Pakistan may fall into a recession due to COVID-19: World Bank

World Bank report estimates the country’s GDP to contract up to 2.2%

ISLAMABAD: Pakistan may fall into a recession – for the first time in 68 years – due to the severe impact of the deadly pandemic, economy expected to be shrinking up to 2.2% and a painful decline in per capita income, reveals a new report of the World Bank.

The country was in such a bad economic condition almost 68 years ago but even after the third India-Pakistan war that led to separation of East Pakistan, the country posted some growth.

As opposed to last week’s estimates of 1% growth in the current fiscal year 2019-20, the WB on Sunday projected a decline in Pakistan’s national output in the range of 2.2% to 1.3%, which will also hit personal incomes badly.

Released from Washington, the latest “South Asia Economic Focus” – a flagship publication of the WB, anticipates a sharp economic slump in each of the region’s eight countries, caused by halting economic activity, collapsing trade, and greater stress in the financial and banking sectors.

“Pakistan, which has already experienced low growth rates in recent years, could well fall into a recession”, noted the report. With 1.8% population growth, that would imply a painful decline in per capita income, it added.

Pakistan’s GDP may contract in the range of 2.2% to 1.3% in this fiscal year, reported the WB.

These are the steepest estimates so far given by any multilateral agency and local authorities and independent experts. The Ministry of Planning had predicted Rs2 trillion to Rs2.5 trillion economic losses in April-June period but it did not forecast the economy falling into a recession.

This week, Tola Associates -a tax advisory firm, predicted contraction in GDP but that was also only 0.3%.

“Pakistan suffered a decline in its GDP only once in her entire history (1951-52). Even at the height of the Bangladesh crisis in 1971, GDP growth was positive at 1.23%, wrote former chief economist Planning Commission Pervez Tahir in an article that appeared in The Express Tribune in 2013.

The horrifying forecast by the World Bank requires an urgent coordinated response from the federal government and the State Bank of Pakistan that are responding to the crisis in a fragmented manner. SBP and Prime Minister Imran Khan are separately announcing their relief packages.

The response and preparedness to deal with the crisis within the government also remains disjointed. Planning Commission has outsourced some of its work to the United Nations Development Programme instead of using its in-house expertise.

Pakistan is among Maldives, Sri Lanka and Afghanistan whose GDP growth forecast for this fiscal year is in negative territory. In the worst case scenario, the whole region would experience a contraction of GDP, according to the WB.

“South Asia is in a perfect storm”, said Hans Timmer, World Bank Chief Economist for the South Asia Region while speaking from Washington through an audio link.

Pakistan is already in a difficult fiscal situation so that makes response more difficult, said the regional chief economist.

In the case of Pakistan, 54% of manufacturing exports are related to the textile and food, beverages, and tobacco sub-sectors. Bangladesh and Pakistan, the main exporters, will suffer disproportionately, in part because the countries that suffered the largest outbreaks are also the largest buyers of garments from these two countries.

Capital markets seem less vulnerable for the time being, but declines in capital flows may impact India and Pakistan, according to the WB.

South Asia might well experience its worst economic performance in 40 years, with at least half of the countries falling in a deep recession. The harsh reality of inequality in South Asia is that poor people are more likely to become infected with the coronavirus, as social distancing is difficult to implement for them.

If the coronavirus spreads further and lockdown measures remain in place for a long period, it will become more challenging to guarantee food security, especially for the most vulnerable in the population, said the WB.

Contrary to PM’s claim of handling the lockdown issue well, the report notes that “In India, Bangladesh and Pakistan, the time between the announcement of suspension of inland passenger transport and its enforcement was less than a day, which created chaos as migrants scrambled to get back to their provinces, exacerbating the crowding and making enforcement of social distancing impossible”.

In Pakistan, India, Nepal and Bangladesh, with high levels of food insecurity and widespread malnutrition among children, the consequences of the virus spreading widely could reverse the recent positive trends in poverty and prove to be catastrophic and far reaching, it added.

The report underlined that close to 70% of the poorest group in India and Pakistan lacks either soap or water for handwashing. It should not be a surprise that a highly transmissible disease could spread more quickly among those in poorer groups.

Overall South Asia regional growth will fall to a range between 1.8% and 2.8% in 2020, down from 6.3% projected six months ago, according to the WB.

That would be the region’s worst performance in the last 40 years, with temporary contractions in all South Asian countries, said Hans Timmer.

Poor people may likely to be worst affected and could even die and are also more vulnerable to food price spike, Timmer added. The domestic migrant workers are forced to go back to rural poverty and the policymakers are in an unchartered territory, said Timmer.

In case of prolonged and broad national lockdowns, the report warns of a worst-case scenario in which the entire region would experience a negative growth rate this year.

This deteriorated forecast will linger in 2021, with growth projected to hover between 3.1% and 4%, down from the previous 6.7% estimate.

“The priority for all South Asian governments is to contain the virus spread and protect their people, especially the poorest who face considerable worse health and economic outcomes,” said Hartwig Schafer, World Bank Vice President for the South Asia Region.

“After tackling the immediate COVID-19 threat, South Asian countries must keep their sovereign debt sustainable through fiscal prudence and debt relief initiatives,” said Hans Timmer.

The issue of debt relief will be discussed during upcoming WB-IMF spring meetings, said the WB Vice President for South Asia while responding to a question.

Public debt is already high in most countries and the pandemic is expected to slash growth and tax revenues, which creates particularly serious problems for Pakistan and Sri Lanka, already vulnerable countries that had embarked on IMF programs in the last years.

India, Bangladesh Pakistan and Sri Lanka are expected to see deficits rise to between 7% and 10% of GDP in the baseline, according to the WB.

India, Bangladesh and Sri Lanka had already loosened monetary policy since mid-2019 in an effort to stimulate weak demand. In contrast, the State Bank of Pakistan had maintained a tight monetary in 2019 to defend the exchange rate but has since lowered rates in response to COVID-19.