The economy has been one of the most severely impacted sectors by the covid-19 pandemic all around the world. Strict lockdowns and precautionary measures have resulted in a reduction of economic activity, leading to grim consequences.
According to data compiled by the International Monetary Fund (IMF), the worst global economic recession since the Great Depression stands on the threshold of the global economy. The World Economic Outlook April 2020 reports that the global economy will contract by 3% in 2019-20, which is three times more than contraction during the 2008-09 world recession.
Provided that the crisis is somehow terminated by the end of 2020, the IMF reports a partial recovery for many economies around the world but the level of GDP is expected to remain below the pre-pandemic trend. However, various obscurities cloud this projection of a global economic recovery of 5.8% as well.
Unforeseeable factors like how and whether the pandemic continues to spread, the intensity of efforts to contain the spread, the effectiveness of policies, variations in demand and supply chains, and shifts in spending patterns can cause dramatic shifts in these predictions.
‘The Great Lockdown’ as it has been termed, can lead to enduring economic effects across nations and enhanced inequalities. If covid-19 infections continue to spread, it might take longer for the economy to begin the recovery period, which is a possibility that will result in worse outcomes.
Pakistan, a developing country with an already-strained economy has been facing the ‘economy vs public health’ dilemma since the first few cases were reported in the country. As provincial governments implemented varying partial lockdowns across the country, the number of infections kept increasing. Daily wage-earners, business owners, and poverty-stricken citizens of Pakistan have been struggling to make ends meet, and this is just the beginning of long-prevailing consequences of the halt in economic activity.
Poverty and unemployment
As businesses lose significant revenues, exports are expected to decline as ports, airports – the entire transport sector – have shut down. With decreases in private investments, household spending, and purchasing power, the economy will undergo dramatic changes and have lasting profound effects on all other sectors of life.
Like in any other crisis, the most affected households are those who were already living hand to mouth. The hardest-hit sectors of the economy in Pakistan include daily wage earners, those employed by small or medium businesses.
Pakistan will experience GDP growth of -1.3% in 2019-20. Hafiz Pasha, former finance minister of Pakistan, and Shahid Kardar, former governor of State Bank of Pakistan, laid out comprehensive projections by simulating the impact on unemployment and poverty in Pakistan. According to their estimates, Pakistan’s GDP could decline by 13.6% in the last quarter of 2020 which could lead to a loss of Rs. 2,075 billion in GDP.
They found that the lockdowns and decline in GDP might induce temporary unemployment of 11.5 million people and in the long term, 6.5 million people, pushing the unemployment rate in Pakistan to its highest at 16%. Up to 15-20 million citizens could fall below the poverty line raising the total number of poverty-stricken citizens to 103 million in the country.
According to estimates, 15 million families will suffer severe blows to their financial situations and require government support for livelihood.
Economy in lockdown
When coronavirus infections first started spreading in Pakistan, the government had a few options but held off on a national lockdown providing rationale that the fragile economy of the country could not afford it. Even after many provincial governments implemented strict partial lockdowns, Prime Minister Imran Khan maintained his stance on the looming economic decline highlighting the plight of the most vulnerable sectors of society. Not long after provincial lockdowns were put in place, the government announced stimulus packages to aid the poor as major economic activity ceased in Pakistan.
Dr. Sajid Amin Javed, a senior research fellow at the Sustainable Development Policy Institute (SDPI) and head of their policy solutions lab, tells MIT Technology Review Pakistan that one of the biggest issues caused by various factors during the lockdown was the liquidity and cash flow problem. He states that most small business enterprises (SMEs) in Pakistan, which are part of the informal economy, suffered the cash-flow problem from two sides as they found themselves unable to pay back their loans or maintain the payroll of their employees. As a result, they had to lay off many employees.
According to his research, roughly one million SMEs were unable to survive the lockdown due to issues with cash flow, and there was a 50% decline in the income during April. Recently, the State Bank of Pakistan (SBP) has offered refinancing services, which allow SMEs to qualify for loans as long as they agree not to lay off their employees. However, many do not qualify for this service.
Dr. Javed says that Pakistan is facing more pressure than other developing countries because its economy had been on a slow trajectory for the past few years. The country had been following some policies in order to fulfill IMF requirements that were opposite to what would be required in a pandemic situation. “Suddenly covid happened, and the government had to take a 180 degrees reverse turn,” he remarks.
The government had to take immediate measures to mitigate the impact of the health crisis and commence various social protection programs which put a lot of pressure on the government. Among all these hurdles, the social protection system of Pakistan has not been able to reach the people at the grassroots level.
Life after lockdown
After the lockdown, life will most likely not return to the same kind of normal known by society before the pandemic. It will require a lot of effort in adjusting to the new normal. Economists have noted that the economy will not immediately resume as soon as the lockdown is ended, but it will go through a few phases to reach its regular hustle and bustle.
“We are assuming that the economy will go from lockdown directly into recovery mode and we are planning that way,” says Dr. Javed explaining that this isn’t the case. After the lockdown phase, the second phase would commence, in which containment efforts of the virus will continue and stabilization of the economy will be prioritized. In this phase, the supply chain for businesses, that has been disrupted, will be brought back.
The next phase will be dealing with demand compression. Only after that, the economy will start recovering in the next phase. Dr. Javed says that the creation of policies to cater to all of these phases is paramount.
Dr. Javed points out that life after the lockdown wasn’t just going to be affected by the internal changes in Pakistan’s economy, some international factors will also influence the economy. He gave the example of the gulf region, which will also be facing an economic recession and will affect Pakistan’s exports of labor etc.
Another issue Dr. Javed underlines is the assumption that businesses are only facing financial hurdles during the lockdown. “This is not true. Businesses are facing a multitude of problems and the government should be taking steps to counter them,” he maintains.
Factors such as the capacity to protect employees, provide a safe environment to work, follow the SOPs set by the government and changes in schedules, etc can impact SMEs especially until a vaccine has been created. Another issue is that for many SMEs, the cost of compliance with the government’s SOPs will be a difficult task. The dissemination of information will also be a factor.
According to the IMF, strong multilateral and multinational cooperation is required for the world to rise out of the economic crisis. As the pandemic itself hasn’t restricted itself to borders, the solution must also be achieved by international cooperation.
Effective and targeted economic policies are the only way to mitigate the negative effects of the pandemic. Policymakers must take action and create targeted policies to alleviate the economic suffering of the masses.