The Impact of COVID-19 on South Asian Economies - Pakistan
EARLY IMPACT OF THE PANDEMIC On February 26, 2020, Pakistan confirmed its first two cases of COVID-19. The pandemic could not have come at a worse time: the economy was growing at a tepid rate, jobs were hard to come by, and high inflation continued to erode the purchasing power of millions of households. As the case count grew, fear that the virus would spread rapidly across the country led to a vociferous “lockdown versus livelihoods” debate. Khan made a public case for protecting livelihoods and argued against a countrywide lockdown. Nevertheless, provincial governments began to issue their own lockdown orders, shutting down all nonessential businesses. The enforcement of these orders brought Pakistan’s economy to a standstill by the end of March.
Early estimates predicted that the economy would lose between 12 and 18 million jobs during the lockdown. The World Bank predicted that the country would enter its first recession in decades. Consequently, on March 24, 2020, Khan announced a stimulus package to prop up the economy and pave the way for a quick recovery. Totaling Rs.1.2 trillion (about 3 percent of GDP), the stimulus included an Rs.200 billion fund to protect laborers, Rs.150 billion to expand the country’s existing cash transfer program to poor families, and another Rs. 100 billion for pandemic-related emergencies.
The biggest success of the stimulus was the rapid expansion of the country’s cash transfer mechanism. More than 15 million families received funds through the program, ensuring that millions of citizens did not fall into extreme poverty. The State Bank also played a key role in supporting the economy, extending credit to small- and medium-sized businesses and protecting millions of jobs in the formal economy. The cumulative support provided by the central bank reached Rs. 1.3 trillion by October 2020. It also sharply cut interest rates from 13.25 percent to 9 percent in April 2020 and pushed them down to 7 percent by the end of June. As its domestic economy struggled, Pakistan had to pause its USD 6 billion fiscal stabilization program (which had started in 2019) and seek emergency relief from the IMF. By mid-April, the IMF also approved a USD 1.39 billion loans to alleviate the economic pain from the pandemic. In the following months, the World Bank provided USD 505 million in low-interest, soft loans; the Asian Development Bank approved a USD 500 million emergency loan; and the Asian Infrastructure Investment Bank approved a USD 250 million loans. Nevertheless, by December 2020, debt relief program talks with the IMF stalled as the Khan government resisted the demands and restrictions posed by the IMF. These included demands to increase energy tariffs and to sustainably reduce debt in the power sector, among others.
Questions:
i. Discuss the projected impact of the countrywide lockdown on Pakistan’s economy.
ii. Analyse the implications of the pandemic on the domestic economy of Pakistan.