DR HAFIZ A PASHA AND SHAHID KARDAR
In an earlier article on the subject carried by the Business Recorder on 30th March we dwelt on the economic impact of the Coronavirus on Pakistan’s economy consequential to the disruption of normal economic activities.
Employing our model, we simulated the potential macroeconomic, unemployment and poverty impacts of key exogenous parameters in two scenarios. Scenario-I reflected a more optimistic assessment while Scenario-II a more pessimistic one.
Since then estimates from leading global front-line agencies have become available. These paint a bleaker picture of the likely decline in global trade and output. Factoring in these rather grim projections of sharply negative global growth we have simulated a Scenario-III which, while cautioning that, in view of the high degree of uncertainty about the economic outlook, the outcomes could be worse, depending particularly on the duration of pandemic.
For Scenario-III our model simulates the combined impact of different shocks, the most important being a) the WTO’s most recent projections on negative global growth-the decline in Real GDP at market exchange rates estimated at 2.5% in an optimistic scenario to between 9% to 11% in a pessimistic scenario and b) its assessment of the plummeting of global trade in goods by as much as 32% in a Pessimistic Scenario (ranging from 28.8% to 34%) and 13% in an Optimistic Scenario. Similarly, the ILO has estimated that 195 million jobs could be lost globally in the short run.
Based on the assumptions set out in Table 1, Scenario-III simulated the size of the negative impact of the Coronavirus on the economy.
==========================================================
Table 1
Assumptions on Magnitude of the Shocks
==========================================================
(%)
Scenario-III
==========================================================
EXTERNAL
Volume of World Trade (as per WTO) -32
FDI in Pakistan -60
Remittances -30
DOMESTIC
Availability of Domestically Produced Goods
(assuming that availability of food products
will be somewhat under control-keeping
it as in Scenario II) -10
Export Orders -50
Availability of Imported Goods -25
==========================================================
The projections of the key macroeconomic variables from the above referred shocks are summarized in Table 2-Scenario-II being the one published in the article of the 30th of March.
===============================================================================================
Table 2: Scenario-III compared with the Original Scenario-II*
===============================================================================================
Growth Rate in Fourth Quarter GDP Growth Rate
of 2019-20 in 2019-20
===============================================================================================
Scenario-II Scenario-III
===============================================================================================
Private Consumption Expenditure -8.2 -9.6 1st – 3rd Quarter 2.4
Public Consumption Expenditure 8.0 12.0 4th Quarter** -13.6
Private Investment -27.0 -32.1 2019-20 -2.4
Public Investment 10.0 8.0
Exports of Goods and Services -15.1 -28.8
Imports of Goods and Services -2.6 -0.8
Net Taxes -9.5 -13.6
GDP -9.5 -13.6 ** 30% of the GDP
Rate of Inflation 16.1 11.5 in the Fourth Quarter
===============================================================================================
* As published in the Business Recorder.
As mentioned above, the key underlying assumption for Scenario-III is the possible decline in global exports of goods by 32% (the pessimistic projection of the WTO), with an overall decline in the volume of our exports of goods and services combined by 28.8%,
As against the much harsher fall in the volume of exports the volume of our imports of goods and services are expected to decline by less than 1%. The decline in unit value of exports and imports has also been built into the model, with the expectation that the unit dollar value of imports will experience a bigger fall than the unit dollar value of our exports, because of a more significant decline in global oil (which may now settle at around US$40 if OPEC and the US agree on cuts in oil production) and commodity prices.
The availability of domestically produced goods or imported goods in volume terms is linked to domestic demand. The domestic economy’s supply and demand aspects will also understandably impact private investment, which is projected to fall by 32%, while the projections of the growth in public consumption and investment expenditures have been estimated at 10% and 8% respectively.
The exchange rate, taxation revenues and inflation are endogenous variables and flow from the simulations of the model. And in Scenario-III the rate of inflation is projected at a lower rate (11.5%) because of the bigger fall in import prices and lower aggregate demand.
The macroeconomic projections reveal that the GDP could decline by 13.6% in the fourth quarter, resulting in a possible GDP loss of as high as Rs.2,075 billion, along with a significant decline in private consumption expenditure by 9.6%.
The sector-wise breakup of the weakening is reflected in Table 3, which shows that the largest contraction will be in the industrial sector-by more than 22%, followed by the services sector (comprising mainly retail, wholesale and transport) experiencing a shrinkage of 15.2%
===========================================
Table 3: Sectoral Growth Rates of GDP
4th Quarter, 2019-20
===========================================
Scenario-II Scenario-III
===========================================
Agriculture 1.0 1.0
Industry -14.2 -22.3
Services -11.1 -15.2
GDP -9.5 -13.6
===========================================
The possible increase in the number of unemployed owing to the lockdown (a wide range of sectors of the economy having shut down) and the sharp slowing down of the economy has also been estimated. The temporary loss of jobs due to the lockdown is likely to be11.5 million. The loss of jobs on a longer term basis could approach 5million in Scenario-II and as high as 6.5 million in Scenario-III. This implies that the unemployment rate could rise to an unprecedented 16%.
