3. Exit strategy

Export oriented industries are exempted from lockdown (cement, glass, mining, fertilizers,
paper, packaging, chemicals and essential food items). The State Bank of Pakistan has allowed
the suspension of dividend distribution to banks for the coming 2 quarters. On May 15th the
SBP has again reduced interest rate by 100 basis point, down to 8%; relaxing credit
requirements for exporters / importers, refinance support schemes for companies to prevent
layoff and downsizing, cheap loans for hospitals and medical facilities.

Construction sector: reduction of taxes on import of building materials, taxes on transfer of real
estate; PR 50 Billion in financial assistance to SMEs; exemption of electricity bills to small
traders after lifting of lockdown; PR 75 Billion social assistance against loss of employment to
unskilled laborers.

Two of the largest industrial and commercial centers (provinces of Punjab and Sind) have
announced partial lifting of lockdown; opening of businesses related to construction and
building industry.

The government is planning to raise $1.5 billion by floating Eurobonds in the next fiscal year
FY2021. The planning comes after the decision to give preference to hot foreign money over $3
billion worth of bonds in the outgoing fiscal year FY2020 proved costly.

4. Economy

a. Economic impact

According to a pre-budget economic update report, the Ministry of Finance has announced that
the current account deficit reduced by 71% to US$ 3.3 billion (1, 5% of the GDP) during July-
April FY 2020 against US$ 11.4 billion last year (4.8% of the GDP).

Export declined by 2.4% to US$ 19.6 billion against US$ 20.1 billion last year. Imports declined
by 16.9% US$ 36.1 billion (US$ 43.3 billion last year). Consequently, the trade deficit declined
by 29.5% to US% 16.4 billion.

During the same period FDI July-April FY2020 FDI increased by 126.8% to reach US% 2.28 billion
compared to US$ 1.009 Billion last year. Foreign remittances increased by 5.5% growing from
US$ 17.8 Billion to US$ 18.7 billion.
b. Trade barriers

Import duties have been waived on 16 medical products for 3 months (20/3 to 20/6). Exports of
anti-malaria medicines and personal protection equipment are banned, exports of masks
(except N95 & PPE) and sanitizers are authorised.

The Ministry of Commerce is considering special tariff measures in the upcoming budget to
reduce customs and regulatory duties on more than 1600 raw materials and semi-finished
products that are currently subjected to custom duties of more than 5%.

C. Measures for economic prelaunch

The State Bank of Pakistan has announced having deferred principal repayments of loans
amounting to PR 432 Billion under its refinancing scheme to protect SMEs from the impact of
Covid-19.

A US$ 305 million loan finalized with the ADB of which 200 Million for social sector and 105
million for healthcare infrastructure support; for the month of April 2020 Pakistani exports
registered a downward turn by US$ 1 Billion (-54%) and imports down by US$ 3.1 billion (-
34.4%).

The signing of an agreement between the government of Pakistan and the China Power –
Frontier Works Organization (Pakistan) consortium for the construction of the Diamer Bhasha
Dam including the 4500 MW hydropower plant should give a short-term boost to the
construction sector in Pakistan.

d. Economic outlook

According to the latest estimates by the World Bank and Pakistani authorities the economy is
going to suffer a negative growth of between -1% and -1.5% during the current fiscal year.

Agriculture is expected to see slow growth as the worst locust infestation in over 2 decades
damages harvests of cotton, wheat, and other major crops. The government has declared a
national emergency to combat the infestation. Modest growth is expected in some export-
oriented industries such as textiles and leather. However, large-scale manufacturing, which
provide over half of industrial production, will likely contract, as it did in the first half of FY2020
when currency depreciation ran up production costs.

Emergency assistance received/committed from multinational donors; ADB – US$ 2 billion; IMF
– US$ 1.38 billion; Islamic Development Bank – US$ 650 million; European Union; US$ 12.5
million. With reduced industrial production and revenues, the US$ 6.7 billion support
programmer launched by the government to assist the poorest sections of the country (mainly
unskilled labor) is going to put the economy under substantial pressure.

According to the weekly data the foreign exchange reserves held by the State Bank of Pakistan
(SBP) decreased by 0.46% on a weekly basis. Last week, the FC reserves held by the SBP were
recorded at $12,073.9 million, down $55 million compared with $12,129.3 million in the
previous week. According to the central bank, the decrease came on account of external debt
repayments.

Agriculture, one of the major economic sectors in Pakistan, is facing another challenge as one of
the worst locust infestation attack since 1993 is damaging crops in more than 60 districts in
Balochistan, Punjab and Sindh.

e. Short term opportunities

Since the experts in Pakistan consider the spread of COVID-19 yet to be in its initial phase, it is
difficult to identify any opportunities in short term except medical supplies.

The recent incentive plan announced by the government for the construction sector should
result in an upturn in this sector that may present opportunities in construction machinery,
building materials and technologies. The incentive plan includes tax relief for projects and
reduction in certain categories of construction and building products and materials.

In a recent report the National Electric Power Regulatory Authority (NEPRA) has blamed old and
inefficient power plants for the financial problems of the electricity sector and has
recommended their replacement with newer more efficient plants.

Flemish companies continue to write to the post in order to prepare the grounds for the
opening of the market when the situation in Pakistan normalizes again.

f. Long term opportunities

In view of the increased realization by the public and private sector for the need to upgrade the
healthcare infrastructure, long-term opportunities should present themselves. Collaboration
between Pakistani and Belgian companies in the development of pharmacy products, hospital
and medical equipment (diagnostics, electro-medicals, support products, etc.).