Ministry unable to quantify virus impact on economy

Independent assessment puts national output losses in range of Rs891b to Rs1.6tr

ISLAMABAD: The Ministry of Finance has said the magnitude of decline in economic growth due to coronavirus contagion remains uncertain while a new independent assessment puts the national output losses in range of Rs891 billion to Rs1.6 trillion in fourth fiscal quarter alone.

The Gross Domestic Product (GDP) for this fiscal year was projected to grow by 3% but the outbreak of coronavirus may affect Pakistan’s economy through various channels, according to the first Economic Updates that Ministry of Finance released on Tuesday.

“There will be further reduction in GDP growth; however, the magnitude of decline is uncertain,” noted the first of its kind monthly report. Pakistan’s domestic production and exports value may suffer due to less supply of intermediate goods and decrease in global demand and commodity prices.

But former finance minister Dr Hafiz Pasha and the State Bank of Pakistan former governor Shahid Kardar have jointly published a comprehensive assessment of anticipated economic losses due to COVID-19 in an English daily.

The assessment is based on two assumptions – less severe shocks (scenario-I) and more severe shocks (scenario-II). “The GDP could fall by 4.6% in Scenario-I and by as much as 9.5% in Scenario-II in the fourth quarter of 2019-20,” said the authors. In absolute terms, they have estimated the GDP loss in the fourth quarter of 2019-20 at Rs891 billion in Scenario-I and Rs1.6 trillion in the event of a more severe shock.

They argued that the possible increase in number of unemployed workers is 3.1 million in case of less severe shock and almost 5 million in Scenario- II. This is the unemployment caused by the likely slowdown of the economy and is of a more lasting nature.

The temporary unemployment resulting from a lockdown/curfew could be of as much as 10.5 million workers, including daily wage and contract/casual workers in establishments.

Therefore, the number of people who could fall below the poverty line ranges from 9 to 15 million.

Dr Pasha-Kardar article showed that the rate of inflation is likely to remain relatively low at 9.6% in case of less severe shock but it could be as high as 16.1% in Scenario- II.

They have assessed tax revenue loss in the range of Rs150 billion to Rs290 billion, which they stated, will be partially compensated for by a decline in the cost of debt servicing of Rs90 billion over the next three months. Also, as the decline in the oil price gets reflected in imports, the Petroleum Levy could yield additional revenues of Rs100 billion by end-June 2020.

The Ministry of Finance publication said the economic downturn in China, USA, EU and Middle East will affect Pakistan’s exports and remittances inflows.

The slowdown will also have negative impact on tax and non-tax revenues; whereas government spending will overrun and fiscal balance will disturb having negative implications.

But the joint independent assessment showed that the volume of exports of goods and services could fall by almost 7% to 15% resulting in a fall of roughly 35% in value terms under Scenario-II.

Imports of goods and services are likely to increase by over 5% in Scenario-I due to the big fall in import prices but decline by almost 3% in Scenario-II. Under Scenario-I imports of Goods and Services are assumed to increase during Q4 simply because of the sharp fall in import prices.

With regard to the current account deficit, the authors stated, there was a positive outcome in case of less severe shock and the current account deficit could decline by $1.8 billion. However, in case of more severe shock, the current account deficit may worsen by $531 million.

They underlined that the financial account of the balance of payments was likely to come under stress because of the big anticipated decline in foreign direct investment and continuing exit of portfolio funds.

This could be partially mitigated by an increase in the inflow of borrowing from the IMF, World Bank and the ADB, although because of their internal institutional processing mechanisms they are more likely to become available in June or early next financial year.

The Ministry of Finance said that Pakistan economy was moving towards stability and sustainable inclusive growth but now has been exposed to multifaceted challenges as a result of this pandemic.

The ministry said the overall budget deficit was also on the right track before the pandemic. Overall fiscal deficit was recorded at 3.2% of GDP or Rs1.43 trillion during Jul-January of this fiscal year as against 3.8% or Rs1.5 trillion in the comparable period of previous fiscal year.