The estimated incidence of poverty is currently 38% of the population. The number of people likely to fall below the poverty line in the current quarter could be as high as15 to 20 million. In effect, the number of poor in the country could rise to 103 million. Almost 15 million families will then require support through the BISP.
In Scenario-III (summarized in Table 4) our exports are projected to decline by as much as 61% in value terms as against a fall in imports by 33%, while the rupee is expected to experience a depreciation of between 12% to 15% by the end of the fourth quarter.
============================================================================
Table 4: Projection of Current Account and Balance of Payments
4th Quarter, 2019-20
============================================================================
($ million)
============================================================================
2018-19 2019-20 2019-20
Scenario-II Scenario III
(%) (%)
============================================================================
Exports of Goods and Services 7,462 4,842 4,536
(-35) (-61)
Imports of Goods and Services -15,282 -11,828 -10239
(-23) (-33)
Remittances 5,740 4,592 4,000
(-20) (-30)
Others -1,081 -1,189 -1307
(10) (10)
Current Account -3,161 -3,583 -3,010
Financial Account 231 -1,290
Balance of Payments -2,880 -4,300
============================================================================
In view of the fall in the international price of oil and news flowing in on sharp layoffs globally (and especially in the M.E) remittances are projected to fall by more than 30%.
The projections of the Current Account and the Balance of Payments in Scenario-III also factor in potential aid inflows from the IMF, World Bank and ADB in the form of emergency assistance and in the case of the latter two potential reallocation/repurposing of existing commitments.
The Financial Account, therefore, reflects the fast disbursement of US$1.4 billion from IMF, net repayments of US$1.6 billion to multilaterals (repayments of US$2.3 billion less projected inflows of US$700 million) partially relieving the impact of the continuing net outflow of US$1.4 billion of portfolio investments and investments in government securities.
Table 4 reveals the stress likely to be encountered by the external account despite the temporary deferment of payments of bilateral, Chinese, Saudi, UAE and IDB debts. The Current Account Deficit for the year 2019/20 is estimated at between US$5-5 to 5.8 billion.
The projections of tax revenues, government spending, provincial transfers and the fiscal deficit with and without the impact of the Coronavirus for the last quarter and for the year 2019/20 are summarized in Table 5.
===============================================================================
Table 5: Budgetary Projection
4th Quarter, 2019-20
===============================================================================
(% of GDP)
Without With Corona Difference
Corona Virus Virus
===============================================================================
FEDERAL
Tax Revenues 3.2 2.8 -0.4
FBR 3.0 2.4 -0.6
Others 0.2 0.4 0.2
Non-Tax Revenues 0.7 0.4 -0.3
Total Revenues 3.9 3.2 -0.7
Transfer to Provinces -1.7 -1.4 -0.3
A. Net Revenue Receipts 2.2 1.8 -0.4
Current Expenditure 4.8 5.7 0.9
Debt Servicing 2.0 1.7 -0.3
Defence Services 0.9 1.1 0.2
Other 1.9 2.9 1.0
Development Expenditure 0.7 0.9 0.2
PSDP 0.6 0.5 -0.1
Others 0.1 0.4 0.3
B. Total Expenditure 5.5 6.6 1.1
C. Federal Budget Deficit -3.3 -4.8 -1.5
D. Provincial Cash Surplus 0.6 0.0 -0.6
E. Budget Deficit (4th Quarter) -2.7 -4.8 -2.1
GDP (Rs. in billion) 44,003 41,928
F. Budget Deficit (1st 3 Quarters) -5.5 -5.8 -0.3
G. Budget Deficit (2019-20) -8.2 -10.6 -2.4
===============================================================================
The loss of tax revenues (with FBR’s collection projected to touch Rs.1 trillion in the quarter) will be moderately counterbalanced by the lower cost of debt servicing (projected savings of roughly Rs.125 billion) following the reduction in the policy rate. Total expenditure is projected to be higher by Rs.460 billion, to cross Rs. 2,765 billion for the year, resulting in a nominal terms fiscal deficit of Rs.2,012 billion for the fourth quarter and Rs.4,444 billion for the year 2019/20.
We sincerely hope that the impact of the Coronavirus is less severe than our pessimistic Scenario and that global financial support to ease the feared pain is more forthcoming, and speedily. Depending on the intensity of the negative impact the size of the Government relief package may also have to be expanded significantly.
