South Asia and Beyond

Coronavirus The Proverbial Last Straw For Pakistan?

 Coronavirus The Proverbial Last Straw For Pakistan?

NEW DELHI: Pakistan has been reeling under severe economic challenges for the past twelve months, barely avoiding a sovereign default with handouts from Saudi Arabia, UAE, China and the IMF. Keeping in mind that Pakistan is the fifth most populous country in the world, an economic collapse will have severe human implications but in terms of its impact on the global economy, maybe no more than a blip since Pakistan is an insignificant part of global supply chains.

Pakistan has now got hit by something worse, the novel Coronavirus. It sneaked in through the Chinese-funded China-Pakistan Economic Corridor (CPEC), through pilgrims coming back from Iran and resident Pakistanis returning from foreign lands. The situation has become a calamity due to the inability of the military-backed administration to be able to respond to a non-military crisis situation. It has accentuated with the ulemas, who hold considerable sway in the government, insisting on continuing with communal prayers.

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The upshot is that the already fragile economy is coming apart rapidly. Pakistan’s government debt to GDP ratio was expected to cross 74 per cent by 2020. With already 1.2 trillion Pakistani rupees (USD ~7 billion) of aid announced and with significant additional impact expected on the economy, the debt to GDP ratio will inch closer to the 80 per cent mark. This per se would not have been a worrisome factor as there are many other countries with much higher government debt to GDP ratio, but for the fact that Pakistan’s economy does not seem to have the wherewithal to repay such enormous debt.

Putting this in perspective, to tide over its economic woes, Pakistan received $14 billion in aid from Saudi and the UAE last year, almost half of that amount is being deployed as aid for propping up the economy. Unfortunately, given the high levels of corruption in Pakistan and a weak delivery system, very little of that money will reach the common man. This implies that the multiplier effect of that money will be negligible as the siphoned-out money will probably end up as unused savings, possibly in banks outside Pakistan.

Pakistan has also locked itself into high energy prices that is part of the deal it has with the Saudis and the UAE. So, Pakistan got its energy imports with deferred payments but at prices that were high. It will not be able to take advantage of the rock bottom energy prices that are prevailing in the post-Coronavirus market.

The Pakistan Institute of Development Economics has estimated the worst-case scenario will be a negative growth impact (of -4.64 per cent) with reduction of 20 per cent in imports and exports. Given that there will be a significant loss in remittances, which make up considerable part of Pakistan’s forex earnings, and that entire industries such as travel and tourism, manufacturing etc are reported to have been badly hit, it is likely that the actual impact on Pakistan will be far worse. In addition, its five major trading partners (accounting for more than 50 per cent of total trade), China, U.S., UK, Japan and Germany, have all been badly hit by the pandemic.

Worldwide, governments are pumping in money to shore up their economies ravaged by the virus. The money averages around 10 per cent of the economy. In Pakistan’s case, 10 per cent of the economy would imply over $30 billion to be pumped in. But this country’s total foreign exchange reserves in February 2020 was $14.5 billion, enough to pay for a little over three months of imports. From where can Pakistan get the money to resuscitate its economy?

Could China, the UAE, Saudi Arabia and the IMF pitch in again? It doesn’t appear likely that these countries or institutions will be in a position to extend help. Saudi Arabia, for instance, is seeing the lowest oil prices in many years. China, considered to be Pakistan’s iron brother, has till date gifted a million N95 masks, some medical equipment and a grant of $4 million. Overall, China has never had a great track record of providing free aid to Pakistan. It has pumped in loans for the CPEC that has actually pushed Pakistan into a debt trap, contributing to its precarious economic situation.

The human toll in Pakistan will be even worse given that it has a large informal economy and this segment will be hit the worst. Also this segment will not get the visibility and the support that they would require, because of its weak linkage with the government machinery. Most job losses will happen in this segment, leading to collapse of demand for basic necessities. It is considered unlikely that the government will be able to provide sufficient support for the large number of families that desperately need such support. The unfolding human tragedy could lead to discontent and unrest that may well tear it apart.

Under the circumstances, it would be prudent for South Asia and the rest of the world, to prepare for a post-Covid Pakistan, one with an exhausted economy and deep civilian strife, one with the potential to export a large migratory population that will be in search of a new life.


(The writer is a noted author and expert in technology driven government transformation and President, Centre for Digital Economy Policy Research. Views expressed in this article are personal.)


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