Economies all over the world, including Pakistan, are now experiencing a slowdown.

The impact of COVID-19 on Pakistan’s economy can be severe and may lead to a
reduction in GDP growth, deterioration in current & fiscal balances, disruption in
supply chain and increased unemployment.

Gross Domestic Product (GDP)

Pakistan’s GDP at current market prices was PKR 38.6 Trillion for the Fiscal Year
(FY) 2019. Economic growth during FY 2019 was 3.3% and the Government had
projected it to be 2.6% during FY 2020. However, this projection did not account for
the impact of the recent COVID-19 outbreak. According to the recent estimates by
the Planning Commission of Pakistan1, COVID-19 is expected to cause ~10% loss,
estimated at PKR 1.1 Trillion, of total GDP during the last quarter (Apr-Jun 2020) of
FY 2020. Additionally, according to the Pakistan Institute of Development Economics
(PIDE),2 due to trade disruptions as a result of COVID-19, if both imports and
exports of Pakistan fall by 20%, the economy can face a loss of up to 4.64% in GDP.

Exports
According to the Pakistan Bureau of Statistics (PBS), total exports of Pakistan stood
at PKR 287.7 Bn during March 2020, down 12.9% m-o-m. As per the State Bank of
Pakistan (SBP), Pakistan’s largest export partners are the USA, UK, China,
Germany, and the Netherlands contributing to about 40% of the total exports. All
trading partners have been impacted due to the COVID-19 outbreak. Trade globally
is on a downward trajectory and is expected to decline further due to slow down in
demand on the back of lockdowns. According to the report published by PIDE2, the
Ministry of Commerce has estimated that the decline in exports of Pakistan could be
as high as 20%, translating into a dollar value of USD 4.0 Bn fall in exports by June
2020, on account of export order cancellations.
Imports
According to the Pakistan Bureau of Statistics (PBS), total imports of Pakistan stood
at PKR 525.0 Bn during March 2020, down 18.7% y-o-y. As per SBP, the largest
import partners from July 2019 to February 2020 were China, UAE, Singapore, USA,
and Saudi Arabia cumulatively consisting of 51% of the total imports. China alone
accounted for 21% of the total imports during this period. The decline in import value
can be attributed to multiple factors, including disruptions in supply chains, lower
demand in Pakistan, and a fall in prices of goods and commodities.
A decline in imports will have a positive impact on Pakistan’s current account deficit;
However, delays in imports of essential items could disrupt the supply chains of
multiple industries. According to PIDC2, 32% of the total imports of Pakistan are final
products which will not have a direct impact on the country’s GDP. However, 68% of
imports constitute raw materials, intermediate goods, and capital goods which are
used to produce final goods that are consumed domestically or exported. A decline
in these will, therefore, have a negative effect on investment spending as well as on
exports. Consequently, Pakistan is likely to experience a cascading effect of falling
imports, leading to an impact on the GDP.

Remittances
According to the SBP, inward remittances Pakistan stood at USD 1,824 Mn for
February 2020, down 4.4% m-o-m. This decline was attributed to the spread of
COVID19 in various parts of the world. While the numbers for March 2020 are not
yet available, remittances are expected to further decline on the back of spread in
COVID-19. Remittances to Pakistan are primarily from oil-exporting GCC countries.
The largest shares of remittances during February 2020 were from Saudi Arabia
(USD 422.0 Mn), UAE (USD 387.1 Mn) and USA (USD 333.5 Mn).
According to the World Bank, for over 66 countries, especially emerging and
developing economies, remittances represented more than five percent of GDP in
2019. For Pakistan, remittances accounted for 7.7% of the total GDP during the
same year. Additionally, the World Bank also highlighted that sending and receiving
remittances might be severely affected amid shutdowns in major countries amid the
COVID-19 outbreak. Since Saudi Arabia, UAE, and the USA, amongst major other
countries are facing a lockdown situation; hence, remittances to Pakistan are
expected to decline.

