Pakistan's economy may contract 5.5% due to lockdowns

Research paints gloomy picture in case restrictions extended till Nov

Shahram Haq May 13, 2020
Eased lockdown in Karachi. PHOTO: REUTERS

LAHORE: Ever since the Covid-19 pandemic hit the globe, several international institutions have given various estimates about economic losses to different countries.

For Pakistan, a few estimates have been made by key financial institutions, which forecast the country’s economy will contract by up to 1.5%. However, a local business school has painted an even gloomier picture for calendar year 2020 in case the lockdown persists for nine months (March to November).

In a worst-case scenario, the think tank of Lahore School of Economics (LSE) has estimated that Pakistan may post a GDP loss of 5.5% if the lockdown continues for nine months. Utilising a general equilibrium macro (GEM) model, the LSE found that as a result of a three-month lockdown (March to May), Pakistan may experience a 2.9% contraction in GDP growth in 2020.

“This will result in a loss of 1.5 million jobs by the end of the year,” the study stressed. “Out of this, 1.2 million informal jobs will be lost while 0.3 million professionals employed in the formal sector will be rendered unemployed.”

It projected that if the lockdown was extended to six months (March to August), Pakistan would post a negative growth of 3.1% in 2020.

It would result in 1.6 million job losses by year-end, it said. Out of this, 1.3 million people will become unemployed from informal occupations and 0.3 million formal jobs will be lost. In the worst-case scenario ie a nine-month lockdown (March to November), the research said Pakistan’s economy would contract 5.5% in 2020, which would result in job losses for 2.8 million people.

The research claimed that 2.3 million jobs would be lost in the informal sector and 0.5 million jobs would be lost in the formal sector.

These estimates were made by initially adding a supply shock to the model based on the lockdown of various sectors of the economy followed by a demand shock.

The study utilised the theory that the present crisis was triggered by the supply shock just like the Great Depression of the 1930s, Asian crisis of 1998 and the financial crisis of 2008 that were all triggered by supply-side shocks. The lockdown of non-medical-cum-non-essential sectors of economies all over the globe results in a supply shock.

The supply shock leads to loss of income and output. The loss in income then results in a demand shock, primarily through reduced consumption and investment. So, the full impact on the economy comes in form of both supply and demand shocks. The think tank has estimated the supply shock based on lockdowns in various sectors in the wake of government’s directives. It is worth noting that these estimates vary considerably from the IMF’s early projection of a 1.5% contraction in GDP.

Published in The Express Tribune, May 13th, 2020.

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