Macro Bites

Macro Bite # 18

6 min read

Even before researching the structural issues of Pakistan’s economy, Macro Pakistani started its journey with analyzing the relief package presented for COVID-19. This was back when the amount of PKR 1.2 trillion was all over the news at the start of the pandemic. Then, we were more interested in testing if the announced amount was accurate or not. Now, we are more interested in knowing how much is actually required to bring the country back on a growth trajectory. That shift in attitude comes from understanding that Pakistan’s economic crisis started long before COVID. If you want to recap that understanding, the Bites section on our website would be a good place to start.

How was the COVID-19 response in Pakistan?

On 24th March, the Prime Minister announced a fiscal stimulus package of PKR 1.2 trillion for emergency response, relief to citizens and support to businesses and economy. It included the following initiatives:

  • Wheat procurement: PKR 280 billion worth of wheat to be bought from farmers
  • Fuel/Utilities: PKR 70 billion worth of petrol and diesel price reductions along with PKR 100 billion of electricity and gas bill deferrals
  • Daily wagers: PKR 200 billion to be disbursed to 3 million workers who had lost their jobs due to COVID (PKR 17,500/month/worker)
  • Ehsaas Emergency Cash: PKR 150 billion including PKR 144 billion for 12 million low income families and PKR 6 billion for Panagah shelter homes
  • Health & food: PKR 115 billion including PKR 50 billion for medical equipment and workers, PKR 50 billion for utility stores and PKR 15 billion for tax relief on food items
  • SME support: PKR 100 billion for small businesses and agricultural workers
  • Exporters: PKR 100 billion worth of tax rebates and duty drawbacks to be paid back to industries

An additional PKR 25 billion transfer to the National Disaster Management Authority along with PKR 100 billion for contingencies, rounded up the PKR 1.2 trillion package.

The pre-COVID crisis

These fiscal measures amounted to 3.6% of GDP in nominal terms. But in order to understand how much stimulus will actually be required, it is important to understand the past real growth trajectory of the economy. We have discussed how Pakistan’s economic struggles began even before COVID-19. Growth in all sectors fell from 2018 to 2019 with manufacturing being hit the hardest. In 2020, except agricultural, which was largely unaffected by the lockdowns, all other sectors contracted.


Source: Pakistan Bureau of Statistics; MP Analysis

Read the full article below if you want more details on growth within each sub-sector. The main takeaways is that manufacturing continues to be the hardest hit (before and after COVID). Pakistan’s economy did not contract as much as anticipated because the country has been deindustrializing. The industrial sector, severely affected by the

lockdowns, contributed only 18% to GDP. Hence, its contraction had less of an effect on the overall economy. Growth in agriculture and limited contraction in services ensured Pakistan’s economy fell by just 0.4%.

It could be worse

If you consider the expenditure approach for GDP calculations, you will see that the biggest boost to our economy came from government consumption increasing by 10.3% and the trade balance of exports net of imports improving by 26.4% in 2020.


Source: Pakistan Bureau of Statistics; MP Analysis

Government expenditure increased partly due to the COVID-19 response in Pakistan and the trade balance improved because while exports increased only slightly, imports fell significantly. Consumption of imported goods fell by over 11% in real terms due to low oil prices and a switch to market based exchange rate.

It will still be pretty bad

The IMF estimated that Pakistan will lose economic value of over PKR 17 trillion until 2024, with over 5% of GDP lost in 2020 alone. To clear any confusions – the growth rates we have discussed so far were in real terms. The economic loss mentioned is in nominal terms. If the government wanted to stimulate the economy, it would have to spend as much as 5% of GDP to make up for the economic loss.


Note: Economic loss is measured as pre-COVID minus post-COVID GDP projections

Source: IMF (April 2020); MP AnalysisBefore the pandemic, Pakistan’s economy was expected to grow by 2.4% in 2020. Post-COVID, this growth rate dropped to -0.4% and future expected growth rates were also adjusted downward. Instead of a projected GDP of PKR 44.0 trillion in 2020, Pakistan ended up with PKR 41.7 trillion. That is an economic loss of PKR 2.3 trillion for just one year. The red portion in the above chart shows this loss is expected to compound for at least the next 4 years.

Let’s be real again

However, the announced fiscal response to COVID-19 in Pakistan of PKR 1.2 trillion was almost half the projected economic loss. After accounting for already budgeted expenditures for 2020, the package was even smaller at around PKR 900 billion.


Note: As announced on 24th March 2020

Source: Economic Survey of Pakistan 2019-20; MP AnalysisProfit estimated at the time that the package was closer to PKR 750 billion, discounting certain initiatives altogether. Macro Pakistani wants to take a more optimistic view but still provide a fair haircut. Out of all the initiatives, three stand out as contentious. The buying of wheat from farmers is an activity that the government undertakes each year. It boosted the price from PKR 1,300 to 1,400/40kg and increased the procurement amount from 6 to 8 million tonnes. Hence, we should reduce the package amount from PKR 280 billion to PKR 85 billion. Similarly, PKR 40 billion of the Ehsaas Emergency Cash program and the repayment of PKR 100 billion of exporter rebates were also already budgeted for.

Response was good enough

However, debating the exact amount of the package is not as fruitful as understanding how much is required and comparing across countries. The fiscal response to COVID-19 in Pakistan was actually in line with other developing countries.

Source: Economic Survey of Pakistan 2019-20; The Hindu; HBS Global Policy Tracker

The announced fiscal packages across the developing world average 3.6% of GDP, which is the same as Pakistan. We can assume there is a difference between the headline numbers and the actual package in other developing countries too. In India, for example, the headline reports include a fiscal relief package of 4% of GDP while some estimates claim the outlay to be around 1.7% of GDP. The overall package provided by the Indian government is around 10% of GDP, including fiscal and monetary measures.

Pakistan’s monetary stimulus, provided by the State Bank of Pakistan, was worth over PKR 1.1 trillion or 3.3% of GDP. Combined, the overall COVID relief package of 6% of GDP should be enough to address the projected economic loss in Pakistan. The full article below provides the details for all the monetary measures as well.

feedback on this newsletter or the website itself, feel free to reply to this email. You can also share the entire article and even selected excerpts by simply highlighting the text on your own profiles!

We have discussed before how access to finance is critical for improving the investment landscape in the country. For this reason, SBP encouraged cheap credit availability, particularly for businesses to invest in new projects or expansions. Macro Pakistani hopes these initiatives continue beyond the current one year timeline and are directed toward investment in productivity enhancing initiatives. Next time, we will round up the ABCs of Pakistan series and discuss next steps for Macro Pakistani.

Read the full article in the link below

How was the COVID-19 response in Pakistan?

If you have any feedback on this newsletter or the website itself, feel free to reply to this email. You can also share the entire article and even selected excerpts by simply highlighting the text on your own profiles!

Faiz Ahmed

MBA Candidate at Harvard Business School with prior experience at Bain & Company, International Finance Corporation and State Bank of Pakistan. He is also the Founder of Macro Pakistani.

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