Poverty and Unemployment

According to the ‘Employment Trends’ report published by the Pakistan Bureau of
Statistics (PBS) in 2018, the total labor force in Pakistan stands at 63.4 Mn of which
vulnerable Employment was 26.41 Mn (41.6%). Vulnerable employment is measured
as the proportion of own-account workers and contributing family workers in total
employment (poor workers generally dependent on daily wages). These workers are
likely to be the largest impacted individuals and could lose their employment due to
the COVID-19 pandemic.
Due to the slowdown in economic activity and a high proportion of vulnerable
employment in the country, we could be seeing a significant increase in poverty and
unemployment, in the coming months. According to the PIDE report3, approximately
12.3 Mn people are expected to face unemployment in under a scenario of moderate
restrictions by the Government (similar to those implemented currently). This is
approximately 46.3% of the total vulnerable employment and 19.4% of the total
employment in Pakistan. Wholesale & Retail Trade is expected to witness the
highest layoffs of ~4.55 Mn people. Thus, the poverty rate in Pakistan could increase
from 23.4% to 44.2%.

Interest Rates
The Monetary Policy Committee (MPC) of the State Bank of Pakistan reduced the
benchmark policy rate on two separate occasions in March 2020. The first reduction
was during the planned bi-monthly meeting of the MPC on 17th March 2020, where
interest rates were reduced by 75 bps. The subsequent cut came in an emergency
meeting of the MPC where an additional reduction of 150 bps was implemented,
taking the policy rate to 11.0%.
Similar rate cuts have been witnessed globally as well. The monetary policy
statement released by the MPC highlights that the IMF downgraded its global growth
outlook to a recession where Pakistan’s growth and inflation are likely to be revised
down further. The latest available data puts inflation during March 2020 at 10.2% Y-
o-Y, down from 12.4% in the previous month. If the downtrend in inflation persists, it
would provide further room to the State Bank to reduce the policy rate.
Amid growing concerns about the potential economic impact of the COVID – 19
pandemic, the Government of Pakistan and SBP, in collaboration with Pakistan
Bank’s Association (PBA), are taking various measures to provide relief to the
industry as well as the general public. The announced relief packages are
highlighted below:

Relief Package by the Government

 Economic Relief Package worth PKR 1,200 Bn

 Establishment of the “Corona Tigers Relief Force” fund which will work in
coordination with the Pakistan Army and other authorities in wake of the
coronavirus outbreak. It is a donation fund established to counter the
impact of the coronavirus.
Relief Package by SBP

 SBP has allowed all federal and provincial government departments,

hospitals in public and private sectors, charitable organizations,
manufacturers and commercial importers to make Import Advance
Payment and Import on Open Account, without any limit, for the import of
medical equipment, medicines and other ancillary items for the treatment
of COVID-19.
 To support the banking sector to supply additional loans to businesses and
households, SBP has reduced the Capital Conservation Buffer (CCB) from
its existing level of 2.50% to 1.50%. This will enable banks to lend an
additional amount of around PKR 800 Bn.
 As a tool to incentivize banks to provide additional loans to retail SMEs, the
existing regulatory retail limit of PKR 125 Mn per SME has been
permanently enhanced to Rs. 180 Mn.
 SBP has relaxed the Debt Burden Ration (DBR) for consumer loans from
50% to 60%. This measure will allow about 2.3 Mn individuals to borrow
more from banks in this time of need.
 Banks & DFIs will defer the payment of principal on loans and advances by
one year.
 SBP has relaxed the regulatory criteria for restructuring/rescheduling of
loans. The loans that are re-scheduled/restructured within 180 days from
the due date of payment will not be treated as defaults.
 Keeping in view the steep decline in share prices, the margin call
requirement of 30% visà-vis banks’financing against listed shares has
been significantly reduced to 10%.
Conclusion
While the Government has implemented various measures to slow down the spread
of COVID-19 and to provide relief measures to industries and the general public, the
economy is likely to continue to deteriorate in the short run. It is important to ensure
that all the relief packages announced by the government, are implemented swiftly,
and reach the intended beneficiaries. The policymakers should continue to closely
monitor the situation and remain on standby for further interventions.
While businesses should continue to plan tactically for sustaining current business
operations and seeing through the lockdown period. The government should also
plan for return to normalcy, and prepare revival plans for key sectors of the
economy.