First experienced in the Chinese city of Wuhan at end-December 2019, the Coronavirus spread like a wildfire and engulfed more than 210 countries and territories around the world. As of November 23, 2020, over 59 million infected cases were reported with 1.4 million deaths around the world. The pandemic, as the WHO described the virus, has not only brought colossal human suffering but totally devastated the rich and powerful economies as well as the economies of the developing world, including Pakistan’s.
Pakistan’s economy was already in dire straits owing to economic mismanagement and mis-governance of the decade of 2008-18 — the second lost decade for Pakistan. The Covid-19 has further compounded the difficulties and made the recovery a challenging task. Given the various domestic and external constraints that the country is facing, Pakistan’s economic recovery may not be seen anytime soon.
By the end of the second lost decade (2008-18), Pakistan was facing four major economic challenges that included i) economic growth slowing, unemployment and poverty rising; ii) widening of fiscal deficit owing to stagnant revenue effort, rising expenditure and the pursuance of the current NFC Award; iii) deteriorating current account deficit as a result of surging imports, declining exports and stagnant remittances; and iv) surging public and external debt and liabilities making the country highly vulnerable to extraneous pressures.
The government that took charge of the country’s affairs in August 2018 indeed inherited a shattered economy with challenges as mentioned above. The scale and the depth of challenges that the government inherited required a team of experienced and competent Ministers, Advisors/Special Assistants to address them. On the contrary barring few, the team was not only weak but inexperienced as well which compounded the difficulties. The government lost eight precious months (August-April) in finding its feet on the ground. It gave the impression of having little sense of direction and purpose. The crisis of confidence kept on intensifying and investors started waiting on the sidelined for the dust to settle down. Pakistani rupee was on a free fall and interest rates were racing up, perhaps to, “catch a train”.
The government, with the help of other stakeholder, succeeded in mobilizing $9.2 billion in cash and $3.2 billion worth of deferred oil payments from friendly countries. These inflows failed to restore stability in the economy owing to the leaked bucket. Foreign exchange kept on flowing into the country on the one hand but imports of non-essential items like automobiles, cell phones, foreign chocolates, dog, and cat meals, etc. kept on surging on the other. This was nothing but waste of precious foreign exchange in a most difficult time over unnecessary imports. These actions generated a high degree of uncertainty and by April 2019, Pakistan’s macroeconomic vulnerability had become unbearable.
The change of guard took place in the Ministry of Finance and in the country’s Central Bank. A new team that landed in Pakistan by ‘helicopter’ immediately signed the Program with the IMF, and started implementing the four- -decade-old so-called stabilization programme, from July 1, 2019. It is strange that the world has undergone considerable changes in the last four decades, but the prescription of the IMF programme has remained unchanged. The Washington Consensus developed in the early 1980s between the IMF, World Bank, and the US Treasury on a set of policies has remained unchanged in the last four decades.
The type of policies that Pakistan implemented under the IMF programme or as prior actions, not only severely damaged Pakistan’s economy but have heavily dented the popularity of the Pakistani Prime Minister. The two policies— raising discount rate from 6.5 percent to 13.25 percent and devaluing Pakistani Currency from Rs. 121.5 per dollar to Rs. 166.4 per dollar—alone costed Rs. 6353 billion or $40 billion to this economy during the period June 2018 to March 2019. Such policies along with raising utility prices at unprecedented pace have transformed Pakistan from a low cost to a high cost economy. The cost of production increased substantially which reduced output growth on the one hand and eroded the external competitiveness on the other with serious consequences for exports.
The impact of the IMF programme was already exacting a heavy toll on Pakistan’s economy. The standard 1980s vintage of the IMF programme as well as the prior actions that the government implemented since August 2018 had slowed both private and public sector investment; economic growth slowed to less than 2.0 percent with unemployment and poverty rising; industrial and export growth were already in negative zone; the performance of tax collection was abysmally poor and expenditure kept on rising with budget deficit reaching over 9 percent of GDP and public and external debt kept on surging with threatening pace. Inflation and particularly food inflation persisted at high double-digit level, making the lives of the poor and even the middle-income people miserable.
It is during the challenging economic time that the Coronavirus struck Pakistan. Pakistan began to close small and large businesses, transport, airlines, educational institutions, markets, industries, hotels, and restaurants from March 22, 2020 with a view to stopping the spread of the virus. The government took extraordinary measures to protect the poor and the vulnerable sections of society on the one hand and businesses/industries on the other. These measures were turned out to be highly successful in minimizing the impact of Covid-19 on the economy.
Like many other countries in the world, Pakistan witnessed its economy contracting by 0.4 percent—first time since 1952/53. When the growth numbers will be revised in May/June 2021 for the year 2020-21, the economy may have contracted 1.0 – 1.5 percent in 2019-20. Large – scale manufacturing shrank by 10.2 percent and even services sector exhibited negative growth. Both public and private sector investment as percentage of GDP declined and per capita income in dollar terms declined from $1652 to $1325—a decline of 18 percent in two years. This suggests that, on average, Pakistanis have become poorer and their average living standards have deteriorated. These numbers largely reflect the impact of the ongoing IMF programme.
(To be continued tomorrow)
(The writer is Principal & Dean at NUST School of Social Sciences and Humanities, Islamabad: email: ahkhan@s3h.nust.edu.pk)
Copyright Business Recorder, 2020