Tackling Covid-19? - Part II

Part one of this series dealt with health and welfare issues. Let’s now turn to the economic crisis caused by the pandemic.

The economy was already in slowdown before the onset of the crisis. Production of agriculture and industry was sluggish. In fact, LSM was in decline. Other problems included high inflation, rise in public debt and a sharp decline in the rupee. A tight monetary policy prevented investment. The current account had narrowed, but on the back of low imports and inflow of the so-called ‘hot money’.

The pandemic has multiplied our already significant economic troubles. Based on mobility of people, Google has shown that in Pakistan visits to retail stores and recreation places fell by 65 percent between 29 February 29 and April 11. Even visits to grocery stores and pharmacies almost halved during this period.

It is therefore no surprise that all economic indicators look bad. GDP for fiscal 2020 will be down by one to two percent. The fall may continue into the first half of the next fiscal, though it depends on how quickly normalcy returns. Many millions are losing jobs. Hopefully, most of the jobs would return in a few weeks. In some cases, it may take months. By one estimate, between 9 and 15 million will fall below the poverty line. We cannot leave them there.

Both demand and supply have shrunk. This conundrum cannot be tackled directly as normal economic tools when a majority of people must stay at home. This is another reason to further reduce the discount rate.

It is also critical to keep the economic system in place, so that firms survive these difficult times. Once recovery begins, they will be ready to go back into full operation. At present, this is our immediate economic concern. Later, the government of Pakistan must make the long-term reforms that it has postponed for decades.

Today, we must avoid bankruptcies. All firms are faced with falling demand. Textile exporters are especially hit. The SBP has offered a mix of repayment relief and new low-cost debt. They should help. I would, however, like to see fewer limits and conditions on the new loans. They must be sufficiently attractive for businesses to retain their employees during this period of loss in demand.

A large number of firms that are in the informal sector do not avail bank credit. The government must find innovative ways for them to avoid liquidity pressure. These small firms are the backbone of the economy. Announcing a loan facility for them is not enough. The government and the SBP must ensure their survival.

These firms are the weakest, though vital, link in the economic chain. They serve a host of other businesses and employ a large part of the workforce. We must get to them fast and substantially and not impose conditions such as that of NTN. Else, we may find the carpet pulled from under the feet of the Pakistan economy. Without a risk-sharing mechanism, they cannot get loans from the banks.

Workers in the informal sector would need direct income support. Ehsaas has announced help for 12 million beneficiaries. This may have to grow further to 20 million or more. The government ought to do so quickly.

The prime minister was perhaps the first to call for delay in debt repayment. According to news reports, the government has sought rollover of $28 billion of debt falling due within the next three years. If it happens, that will allow the government to redirect budget resources for welfare and health sectors and to support businesses.

As the government finds fiscal space to absorb the shock from the emergency, it is critical that it also prepare a plan for sustained growth over the long term. Otherwise, we will come out of the emergency no wiser, with more debt and without the ability to repay. Recall that in the 2000s Pakistan received massive amounts of concessional aid and debt rescheduling. But in 2008, we were back with the IMF, with a 40 percent devaluation. We had not spent the money to build competitiveness and productivity.

A strong signal should go to the market that the above relief measures are for the short term. Businesses must not expect them to continue beyond the initial weeks or months. We have the example of some industries that have stayed ‘infant’ for decades and demand ever more support from the government.

For several years, my Institute has called for structural reforms to build value-added manufacturing and exports. If this is not done, our macroeconomic weakness and dependence on external aid will stay forever. The economy’s low rates of savings and investment do not support growth. Access to credit is a key consideration in building the manufacturing sector. We must revive Development Finance Institutions in the country. They played a key role in industrialization during the 1960s-1980s with fixed rate credit for private projects. Many factors have contributed to a shrinking manufacturing sector. But its decline almost coincides with the phasing out of DFIs in the country.

On the subject of credit for businesses, the State Bank must study why its Long-Term Finance Facility has not been used extensively. There are too many conditions. The LTFF should become forward looking and apply to all industries whether they export or sell in the domestic market. Companies have to first succeed in the home market before they can compete globally. Also, the SBP must enhance per loan limit as well as the overall LTFF envelope. The SBP may also review its Export Finance Scheme. Both schemes must keep pace with devaluation of the rupee. The SBP’s new TERF facility is for one year and even during this short period available for new units only. TERF should fund BMR also.

Our quest for formalizing the economy has achieved no progress. But in doing so, it has brought transactions to a standstill. Transactions are an essential base of an economy. No transaction means no economy. There is an urgent need to review this policy and stagger its execution.

Middle-class savers have had one avenue to invest their savings. That was real estate. In an effort to prevent speculators, the government has hit middle-class savers hard. Real-estate transactions have come to a halt. It is not clear what the government has achieved by closing down a whole sector. Bear in mind that investment in the stock exchange is very risky for anyone who is not an expert. The National Savings Scheme often offers below inflation returns. Real estate was the credible option for the middle classes. If holding of empty plots is an issue, the government should encourage house building by offering loans at preferential rates. Partly, the new construction policy has dealt with the matter. I hope it will be effective in reviving the sector.

The virus has a message for us. It is a wakeup call that our economic policies don’t work and that we must revisit the social contract in the country. It is critical to respond to this call.

Concluded

The writer is chair and CEO Institute for Policy Reforms, and a former commerce minister.