Worrying projections

While major international financial institutions have predicted a worrying 1.5% contraction for Pakistan’s economy due to the rampaging coronavirus pandemic, a local business school, the Lahore School of Economics, has painted an even worse scenario — 2.9% to 5.5% contraction in GDP, depending on the length of the lockdown. These projections are a serious cause for concern — both for the rulers and the ruled. Unfortunately, while developed economies can still survive and recover from a sizeable one-off contraction, for a developing country like Pakistan, it could be a death knell.

Pakistan cannot sustain a recession, let alone a prolonged depression, which looks to be the case according to this projection by the LSE. The worst-case scenario assumes lockdown conditions will persist until November, while the ‘best case’ assumes the lockdown will be lifted this month. The LSE projections also warn of 1.5 million to 2.8 million jobs lost, and of them between 300,000 and 500,000 would be from the formal sector, and the rest from the informal sector.

The primary difference between the LSE’s modeling and those from the World Bank and others is that the former is made by adding a supply shock to the model, followed by a demand shock. This is based on the theory that like major crises such as the Great Depression of 1930s, the Asian financial crisis of the 1990s, and the 2008 financial crash, the current situation was caused by a supply shock event, namely, production cuts effecting non-medical and other non-essential sectors of the world economy. That shock would create a loss of income for workers which would, in turn, lead to a demand shock caused by reduced consumption and investment.

We can assume that this cyclic condition would continue until a new normal is reached, or a successful intervention breaks the cycle. While we appreciate the hard work of our local scientists and researchers, we also fear what would happen if, on this occasion, they are right. Regardless, the findings do provide food for thought for the government. If the economy is not given proper support, it may take years, not months, for a recovery to begin. 

Published in The Express Tribune, May 15^th, 2020.

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